NEUROGEN CORP, 424A, 1995-07-31

NEUROGEN CORP
424A, 1995-07-31
PHARMACEUTICAL PREPARATIONS

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<PAGE>

RULE NO. 424(a)(1)
REGISTRATION NO. 33-60929

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JULY 28, 1995

PROSPECTUS

2,500,000 SHARES
LOGO NEUROGEN CORPORATION

COMMON STOCK

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All of the shares of Common Stock offered hereby are being offered by
Neurogen Corporation ("Neurogen" or the "Company"). The Common Stock is traded
on The Nasdaq Stock Market under the symbol "NRGN." On July 27, 1995, the last
sale price of the Common Stock as reported on The Nasdaq Stock Market was
$15.375 per share.

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE 6.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase from
the Company up to 375,000 additional shares of Common Stock on the same
terms as set forth above solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

--------

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1995, at the offices of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013.

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SMITH BARNEY INC.

ROBERTSON, STEPHENS & COMPANY

PACIFIC GROWTH EQUITIES

, 1995
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at 7 World Trade Center, New York, New
York 10048, and at Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Reports, proxy statements and other information concerning the Company
may also be inspected at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the common stock, par value
$.025 per share, of the Company (the "Common Stock") offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and in the exhibits and schedules thereto, as certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and to the exhibits and
schedules thereto filed as a part thereof. The Registration Statement may be
inspected without charge, and copies thereof may be obtained upon payment of a
prescribed fee, at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents are incorporated herein by reference: (i) Annual
Report on Form 10-K of the Company for the year ended December 31, 1994; (ii)
Quarterly Report on Form 10-Q of the Company for the quarter ended March 31,
1995; (iii) Current Report on Form 8-K of the Company dated June 20, 1995 and
(iv) the description of the Company's Common Stock which is contained in its
Registration Statement on Form 8-A filed under the Exchange Act on February
21, 1990, as amended on March 5, 1990. All documents filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Prospectus and prior to the termination of the offering of the
Common Stock made hereby shall be deemed to be incorporated by reference in
this Prospectus and to be part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this Prospectus
or any other subsequently filed document that is also incorporated by
reference herein modifies or supersedes such statement. The Company hereby
undertakes to provide without charge to each person to whom a copy of this
Prospectus has been delivered, on the written or oral request of any such
person, including any beneficial owner of Common Stock, a copy of any or all
of the documents referred to above which have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents
that the Prospectus incorporates. Requests for such copies should be directed
to Stephen R. Davis, Vice President--Finance of the Company, at 35 Northeast
Industrial Road, Branford, Connecticut 06504. Mr. Davis' telephone number is
(203) 488-8201.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."

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<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements appearing elsewhere in this Prospectus or incorporated
herein by reference. Prospective investors should carefully consider the
information set forth under the heading "Risk Factors."

THE COMPANY

Neurogen Corporation is an emerging neuropharmaceutical company engaged in
the discovery and development of a new generation of drugs to treat psychiatric
and neurological disorders by regulating nerve cell (neuron) communication in
the brain. The Company is developing "receptor subtype specific" drugs based on
its expertise in neuronal communication. The Company believes that receptor
subtype specific drugs offer the potential for equivalent or improved efficacy
and fewer side effects than currently marketed psychotherapeutic drugs, most of
which interact with multiple receptor subtypes. The Company leverages its
resources, where it believes it to be advantageous, through collaborations with
large pharmaceutical companies for advanced clinical development and
commercialization of its products. The Company has existing collaborations with
Pfizer Inc ("Pfizer") and Schering Corporation and Schering-Plough Ltd.
(together, "Schering-Plough") and intends to enter into additional
collaborations where appropriate.

Neurogen believes that its expertise in neurobiology, medicinal chemistry and
molecular biology, combined with its biased combinatorial chemistry program,
enables it to identify and develop compounds more quickly and efficiently than
it could using traditional drug discovery techniques. Neurogen has developed a
portfolio of neuropharmaceutical drug candidates designed to treat anxiety,
psychosis, dementia, depression and epilepsy and sleep, eating and stress
disorders. Industry analysts estimate the worldwide market for currently
marketed neuropharmaceuticals for such disorders to be approximately $10.5
billion annually.

Communication between neurons occurs through complex electrical and chemical
processes involving the transmission of chemicals, known as neurotransmitters,
across spaces between nerve cells, known as synapses. After being released from
a neuron, a neurotransmitter interacts with "receptors" located on the surface
of adjacent neurons, thereby stimulating specific functions or actions. In
recent years, scientists have discovered that each neurotransmitter interacts
with not just one or two receptors, but with families of receptors with similar
molecular structures. Each family can be divided into a number of receptor
subtypes. Recent discoveries have also shown that specific receptor subtypes
play integral roles in triggering distinct physiological and emotional
responses.

Neurogen's mission is to be a leader in the design, development and
commercialization of drugs for the treatment of a variety of neuropsychiatric
disorders. The key points of the Company's strategy are as follows:

Target Multiple Psychotherapeutic Markets. Neurogen targets several
neuropsychiatric disorders representing large markets, thereby reducing
Neurogen's reliance on any single drug development program.

Develop Receptor Subtype Specific Compounds. The Company focuses its drug
discovery efforts on "receptor subtype specific" compounds the Company believes
will have fewer side effects than currently marketed drugs. The Company
believes that such drugs have the potential to penetrate and expand existing
markets as evidenced by the new class of antidepressants (e.g., Prozac(R),
Zoloft(R) and Paxil(R)), which selectively interact with certain receptors and
have less severe side effects than previous antidepressants.

Utilize Advanced Discovery Technologies. The Company utilizes its advanced
discovery technologies to enhance its drug discovery capabilities and to
provide new opportunities for strategic partnerships. Employing its biased
combinatorial chemistry capability, the Company is developing extensive
libraries of small molecule

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<PAGE>

compounds. This program was instrumental in the discovery of NGD 95-1, the
Company's lead candidate for eating disorders.

Two of the Company's leading drug candidates are currently undergoing human
clinical testing: NGD 91-1 for the treatment of anxiety and NGD 94-1 for the
treatment of psychosis. In January 1995, Neurogen reported the results from a
Phase I-B clinical study conducted by Pfizer indicating that a single dose of
NGD 91-1 produced efficacy in situational anxiety comparable to a single dose
of diazepam (Valium(R)) without the sedation caused by Valium(R). In February
1995, Neurogen reported the results of a Phase I-A clinical study conducted by
the Company involving single escalating dose studies for safety which indicated
that NGD 94-1 was safe and well-tolerated across a broad dose range.

THE OFFERING

<TABLE>
<S> <C>
Common Stock being offered...................... 2,500,000 shares(1)
Common Stock outstanding after the offering..... 12,628,133 shares(1)(2)
Use of proceeds................................. Funding for research and development
activities, including planned clinical
development, and working capital and gen-
eral corporate purposes
Nasdaq Stock Market symbol...................... NRGN
</TABLE>
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(1) Does not include up to 375,000 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based upon the number of shares of Common Stock outstanding as of June 30,
1995. Does not include 2,157,493 shares of Common Stock issuable upon
exercise of outstanding stock options and common stock purchase warrants at
June 30, 1995. At June 30, 1995, options and warrants to purchase 800,446
shares of Common Stock were exercisable. See "Capitalization" and Notes 4,
5 and 7 of Notes to Financial Statements.

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Neurogen was incorporated in Delaware on September 29, 1987. The Company's
executive offices are located at 35 Northeast Industrial Road, Branford,
Connecticut 06405, and its telephone number is (203) 488-8201.

Valium(R), Dilantin(R), Tegretol(R), Xanax(R), Zoloft(R), Clozaril(R),
Haldol(R), Librium(R), Prozac(R) and Paxil(R) are trademarks of Hoffman-LaRoche
Inc., Parke-Davis & Company, Ciba-Geigy Corporation, The Upjohn Company,
Pfizer, Sandoz Inc., McNeil Laboratories, Incorporated, Hoffman-LaRoche Inc.,
Eli Lilly and Company and SmithKline Beecham Corporation, respectively.

4
<PAGE>

SUMMARY FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Research revenue........ -- -- $ 4,595 $ 4,605 $ 5,789 $ 1,150 $ 1,870
Operating expenses:
Research and
development........... $ 2,189 $ 3,674 4,721 6,452 10,150 2,360 3,044
General and
administrative........ 1,249 1,627 2,043 2,475 2,774 797 688
Other income, net....... 410 140 576 506 484 30 162
------- ------- ------- ------- ------- ------- -------
Net loss................ $(3,028) $(5,161) $(1,593) $(3,816) $(6,651) $(1,977) $(1,700)
======= ======= ======= ======= ======= ======= =======
Net loss per share...... $ (.52) $ (.77) $ (.18) $ (.43) $ (.70) $ (.22) $ (.17)
======= ======= ======= ======= ======= ======= =======
Weighted average number
of shares outstanding. 5,773 6,675 8,752 8,962 9,528 8,970 10,084
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1995
------------------------
ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities....... $ 14,045 $68,026
Total assets........................................... 24,532 78,512
Long-term obligations, excluding current portion....... 582 582
Accumulated deficit.................................... (23,467) (9,713)
Stockholders' equity................................... 22,483 72,318
</TABLE>
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(1) Adjusted to give effect to (i) the receipt by the Company of $17.9 million
on June 28, 1995 pursuant to the Schering-Plough Agreement and (ii) the
sale of 2,500,000 shares of Common Stock offered hereby at an assumed
public offering price of $15.438 per share and the receipt of the estimated
net proceeds therefrom. See "Business--Collaborative Research and Licensing
Agreements."

----------------

Unless otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' option to purchase from the Company up
to 375,000 shares of Common Stock solely to cover over-allotments, if any.

5
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT

Neurogen has been unprofitable since its inception in 1987 and has incurred
a cumulative net loss of approximately $23.5 million through March 31, 1995.
Such loss has resulted principally from costs incurred in the discovery and
development of the Company's compounds. The Company to date has incurred
losses in each year of its existence and, excluding the effect of up-front
payments received from Schering-Plough in 1995 under the Collaboration and
License Agreement dated as of June 28, 1995 between the Company and Schering-
Plough (the "Schering-Plough Agreement"), the Company is likely to incur
significant and increasing losses over at least the next several years. The
only revenues generated by Neurogen to date have resulted from payments under
the Collaborative Research Agreement dated as of January 1, 1992 between the
Company and Pfizer (the "1992 Pfizer Agreement"), the Collaborative Research
Agreement dated as of July 1, 1994 between the Company and Pfizer (the "1994
Pfizer Agreement" and, together with the 1992 Pfizer Agreement, the "Pfizer
Agreements") and the Schering-Plough Agreement, interest on the proceeds of
prior private and public offerings of Common Stock by the Company and the
proceeds of an equipment lease financing. Payments under the 1992 Pfizer
Agreement, the 1994 Pfizer Agreement and the Schering-Plough Agreement are
scheduled to expire at the end of 1995, in the middle of 1997 and in the
middle of 1997, respectively, unless the research programs under such
agreements are extended by Pfizer or Schering-Plough. The Company does not
expect to achieve revenues from product sales for several years, if at all.
The Company will not achieve revenues from product sales unless it or one of
its collaborative partners successfully completes product development, obtains
required regulatory approvals and commercializes its products. There can be no
assurance that the Company will ever achieve significant product revenues or
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

EARLY STAGE OF PRODUCT DEVELOPMENT; UNCERTAINTY OF PRODUCT DEVELOPMENT

The Company is in the early stage of product development and does not expect
to have any products resulting from its research efforts commercially
available for a number of years, if at all. To date, human clinical trials
have commenced with respect to only two of the Company's compounds, NGD 91-1,
its lead anxiolytic compound (in May 1994), and NGD 94-1, its lead
antipsychotic compound (in November 1994). All other compounds currently under
development by the Company will require significant research and development
and preclinical testing prior to the commencement of any human clinical
testing. All compounds developed by the Company, including NGD 91-1 and NGD
94-1, will require extensive human clinical testing prior to submission of any
regulatory application for commercial use. Extensive preclinical and clinical
testing required to establish safety and efficacy will take several years and
require substantial expenditures for each compound developed by Neurogen, and
the time required and cost involved in commercializing any new drugs cannot be
predicted. There can be no assurance that the Company's research or product
development efforts, or those of Pfizer, Schering-Plough or any other future
collaborative partner, will result in products being successfully discovered,
developed or approved for human clinical trials or that such products will
successfully complete clinical trials, receive regulatory approval and be
successfully commercialized. Moreover, actual research and development costs
may exceed budgeted amounts. Product development of new pharmaceuticals is
highly uncertain, and unanticipated developments, clinical or regulatory
delays, unexpected adverse side effects or inadequate therapeutic efficacy
would slow or prevent product development efforts and have a material adverse
effect on the Company's operations. See "Business."

UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN CONDUCTING, PRECLINICAL AND
CLINICAL TRIALS

Before obtaining required regulatory approvals for the commercial sale of
products, the Company must demonstrate through human clinical trials that such
products are safe and efficacious for use. To date, the

6
<PAGE>

Company has limited experience in conducting clinical trials. The Company is
dependent on Pfizer and Schering-Plough to conduct clinical trials for
compounds subject to their collaborations, including its lead compounds NGD
91-1 and NGD 94-1, and may become dependent on other third parties to conduct
future clinical trials. With the exception of NGD 91-1 and NGD 94-1, none of
the compounds under development by the Company has received regulatory
clearance for any stage of clinical trials in humans. There can be no
assurance that regulatory approval for clinical trials will be obtained for
any of the Company's other compounds under development. The results of
preclinical tests, including in particular animal model studies designed to
parallel certain human psychiatric conditions, do not necessarily predict the
safety or efficacy of a drug candidate in humans, and the results of initial
clinical trials do not necessarily predict results that will be obtained in
the later stages of clinical trials. In particular, preclinical animal model
studies for schizophrenia may be less reliable than other animal model studies
because, unlike with most other neuropsychiatric disorders, no true animal
parallel exists for schizophrenia. Furthermore, certain of the Company's
compounds, including NGD 94-1, which are designed to interact with specific
receptor subtypes exhibit new mechanisms of action. There can be no assurance
that these or any other products developed by the Company will be safe and
efficacious in humans, or that the administration to humans of any product
under development by the Company will not produce undesirable side effects.
Adverse side effects or lack of efficacy could interrupt, delay or result in
termination of clinical testing of such potential products and could
ultimately prevent their approval by the United States Food and Drug
Administration (the "FDA") or foreign regulatory authorities. The Company or
the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even if approved by the FDA and foreign regulatory authorities
for commercialization, products developed by the Company may later exhibit
adverse side effects that prevent their widespread use or necessitate their
withdrawal from the market. See "Business--Government Regulation."

RELIANCE ON CORPORATE PARTNERS

Neurogen has entered into strategic alliances with Pfizer and Schering-
Plough to develop and commercialize anxiolytics and cognition enhancers, drugs
to treat sleep disorders and drugs to treat schizophrenia and a variety of
dopamine-mediated disorders. The compounds covered by these collaborations
represent the most advanced work of the Company to date. Pursuant to these
collaborations, the Company has granted to Pfizer the exclusive worldwide
license to manufacture, use and sell products developed pursuant to the Pfizer
Agreements and to Schering-Plough the exclusive worldwide license to market,
and the exclusive license to manufacture for sale outside the United States,
products governed by the Schering-Plough Agreement. Because of these
agreements, Neurogen is dependent on Pfizer and Schering-Plough to fund a
significant portion of its research and development expenses and to
manufacture and market resulting products from the collaborations. Neurogen is
also dependent on Pfizer and Schering-Plough with respect to regulatory
filings relating to, and the clinical testing of, compounds developed under
these collaborations. Although NGD 91-1 and NGD 94-1 have been the subject of
clinical trials, either Pfizer or Schering-Plough may, based on data obtained
in these trials or otherwise, elect to halt or repeat these trials or conduct
clinical trials using different formulations of these compounds or using back-
up compounds. Any of these actions could result in delays in the clinical
development of compounds covered by these collaborations. Furthermore, the
amount and timing of resources dedicated by these strategic partners to the
collaborations is not within the Company's control. There can be no assurance
that the interests of the Company will continue to coincide with those of its
collaborators or that the collaborators will not develop independently or with
third parties products that could compete with the Company's products, or that
disagreements over rights or technology or other proprietary interests will
not occur. Further, there can be no assurance that the collaborative
agreements will be extended at the end of their respective terms. If any of
the Company's collaborators breaches or terminates its agreement with the
Company, or fails to conduct its collaborative activities in a timely manner,
the research program under the applicable collaborative agreement or the
development and commercialization of product candidates subject to such
collaboration may be adversely affected. There can be no assurance that the
Company's existing strategic alliances will be successful, that the Company
will receive any milestone payments pursuant to the collaborative agreements,
or that the collaborations will continue. If the strategic alliances are not
continued or successful, the Company's business

7
<PAGE>

could be materially adversely affected, and if the Company's strategic
partners did not continue development of its compounds, there can be no
assurance that the Company would be able to do so. See "Business--
Collaborative Research and Licensing Agreements."

The Company's strategy for the development, clinical testing, manufacturing
and marketing of certain of its products includes entering into additional
collaborations with corporate partners, licensors, licensees and others. There
can be no assurance that the Company will be able to negotiate any such
collaborative arrangements in the future on acceptable terms, if at all, or
that such collaborative arrangements will be successful. The Company may
become dependent on other third parties in any future relationships. To the
extent that the Company is not able to establish such arrangements, it would
require substantial additional capital to undertake such activities on its own
and would likely encounter significant delays in, or could be prevented from
carrying out, the development, manufacture or sale of its products. See
"Business--Patents and Proprietary Technology," "--Manufacturing" and "--Sales
and Marketing."

FUTURE CAPITAL NEEDS

The operation of the Company's business requires substantial capital
resources. The Company currently anticipates that its existing capital
resources, including the net proceeds of this offering, and the interest
earned thereon, plus future scheduled payments under the Pfizer Agreements and
the Schering-Plough Agreement, will enable it to maintain its current and
planned operations through 1998. See "Use of Proceeds." The Company's future
financial requirements will depend on many factors, including the continued
progress of its research and development programs, the timing and results of
preclinical testing and clinical studies of its drug candidates, the timing of
regulatory approvals (if any), technological advances, determinations as to
the commercial potential of its proposed products and the status of
competitive products. The Company's capital requirements will also depend on
the ability of the Company to establish and maintain collaborative
arrangements with others to fund certain research and development programs, to
conduct clinical studies, to seek regulatory approvals and, if such approvals
are obtained, to manufacture and market products and the time and expense
associated with filing and, if necessary, prosecuting and enforcing patent
claims. The Company will require the commitment of substantial resources to
conduct the costly and time-consuming research, preclinical development and
clinical trials and to establish production and marketing capabilities if any
products are successfully developed and approved for commercialization. The
Company expects that it will, in the future, seek to raise additional funds
for these purposes through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. Adequate funds for these purposes may not be available when needed or
on terms acceptable to the Company. If additional funds are raised through the
issuance of equity, further dilution to stockholders may result. The Company
has no established bank lines of credit or other arrangements through which it
can obtain financing. Insufficient funds may require the Company to reduce
substantially or eliminate expenditures for research and development, testing,
production and marketing of its proposed products or to obtain funds through
additional arrangements with corporate partners or others that may require the
Company to relinquish rights to certain of its technologies, product
candidates or products, which could have a material adverse effect on the
Company's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

COMPETITION AND THE RISK OF TECHNOLOGICAL OBSOLESCENCE

Pharmaceutical product discovery is characterized by extensive worldwide
research and development efforts and rapid technological change. New drug
discoveries and developments in the Company's field are expected to continue
at a rapid pace in both industry and academia, and the Company's success will
depend to a large extent upon its ability to develop these technologies. The
Company believes that its most significant competition comes from fully-
integrated pharmaceutical companies, including Eli Lilly, Merck, Upjohn and
others, most of which have products and major research and development
programs in the central nervous system area, certain of which are in late
stage clinical trials. In addition, there are many other entities, both public
and private, in the United States and overseas, including fully-integrated
chemical companies, specialized biotechnology firms, academic institutions,
government agencies and other research organizations which are involved in the
development of

8
<PAGE>

products similar to those of Neurogen. Many of the Company's existing or
potential competitors possess substantially greater research and development
capabilities, technical, clinical, manufacturing, regulatory and marketing
experience and financial, human and managerial resources than Neurogen.
Competition from other biotechnology and pharmaceutical companies is intense
and is expected to increase. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than those of the Company or that render the Company's
technologies or products obsolete or noncompetitive. Prior commercialization
of a substantially similar drug by a competitor could put the Company at a
significant competitive disadvantage. In addition, the Company's competitors
may also succeed in obtaining regulatory approvals and patent protection or
other intellectual property rights that would limit the Company's ability to
develop or commercialize its potential products. See "Business--Competition"
and "--Patents and Proprietary Technology."

GOVERNMENT REGULATION

The products under development by the Company are subject to extensive
regulation and review by numerous federal, state and local government agencies
in the United States, including the FDA, and similar governmental authorities
in other countries where the Company intends to test and market its products.
Obtaining regulatory approval to market a product involves substantial cost
and can take many years. Data obtained from preclinical and clinical trials
are subject to varying interpretations which can delay, limit or prevent FDA
approval. Similar delays may be encountered in foreign countries. Delays and
costs in obtaining regulatory approvals would have a material adverse effect
on the Company's results of operations. There can be no assurance that the FDA
will not change the end points for clinical trials, that clinical data will be
accepted by the FDA or that any approvals will be granted on a timely basis,
if at all. If regulatory approval of a drug is obtained, such approval may
involve limitations and restrictions on the drug's use. In addition, any
marketed drug and its manufacturer are subject to continual governmental
review, and any subsequent discovery of previously unrecognized problems could
result in restrictions on the product or manufacturer, including, without
limitation, withdrawal of the product from the market. Failure to comply with
applicable regulatory requirements can, among other things, result in fines,
suspension of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution. See "Business--Government
Regulation."

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's success depends, in part, on its ability to obtain patents,
maintain trade secrets and operate without infringing on the intellectual
property rights of third parties. The Company files patent applications both
in the United States and in foreign countries in order to protect both its
products and its processes. The patent position of biotechnology and
pharmaceutical firms is highly uncertain and involves many complex legal and
technical issues. There is no clear policy involving the breadth of claims
allowed in such cases or the degree of protection afforded under such patents.
As a result, there can be no assurance that patent applications relating to
the Company's products or processes will result in patents being issued or
that issued patents or patents issued in the future to the Company will
provide protection against competitors. It is possible that patents issued to
the Company will be successfully challenged, or that patents issued to others
may preclude the Company from commercializing its products under development.
Litigation to establish the validity of patents, to defend against
infringement claims or to assert infringement claims against others, if
required, can be lengthy and expensive. Moreover, much of the Company's know-
how and technology cannot be patented. The Company also relies on trade
secrets and confidentiality agreements with collaborators, advisors,
employees, consultants, vendors and other service providers in order to
protect proprietary know-how. There can be no assurance that these agreements
will not be breached, that the Company would have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. Furthermore, the Company's
business may be adversely affected if competitors independently develop
substantially equivalent technology or if the Company is unsuccessful in
protecting its proprietary rights. See "Business--Patents and Proprietary
Technology."

9
<PAGE>

NO ASSURANCE OF ADEQUATE REIMBURSEMENT

The Company's ability to commercialize its products successfully will depend
in part on reimbursement of the costs of such products and related treatments
at acceptable levels from government authorities, private health insurers and
other organizations, such as health maintenance organizations ("HMOs"). Third-
party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend towards managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care providers
are instituting and the effect of any health care reform could adversely
affect the Company's ability to sell its products if successfully developed
and approved by the FDA and/or any other appropriate regulatory authority.

There can be no assurance that reimbursement in the United States or foreign
countries will be available for any products the Company may develop, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products,
thereby adversely affecting the Company's business. The unavailability or
inadequacy of third-party reimbursement for the Company's products would
adversely affect the Company's business. Moreover, the Company is unable to
predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted
in the future or what effect such legislation or regulation would have on the
Company's business. See "Business--Third-Party Reimbursement."

ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS

The Company's success to date has been highly dependent on the skills of its
scientific and management personnel. The Company believes its future success
will depend in large part on its ability to recruit and retain such personnel,
consultants and members of its Scientific Advisory Board. The Company faces
significant competition for such individuals from other companies, academic
institutions, government entities and other organizations. The failure to
attract and retain one or more of these key personnel could adversely affect
the Company. In addition, the failure to retain certain of the Company's
current personnel, some of whom do not have employment contracts with the
Company, could adversely affect the Company. Each of the Company's current
personnel has entered into confidentiality and non-competition agreements with
the Company. See "Business--Human Resources."

LACK OF MANUFACTURING CAPABILITY

Neurogen is currently relying, in significant part, on third-party
manufacturers to produce its compounds for preclinical and clinical trials.
Pfizer and Schering-Plough are responsible for the manufacture of compounds
for clinical trials which are subject to the Pfizer Agreements and the
Schering-Plough Agreement, respectively. See "Business--Collaborative Research
and Licensing Agreements." The Company also currently utilizes third-party
manufacturers from time to time to produce other compounds for its research
purposes. The Company expects to be dependent on its collaborative partners or
third-party manufacturers to supply adequate quantities of its compounds for
additional clinical trials and commercial distribution if approved by the FDA
and/or any other applicable regulatory authority, although the Company has
retained certain manufacturing rights under the Schering-Plough Agreement.
There can be no assurance that the Company will be able to enter into any
necessary third-party manufacturing arrangements on terms acceptable to the
Company, if at all. In the event that the Company is unable to obtain contract
manufacturing on commercially acceptable terms, its ability to commercialize
its potential products may be adversely affected. The Company's dependence
upon third parties for the manufacture of its potential products may adversely
affect the Company's future profit margins, if any, and its ability to develop
and manufacture products on a timely and competitive basis. Furthermore, there
can be no assurance that such manufacturers will abide by any use limitations
or confidentiality restrictions in licenses with the Company. In addition, any
such manufacturer may develop process technology related to the manufacture of
Neurogen's compounds which it owns independently or jointly with Neurogen,
which could

10
<PAGE>

increase the Company's reliance on such manufacturer or require the Company to
obtain a license from such manufacturer in order to have its products
manufactured. There can be no assurance that such license, if required, would
be available on terms acceptable to the Company, if at all. See "Business--
Manufacturing." In the event the Company decides to or is required to
establish internal manufacturing capabilities for additional clinical trials
or commercial distribution of any of its products there can be no assurance
that the Company will be able to establish such capabilities at an acceptable
cost or in an acceptable time frame, if at all.

LACK OF SALES AND MARKETING EXPERIENCE

Neurogen has limited experience in product sales, marketing and distribution
and intends to rely on co- promotion or other licensing arrangements with
corporate partners (including Pfizer and Schering-Plough) for the marketing
and sales of certain of its potential products in some or all geographic
markets, if regulatory approval is obtained. There can be no assurance that
the Company will be successful in establishing future strategic alliances to
market potential products, or that its licensees in these arrangements will be
successful in marketing such products. In the event that the Company is unable
or elects not to enter into such arrangements, there can be no assurance that
Neurogen will successfully develop sales and marketing capabilities, that the
cost of establishing a marketing staff or sales force will not exceed product
revenues, if any, or that any sales and marketing efforts by the Company will
be successful. In addition, the Company competes with many other companies
that currently have extensive and well-funded marketing and sales operations.
Moreover, even if products that the Company or any collaborative partner
develops are brought to market, there can be no assurance that they will gain
acceptance among physicians, patients or third-party payors. See "Business--
Sales and Marketing."

POTENTIAL PRODUCT LIABILITY

The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have caused an
adverse effect on patients. Such risk exists for products being tested in
human clinical trials, as well as products that receive regulatory approval
for commercial sale. Manufacturers of pharmaceuticals have been the subject of
significant product liability litigation. The Company maintains product
liability insurance for compounds it is testing in clinical trials. The
Company intends to seek additional product liability insurance coverage if and
when its products are commercialized, but can give no assurance that it will
be able to obtain such insurance at acceptable costs, if at all. Furthermore,
there can be no assurance that such coverage, if obtained, will be adequate to
cover claims. There can be no assurance that the Company will not experience a
significant product liability claim or recall, which could adversely affect
the Company's business.

HAZARDOUS MATERIALS

As with many biotechnology companies, the Company's research and development
involves the controlled use of hazardous materials, chemicals and radioactive
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by state and federal regulations or that it will not be subject to
the risk of accidental contamination or injury from these materials. In the
event of such an accident, the Company could be held liable for any damages
that result and any such liability could adversely affect the Company. See
"Business--Government Regulation."

VOLATILITY OF STOCK PRICE

The market prices for securities of biotechnology companies, including
Neurogen, have historically been highly volatile, and the market has from time
to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements
of technological innovations, regulatory developments or new commercial
products by, and developments concerning proprietary rights and clinical
progress of, the Company or its competitors and period to period fluctuations
in financial results may have a significant impact on the Company's business
and on the market price of the Common Stock.

11
<PAGE>

Future sales of substantial amounts of Common Stock by existing stockholders
could also adversely affect the prevailing price of the Common Stock. See
"Price Range of Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the prevailing market price of
the Common Stock. Upon completion of this offering, based on the number of
shares outstanding at June 30, 1995 and without taking into account shares of
Common Stock issuable upon the exercise of outstanding stock options or
warrants, the Company will have 12,628,133 shares (or 13,003,133 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock
outstanding. Of these shares, the Company believes 9,336,840 shares will be
freely tradeable under the Securities Act without restriction or further
registration under the Securities Act, and 3,291,193 shares will be held by
affiliates of the Company and will be freely tradeable subject to the volume
and other restrictions of Rule 144 promulgated under the Securities Act.

In addition, shares of Common Stock issuable upon the exercise of options
granted pursuant to the Company's stock option plans will be freely tradeable
without restriction when those options are exercised, subject, in certain
cases, to the volume and other restrictions of Rule 144. Options to purchase
753,388 shares of Common Stock were exercisable at June 30, 1995.

The Company and the officers and directors and certain other stockholders of
the Company (holding an aggregate of approximately 3,291,193 shares of Common
Stock) have agreed not to offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock except without the prior written
consent of Smith Barney Inc. for 90 days after the date of this Prospectus, in
the case of the Company, in certain limited circumstances.

In addition, certain holders of shares of Common Stock or warrants to
purchase shares of Common Stock have the right to cause the Company to
register their shares under the Securities Act, subject to certain conditions
and limitations. Exercise of any of these registration rights could involve a
substantial expense to the Company and may adversely affect the Company's
ability to complete future equity financings.

DILUTION; WARRANTS AND STOCK OPTIONS

The public offering price of the Common Stock is substantially higher than
the net tangible book value per share of the Common Stock prior to the
offering. Purchasers of shares of Common Stock in this offering, therefore,
will experience immediate and substantial dilution equal to approximately
$9.70 per share from the public offering price per share (assuming a public
offering price of $15.438 per share). Certain stock options and common stock
purchase warrants granted by Neurogen to date may be exercised at prices equal
to or lower than the public offering price and consequently may have a further
dilutive effect on the net tangible book value per share of the Common Stock.
Neurogen anticipates that it will grant additional stock options in the future
which may have similar dilutive effects in connection with its efforts to
recruit and retain key personnel. See "Dilution."

12
<PAGE>

USE OF PROCEEDS

The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered hereby, after deducting estimated offering expenses payable by the
Company, are estimated to be approximately $36.1 million ($41.5 million if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $15.438 per share.

The Company intends to use the proceeds of this offering to fund its
research and development activities, including the clinical development of
compounds which are not the subject of existing collaborations with Pfizer and
Schering-Plough. While Pfizer and Schering-Plough have assumed responsibility
for the funding of the development of the compounds under their respective
collaborative agreements, Neurogen plans to seek to enter into additional
collaborations with respect to eating disorders, stress disorders or other
programs whereby it may assume additional responsibilities for the funding of
development activities and would seek to retain additional commercial rights.
The amount and timing of the proceeds allocated to specific research and
development activities will depend upon numerous factors, some of which are
beyond the Company's control, such as the status of competitive products, the
progress of the Company's research and development programs and the timing and
availability of alternative methods of financing for the Company, including
existing or future strategic alliances and joint ventures with third parties.
The Company evaluates on an ongoing basis potential collaborative arrangements
with third parties. In addition, the Company intends to use some of the
proceeds to fund working capital and general corporate purposes, which may
include capital expenditures in connection with improvements to the Company's
facilities. The Company has not determined the amount it plans to spend for
each of such purposes or the timing of such expenditures.

Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest-bearing obligations of investment grade. The
Company anticipates that its existing capital resources, including the net
proceeds of the offering, will enable it to maintain its current and planned
operations through 1998. The Company's capital requirements may vary, however,
depending upon numerous factors, including those described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DILUTION

At March 31, 1995, the adjusted net tangible book value of the Company was
approximately $36.2 million or $3.59 per share of Common Stock. The adjusted
net tangible book value per share of the Company represents the amount of
total tangible assets of the Company less the amount of total liabilities at
March 31, 1995, giving effect to the up-front payment by Schering-Plough under
the Schering-Plough Agreement as if such payment had been made on such date,
divided by the number of shares of Common Stock outstanding as of such date.
Without giving effect to any additional changes in adjusted net tangible book
value after March 31, 1995, other than the sale of the shares offered hereby
and receipt of the net proceeds therefrom at an assumed public offering price
of $15.44 per share, the adjusted net tangible book value of the Company at
March 31, 1995 would have been approximately $72,318,000 or $5.74 per share.
This represents an immediate increase in adjusted net tangible book value of
$2.15 per share of Common Stock held by the existing stockholders of the
Company and an immediate dilution of $9.70 per share to new investors
purchasing shares at the public offering price. The following table
illustrates the dilution in adjusted net tangible book value per share to new
investors as of March 31, 1995, assuming that the Underwriters' over-allotment
option is not exercised:

<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $15.44
Adjusted net tangible book value per share before offering... $3.59
Increase in adjusted net tangible book value per share
attributable to the offering............................... 2.15
-----
Pro forma net tangible book value per share after the offering. 5.74
------
Dilution per share to new investors............................ $ 9.70
======
</TABLE>

The foregoing assumes no exercise of stock options or warrants to purchase
799,751 shares of Common Stock which were exercisable on March 31, 1995. To
the extent such options and warrants are exercised at prices lower than the
public offering price, there will be further dilution to new investors. See
"Risk Factors--Dilution; Warrants and Stock Options."

13
<PAGE>

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on The Nasdaq Stock Market under the symbol
"NRGN." The table below sets forth the high and low last sale prices for the
Common Stock on The Nasdaq Stock Market for the periods indicated since
January 1, 1993. The Company's fiscal year ends on December 31.

<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------ -----
1993:
-----
<S> <C> <C>
First Quarter............................................. $ 8 3/8 $ 5 3/4
Second Quarter............................................ 7 5 1/2
Third Quarter............................................. 7 5/8 6
Fourth Quarter............................................ 7 5/8 6 1/8

1994:
-----
First Quarter............................................. $ 9 $ 7
Second Quarter............................................ 9 6 1/2
Third Quarter............................................. 6 7/8 4 3/4
Fourth Quarter............................................ 7 6

1995:
-----
First Quarter............................................. $ 9 5/8 $ 6 5/8
Second Quarter............................................ 17 9 1/4
Third Quarter (through July 27, 1995)..................... 15 5/8 13 1/2
</TABLE>

On July 27, 1995, the last reported sale price for the Common Stock as
reported on The Nasdaq Stock Market was $15.375 per share. As of June 30,
1995, there were approximately 460 holders of record of the Common Stock.

DIVIDEND POLICY

Neurogen has never paid any dividends on its Common Stock. For the
foreseeable future, it is anticipated that earnings, if any, which may be
generated from Neurogen's operations will be used to finance growth and that
dividends will not be paid to stockholders.

14
<PAGE>

CAPITALIZATION

The following table sets forth the current and long-term portions of long-
term obligations and the stockholders' equity of Neurogen as of March 31, 1995
and as adjusted to reflect (i) the receipt by the Company of $17.9 million on
June 28, 1995 pursuant to the Schering-Plough Agreement and (ii) the sale by
the Company of 2,500,000 shares of Common Stock offered hereby, assuming a
public offering price of $15.438 per share, and the receipt of the estimated
net proceeds therefrom.

<TABLE>
<CAPTION>
MARCH 31, 1995
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations................. $ 146 $ 146
======== ========
Long-term obligations, excluding current portion......... $ 582 $ 582
-------- --------
Stockholders' equity:
Preferred Stock, par value $.025 per share; 2,000,000
shares authorized; none issued and outstanding,
actual and as adjusted.............................. -- --
Common Stock, par value $.025 per share; 30,000,000
shares authorized; 10,098,663 shares issued and
outstanding, actual; and 12,598,663 shares issued
and outstanding, as adjusted(1)..................... 252 315
Additional paid-in capital............................. 45,681 81,699
Accumulated deficit.................................... (23,467) (9,713)
Unrealized gain on marketable securities............... 17 17
-------- --------
Total stockholders' equity........................... 22,483 72,318
-------- --------
Total capitalization................................ $ 23,065 $ 72,900
======== ========
</TABLE>
- --------
(1) Does not include 2,154,933 shares of Common Stock issuable upon exercise
of outstanding stock options and common stock purchase warrants at March
31, 1995. At March 31, 1995, options and warrants to purchase 799,751
shares of Common Stock were exercisable. See Notes 4, 5 and 7 of Notes to
Financial Statements.

15
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data presented below as of December 31, 1990, 1991,
1992, 1993 and 1994 and for each of the years in the five-year period ended
December 31, 1994 are derived from the financial statements of Neurogen, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The selected financial data for the three-month
period ended March 31, 1994 and 1995 have been derived from the unaudited
financial statements of the Company, and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial data for such periods. The results
of operations for the three-month period ended March 31, 1995 are not
necessarily indicative of the results of operations for the full year. The
selected financial data presented below should be read in conjunction with the
more detailed information contained in the financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Research revenue...... -- -- $ 4,595 $ 4,605 $ 5,789 $ 1,150 $ 1,870
Operating expenses:
Research and
development......... $ 2,189 $ 3,674 4,721 6,452 10,150 2,360 3,044
General and
administrative...... 1,249 1,627 2,043 2,475 2,774 797 688
Other income, net..... 410 140 576 506 484 30 162
------- ------- ------- ------- ------- ------- -------
Net loss.............. $(3,028) $(5,161) $(1,593) $(3,816) $(6,651) $(1,977) $(1,700)
======= ======= ======= ======= ======= ======= =======
Net loss per share.... $ (.52) $ (.77) $ (.18) $ (.43) $ (.70) $ (.22) $ (.17)
======= ======= ======= ======= ======= ======= =======
Weighted average
number of shares
outstanding......... 5,773 6,675 8,752 8,962 9,528 8,970 10,084
</TABLE>

DECEMBER 31,
---------------------------------------------- MARCH 31,
1990 1991 1992 1993 1994 1995
------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities........... $ 4,028 $ 7,638 $ 19,423 $ 12,326 $ 15,480 $ 14,045
Total assets.......... 11,156 14,695 27,426 22,704 25,889 24,532
Long-term obligations,
excluding current
portion.............. 1,093 1,687 1,265 792 620 582
Accumulated deficit... (4,545) (9,706) (11,299) (15,115) (21,766) (23,467)
Stockholders' equity.. 9,771 12,065 24,587 20,771 24,081 22,483
</TABLE>

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Since its inception in September 1987, Neurogen has been engaged in the
discovery and development of proprietary therapeutic products for the
treatment of psychiatric and neurological disorders. The Company has not
derived any revenue from product sales and expects to incur significant and
increasing losses over at least the next several years as it continues to
expand its discovery and development programs. Its revenues to date have come
from two collaborative research agreements entered into with Pfizer, one
collaboration and license agreement with Schering-Plough and from interest
income. The Company entered into the 1992 Pfizer Agreement in February 1992 to
collaborate with respect to the development of compounds for anxiety and
cognition disorders. The Company entered into the 1994 Pfizer Agreement in
June 1994 to collaborate with respect to its sleep disorder program. The
Company entered into the Schering-Plough Agreement in June 1995 to develop and
market compounds for the treatment of dopamine-mediated psychiatric disorders.

RESULTS OF OPERATIONS

Results of operations may vary from period to period depending on numerous
factors, including the timing of payments received under existing or future
strategic alliances, joint ventures or financings, if any, the progress of the
Company's research and development projects, technological advances and
determinations as to the commercial potential of proposed products. Neurogen
expects research and development costs to increase significantly over the next
several years as its drug development programs progress. In addition, general
and administrative expenses necessary to support the expanded research and
development activities are expected to increase for the foreseeable future.

Three Months ended March 31, 1995 and 1994

The Company's research revenues were $1,869,667 for the three months ended
March 31, 1995 compared to $1,150,000 for the same period in 1994. Research
funding pursuant to the Pfizer Agreements constituted substantially all of the
Company's revenues and increased 63% for the three-month period ended March
31, 1995 compared to the same period in 1994. This increase is due to the
commencement of the 1994 Pfizer Agreement. Research funding under the 1992
Pfizer Agreement, which has represented $4.6 million per year for the last
three years, is scheduled to terminate at the end of 1995 if Pfizer does not
extend the collaboration.

Research and development costs have increased $684,216, or 29%, to
$3,043,972 for the three-month period ended March 31, 1995 as compared to the
same period in 1994. This increase is due primarily to expansion of
preclinical and clinical testing on the Company's lead antipsychotic compound,
increased staffing levels and purchases of laboratory equipment, materials and
supplies. Research and development costs represented 82% of total operating
expenses for the first quarter of 1995 as compared to 75% for the same period
in 1994.

General and administrative expenses decreased $109,095, or 14%, to $688,432
for the three-month period ended March 31, 1995 as compared to the same period
in 1994. This decrease is primarily attributable to a refinement in the
Company's allocation of expenses between research and development and general
and administrative and to a general reduction in several areas.

Other revenues, consisting primarily of interest income and gains and losses
from U.S. government securities, increased 268% for the first quarter of 1995
compared to the same period in 1994 due to higher interest rates, realized
gains on U.S. government securities and a higher level of invested funds.

The Company incurred a net loss of $1,700,461 for the three months ended
March 31, 1995 as compared with a net loss of $1,976,833 for the same period
in 1994. The net loss decreased in 1995 due primarily to revenue received
under the 1994 Pfizer Agreement.

Years ended December 31, 1994, 1993 and 1992

The Company's research revenues were $5,789,333 in 1994, $4,604,524 in 1993
and $4,595,476 in 1992. Research funding pursuant to the Pfizer Agreements
constituted substantially all of the Company's revenues and increased 22% in
1994 compared to 1993 due to the commencement of the 1994 Pfizer Agreement.
Revenues remained relatively constant in 1993 as compared with 1992.

17
<PAGE>

Research and development costs have increased substantially over the years,
rising 57% to $10,149,633 in 1994 as compared with 1993 and 37% to $6,451,876
in 1993 as compared with 1992. The increase in 1994 was due primarily to
expansion of preclinical and clinical testing on the Company's lead
antipsychotic compound, increased staffing levels and purchases of laboratory
equipment, materials and supplies. The increase in 1993 over 1992 was due to
expansion of preclinical testing on the Company's lead compounds in the
anxiolytic, anticonvulsant and antipsychotic programs, increased staffing
levels and purchases of laboratory equipment, materials and supplies. Research
and development costs represented 79%, 72%, and 70% of total operating
expenses in 1994, 1993, and 1992, respectively.

General and administrative expenses increased 12% to $2,774,380 in 1994, and
21% to $2,474,647 in 1993 as compared with 1992. The increases in both years
were due primarily to staff additions in connection with the expansion of the
Company's operations and the addition of related facilities.

Other revenues, consisting primarily of interest income and gains and losses
from U.S. government securities, decreased 7% in 1994 due to realized and
unrealized losses on U.S. government securities. Other income decreased in
1993 as compared with 1992 due to a lower level of invested funds and
declining interest rates.

The Company incurred a net loss of $6,651,195, $3,816,131 and $1,593,286 in
1994, 1993, and 1992, respectively. The increase from 1993 to 1994 was due to
increased development and clinical costs of NGD 94-1, its lead antipsychotic
compound, and additional staff and related laboratory supply costs for other
non-Pfizer projects. The net loss increased from 1992 to 1993 due to the
Company's expansion of operations unrelated to the Pfizer Agreements.

In 1993 and 1994, respectively, the Company adopted Financial Accounting
Standards Board Statements No. 109, "Accounting for Income Taxes" ("SFAS 109")
and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Adoption of SFAS 109 and 115 did not have a
significant impact on the Company's financial statements.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1995 and December 31, 1994, cash, cash equivalents and
marketable securities were in the aggregate $14,045,000 and $15,480,000,
respectively. The decrease in 1995 was due to expenditures associated with
establishing additional operations.

Neurogen's cash requirements to date have been met by the proceeds of its
financing activities, including interest earned on such proceeds, and research
funding received pursuant to the Pfizer Agreements and the Schering-Plough
Agreement. The Company's financing activities have included three private
placement offerings of the Company's common stock during 1988 and 1989, a
public offering of the Company's common stock in each of 1989 and 1991, and
the sale of common stock to Pfizer in 1992 and 1994 in connection with
entering into the Pfizer Agreements. Total funding received from these
financing activities was approximately $45,400,000. The Company's expenditures
have been primarily to fund research and development and general and
administrative expenses, including hiring research and development, management
and administrative personnel, and to construct and equip its research and
development facility.

In the first quarter of 1992, the Company entered into the 1992 Pfizer
Agreement effective January 1992 pursuant to which Pfizer made a $13,750,000
equity investment in the Company. Pursuant to the 1992 Pfizer Agreement, the
Company expects to receive approximately $18,400,000 during the four-year
period which commenced January l, 1992 for research and development funding of
the Company's anxiolytic and cognitive enhancer programs, and may receive up
to an additional $4,600,000 for a fifth year should Pfizer exercise its option
to extend the collaboration. Neurogen could also receive milestone payments of
up to $12,500,000 during the development and regulatory approval of its
products. In return, Pfizer received the exclusive rights to manufacture and
market GABA-based anxiolytics and cognition enhancers developed in the
collaboration for which it will pay Neurogen royalties based upon net sales
levels, if any, for such products. As of March 31, 1995, Pfizer had provided
$14,950,000 of research funding to the Company pursuant to the 1992 Pfizer
Agreement, in addition to its equity investment in 1992.

18
<PAGE>

Neurogen and Pfizer entered into their second collaborative agreement, the
1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer provided
$9,864,000 in equity financing. Pursuant to the 1994 Pfizer Agreement, the
Company expects to receive approximately $7,386,000 during the three-year
period which commenced July 1, 1994, for research and development funding of
the Company's sleep disorder program and may receive up to an additional
$2,379,000 for a fourth year should Pfizer exercise its option to extend the
collaboration. Neurogen could also receive milestone payments of up to
$3,250,000 during the development and regulatory approval of its sleep
disorder compounds. As part of this second collaboration, Pfizer received the
exclusive rights to manufacture and market GABA-based sleep disorder products
developed in the collaboration for which it will pay Neurogen royalties
depending upon net sales levels, if any. As of March 31, 1995, Pfizer had
provided $2,628,667 of research funding to the Company pursuant to the 1994
Pfizer Agreement, in addition to its equity investment in 1994.

Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement, in
addition to making the equity investments and the research and milestone
payments noted above, Pfizer is responsible for funding the cost of all
clinical development and marketing, if any, of drugs developed from the
collaboration.

In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement pursuant to which Neurogen and Schering-Plough are collaborating in
the discovery and development of anti-psychotics and drugs for other disorders
which act through the dopamine family of receptors. Pursuant to the Schering-
Plough Agreement, the Company received an up-front payment of $14,000,000 for
the rights to Neurogen's dopamine compounds and $3,000,000 for the right to
test certain of Neurogen's combinatorial chemistry libraries in selected non-
CNS assays. Schering-Plough also agreed to pay an additional $3,000,000 in
1996 for the right to test additional libraries. Moreover, Neurogen expects to
receive approximately $7,200,000 during the two year period which commenced
June 28, 1995, for research and development funding of the Company's
antipsychotic program and may receive additional research and development
funding of up to $3,600,000 per year for three additional one-year periods
depending on whether and the extent to which Schering-Plough exercises its
right to extend the collaboration. Neurogen could also receive milestone
payments of up to approximately $32,000,000 if it achieves certain development
and regulatory objectives regarding its products subject to the collaboration.
In return, Schering-Plough received the exclusive worldwide license to market
products subject to the collaboration and Neurogen retained the rights to
receive royalties based on net sales levels, if any.

The Company plans to use its cash balance for its research and development
activities, working capital and general corporate purposes. Neurogen
anticipates that its cash balance, including the proceeds from this offering,
and interest thereon, as supplemented by research funding pursuant to the
Pfizer Agreements and the Schering-Plough Agreement, will be sufficient to
fund its current and planned operations through 1998. However, Neurogen's
funding requirements may change and will depend upon numerous factors
including, but not limited to, the progress of the Company's research and
development programs, the timing and results of preclinical testing and
clinical studies, the timing of regulatory approvals, technological advances,
determinations as to the commercial potential of its proposed products, the
status of competitive products and the ability of the Company to establish and
maintain collaborative arrangements with others for the purpose of funding
certain research and development programs, conducting clinical studies,
obtaining regulatory approvals and, if such approvals are obtained,
manufacturing and marketing products. The Company anticipates that it will
augment its cash balance through financing transactions, including the
issuance of debt or equity securities and further corporate alliances. No
arrangements have been entered into for any future financing and no assurances
can be given that adequate levels of additional funding can be obtained on
favorable terms, if at all.

As of December 31, 1994, for federal income tax purposes, the Company had
generated net operating loss carryforwards of approximately $22,800,000, which
are scheduled to expire in the years 2003 through 2009. A significant portion
of these net operating loss carryforwards will be utilized in 1995 as a
result, in part, of up-front payments received and corresponding revenues
recognized pursuant to the Schering-Plough Agreement. The issuance of shares
by the Company pursuant to this offering, future issuance of securities by the
Company and/or sales of securities by the Company's principal shareholders
could result in an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986. Such an ownership change could limit the Company's
utilization of net operating loss carryforwards to offset future taxable
income, if any.

19
<PAGE>

BUSINESS

OVERVIEW

Neurogen Corporation is an emerging neuropharmaceutical company engaged in
the discovery and development of a new generation of drugs to treat
psychiatric and neurological disorders by regulating nerve cell (neuron)
communication in the brain. The Company is developing "receptor subtype
specific" drugs based on its expertise in neuronal communication. The Company
believes that receptor subtype specific drugs offer the potential for
equivalent or improved efficacy and fewer side effects than currently marketed
psychotherapeutic drugs, most of which interact with multiple receptor
subtypes. The Company leverages its resources, where it believes it to be
advantageous, through collaborations with large pharmaceutical companies for
advanced clinical development and commercialization of its products. The
Company has existing collaborations with Pfizer and Schering-Plough and
intends to enter into additional collaborations where appropriate.

Neurogen believes that its expertise in neurobiology, medicinal chemistry
and molecular biology, combined with its biased combinatorial chemistry
program, enable it to identify and develop compounds more quickly
and efficiently than it could using traditional drug discovery techniques.
Neurogen has developed a portfolio of neuropharmaceutical drug candidates
designed to treat anxiety, psychosis, dementia, depression and epilepsy and
sleep, eating and stress disorders. Industry analysts estimate the worldwide
market for currently marketed neuropharmaceuticals for such disorders to be
approximately $10.5 billion annually.

BACKGROUND

The human central nervous system (the "CNS") is composed of neurons in the
brain and spinal cord which are organized into interconnecting networks
responsible for coordinating all functions in the body. As a result, neurons
are implicated in all psychiatric and neurological disorders.

Neurons can be divided into many different classes. While the fundamental
purpose of all neurons is to communicate with other neurons and cells
throughout the body, each class of neurons has a particular function to play
in the CNS, including controlling a physiological action, responding to
stimulation or storing memory. Communication between neurons occurs through
complex electrical and chemical processes involving the transmission of
chemicals, known as neurotransmitters, across spaces between nerve cells,
known as synapses. At a synapse, electrical signals in the transmitting neuron
cause the release of neurotransmitters. After being released from one neuron,
a neurotransmitter diffuses in the synapse and interacts with proteins, known
as receptors, located on the surface of adjacent neurons. Each neuron contains
thousands of receptors. When a neurotransmitter binds to and activates a
receptor, it produces a response in the receiving neuron thereby stimulating
specific functions or actions.

Disruption of normal neuronal communication has been implicated in many
neurological and psychiatric disorders, including anxiety, schizophrenia,
eating disorders, stroke and epilepsy. Such disruption can result from
abnormal release of neurotransmitters, aberrant signaling between nerve cells
or heightened sensitivity of receptors to normal levels of neurotransmitters.

[ART]

Artist's depiction of neurotransmitter activity at the synapse

20
<PAGE>

The complex task of communication between neurons is carried out by almost
100 different types of neurotransmitters. Each neurotransmitter interacts only
with selected types of receptors specific to that neurotransmitter.

For many years, it was commonly believed that each neurotransmitter
interacted with one or at most two types of receptors. In the last decade,
however, scientists, including current members of Neurogen's scientific staff,
have discovered that each neurotransmitter interacts with not just one type of
receptor but with multiple receptor subtypes which are grouped into families
depending on the similarity of their molecular structure. Receptor subtypes
differ slightly from other members of their family, are distributed
differently throughout the brain and may control different physiological
functions from other receptor subtypes within the same family.

The neurotransmitters gamma-aminobutyric acid ("GABA"), dopamine and
neuropeptides control many important neurophysiological functions. GABA is
believed to be one of the most prevalent neurotransmitters in the CNS. GABA
interacts with a family of receptor subtypes, known as GABA receptors, to
regulate the activity level of neurons. Subtypes of GABA receptors have
evolved to carry out particular functions in the CNS. Because of its
prevalence in the CNS, disruption of normal GABA receptor function is
implicated in many neuro-psychiatric disorders, including anxiety, learning
and memory impairment, sleep disorders and seizures.

Dopamine is present at fewer synapses in the CNS than GABA, but is known to
control important functions such as movement and emotional responses. Dopamine
interacts with a family of receptors, known as dopamine receptors, consisting
of at least five subtypes, each of which is responsible for certain functions
in the CNS. For example, abnormalities in dopamine transmission have been
implicated in schizophrenia.

The Company believes neuropeptides, by interacting with certain receptors,
are associated with mood, eating and stress responses. Two neuropeptides,
neuropeptide Y ("NPY") and corticotrophin releasing factor ("CRF"), are
believed to be associated with eating and stress disorders. As with dopamine,
NPY and CRF interact with their own families of receptor subtypes.

Almost every psychotherapeutic drug currently on the market interacts not
with one specific receptor subtype, but with many or all members of one or
more receptor families. Neurogen believes that this nonselectivity is the
principal cause of the side effects, including sedation and addiction,
associated with such drugs. The discovery of receptor subtypes has provided an
opportunity for Neurogen to design drugs which target specific receptor
subtypes. Neurogen believes that receptor subtype specific drugs could be
efficacious with fewer adverse side effects than currently marketed drugs.

BUSINESS STRATEGY

Neurogen's mission is to be a leader in the design, development and
commercialization of psychotherapeutic drugs for the treatment of a variety of
neuropsychiatric disorders. The Company focuses its drug discovery programs on
small molecule compounds that target specific receptor subtypes implicated in
such disorders. Neurogen believes that such compounds offer the potential for
equivalent or improved efficacy with fewer side effects than drugs currently
on the market. The key points of the Company's strategy are as follows:

Target Multiple Psychotherapeutic Markets. Neurogen utilizes its expertise in
the CNS area to develop a diverse portfolio of drug candidates to treat common
neurological disorders, including anxiety, psychosis, depression and eating,
sleep and stress disorders. By targeting multiple neuropsychiatric disorders
which represent large markets, the Company seeks to reduce its reliance on any
single program.

Develop Receptor Subtype Specific Compounds. The Company focuses its drug
discovery efforts on receptor subtype specific small molecule compounds the
Company believes will have fewer side effects than currently marketed drugs.
The Company believes that such drugs have the potential to penetrate and
expand existing markets as evidenced by the new class of antidepressants
(e.g., Prozac, Zoloft and Paxil) which selectively

21
<PAGE>

interact with certain receptors and have less severe side effects than
previous antidepressants. In addition, the Company seeks to develop small
molecule drugs due to their relatively high solubility, increased ability to
cross the blood brain barrier (a critical consideration in developing safe and
efficacious psychotherapeutic drugs) and low manufacturing costs.

Utilize Advanced Discovery Technologies. The Company utilizes its advanced
discovery technologies, including its combinatorial chemistry program, to
enhance its drug discovery capabilities and to provide new opportunities for
strategic partnerships. Employing its biased combinatorial chemistry
capabilities, the Company is developing extensive libraries of small molecule
compounds. This program was instrumental in the discovery of NGD 95-1,
Neurogen's development compound for the treatment of eating disorders. In
addition, as part of its collaboration with Schering-Plough, Neurogen will
share its combinatorial libraries with Schering-Plough in return for $3.0
million per year for two years.

Ratchet Growth Through Strategic Collaborations. The Company seeks to ratchet
its growth through successive strategic collaborations in which it hopes to
progressively retain additional commercial rights and assume additional
responsibilities to gradually develop its clinical development, manufacturing
and sales capabilities. Further, through its collaborations, Neurogen seeks to
diversify the development risk of its programs and to enhance the likelihood
of commercialization of its compounds. In its collaborations with Pfizer,
Neurogen has focused its efforts primarily on research and discovery and looks
to Pfizer to conduct and fund all clinical development, manufacturing and
sales/marketing activities. In its collaboration with Schering-Plough, in
addition to leading the research and discovery efforts, Neurogen has retained
the right to participate in the clinical development of collaboration
compounds (while Schering-Plough will conduct and fund clinical trials) and an
option to manufacture products resulting from the collaboration for the United
States market.

PRODUCT RESEARCH AND DEVELOPMENT

The Company believes it is well positioned to capitalize on advances in
molecular biology, medicinal chemistry and neurobiology to develop new
psychotherapeutic compounds. The Company believes that its scientists possess
an advanced understanding of the biochemistry of the brain and its possible
connection to human behavior and that this understanding has enabled the
Company to develop a portfolio of compounds which include product candidates
for the treatment of anxiety, psychosis, epilepsy, dementia and depression and
sleep, eating and stress disorders.

DRUG DISCOVERY TECHNOLOGIES

Neurogen's drug discovery technologies have evolved from a traditional
approach of identifying leads from known chemical compounds to developing its
own proprietary library of potential compounds. When Neurogen first began to
concentrate on anxiety and psychosis disorders, a number of small molecule
compounds were known to interact with the GABA and dopamine receptor families
and provide therapeutic benefits. This allowed Neurogen to follow a
traditional medicinal chemistry approach by starting from known active
structures and from that starting point searching for novel chemical classes
of compounds to treat these disorders. Neurogen then coupled its understanding
of the biology of these receptor families with its expertise in medicinal
chemistry to pursue the discovery of receptor subtype specific compounds from
such novel classes. Throughout the discovery process, Neurogen employs its
expertise in pharmacology and animal behavioral assays to assess and further
define the activity of its compounds and thereby guide and refine its
discovery efforts.

At the commencement of Neurogen's neuropeptide program for the treatment of
eating disorders in 1994, no suitable starting points for chemical structures
were known to exist. In order to enhance its ability to discover and develop
lead compounds for this program and other therapeutic targets, Neurogen
developed a combinatorial chemistry program, an emerging field in the
biotechnology and pharmaceutical industries. Unlike traditional drug
discovery, in which compounds are typically designed and synthesized at a rate
of 50 to 100 compounds per year per chemist, combinatorial chemistry
technologies can generate libraries of thousands of compounds in

22
<PAGE>

days. Moreover, advances in screening techniques and robotics now allow the
rapid screening of thousands of compounds created through combinatorial
efforts. Combinatorial libraries like those being developed at Neurogen can be
used to find new lead structures for receptors or other targets where no leads
exist as well as to optimize lead structures by refining candidates into
structures with suitable drug characteristics.

Most companies with combinatorial chemistry programs have used these
technologies to systematically create immense libraries of diverse compounds.
However, since the number of unique organic compounds is essentially infinite,
Neurogen believes it is important to bias its libraries toward the selection
of molecules most likely to interact with receptor families of interest to
Neurogen and other pharmaceutical companies. Neurogen also biases its library
to create compounds more likely to have drug-like characteristics such as oral
availability. To bias its library, Neurogen first selects or designs a number
of known and proprietary pharmacophores (arrangements of atoms thought to have
activity in some biochemical assay) with the aid of Computer Assisted
Molecular Modeling (CAMM). These pharmacophores then serve as templates and
are subjected to "combinatorial" procedures, whereby the templates are reacted
with numerous different variants of a given reaction simultaneously, producing
a pool of ten or more compounds. The pools of compounds are then screened
through a variety of high capacity receptor-based assays to identify compounds
that bind with specific receptor subtypes. In 1994, Neurogen generated a
library of more than 100,000 compounds using these techniques.

To date, Neurogen's combinatorial program has been instrumental in
developing NGD 95-1, the Company's lead NPY antagonist for eating disorders,
and other candidates in its neuropeptide program. The Company believes that
this achievement required a fraction of the time that would have been needed
using traditional approaches. Neurogen believes these discovery technologies
will continue to enhance its ability to find lead structures for difficult
medicinal chemistry problems and significantly shorten the time required to
optimize such leads and produce viable drug candidates. In addition, the
Company believes that these discovery technologies will provide it with new
opportunities for strategic partnerships, as evidenced by the Schering-Plough
Agreement.

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<PAGE>

PRODUCT DEVELOPMENT PROGRAMS

The following table lists the neuropsychiatric disorders being targeted by
the Company and the current status of Neurogen's potential products with
respect to each of these disorders.

<TABLE>
<CAPTION>
DISORDER RECEPTOR DEVELOPMENT COMMERCIAL
(COMPOUND) TARGET STATUS RIGHTS
- ---------- -------- ----------- ----------
<S> <C> <C> <C>
Anxiety (NGD 91-1) GABA receptor subtype Phase I-B clinical trials (1) Pfizer
(Neurogen royalty)
Schizophrenia (NGD 94-1) Dopamine D/4/ receptor Phase I-A clinical trials (1) Schering-Plough
(Neurogen royalty)
Schizophrenia (NGD 94-2) Dopamine D/4/, D/2/ receptors Preclinical Schering-Plough
development (2) (Neurogen royalty)
Schizophrenia (NGD 93-1) Multiple dopamine receptors Preclinical Schering-Plough
development (2) (Neurogen royalty)
Eating disorders (NGD NPY/1/ receptor Preclinical Neurogen
95-1) development (2)
Seizure disorders (ADCI) NMDA receptors Preclinical Neurogen
development (2) (NIH royalty)
Dementia, cognition GABA receptor subtype Leads identified (3) Pfizer
deficits (Neurogen royalty)
Insomnia GABA receptor subtype Leads identified (3) Pfizer
(Neurogen royalty)
Depression NPY/2/ receptor Discovery (4) Neurogen
Stress-related disorders CRF receptor Discovery (4) Neurogen
</TABLE>
- --------
(1) See "--Government Regulation" for a description of the phases of clinical
trials.
(2) "Preclinical development" indicates that Neurogen is conducting
pharmacology testing, toxicology testing, formulation, process development
and/or manufacturing scale-up prior to possible submission of an
Investigational New Drug application (an "IND").
(3) "Leads identified" indicates that lead compounds have been discovered that
meet certain in vitro criteria of the Company. Lead compounds may undergo
structural modification and more extensive evaluation prior to selection
of candidates, if any, for preclinical development.
(4) "Discovery" activities include initial research related to specific
molecular targets and assay development for the identification of new lead
compounds.

ANXIETY PROGRAM. Estimates by the National Institute of Mental Health (the
"NIMH") suggest that anxiety, a sense of irrational fear or dread, is the most
common CNS disorder in the United States affecting approximately 23 million
people, or 12% of the adult population. The most common anxiety-reducing
drugs, or anxiolytics, are the class of drugs known as benzodiazepines (such
as Valium(R), Xanax(R) and Librium(R)) which are orally administered compounds
that exert their pharmacologic effect on the GABA family of receptors.
Benzodiazepines alleviate some of the symptoms of anxiety, but at the same
time cause numerous side effects, including drowsiness, impairment of motor
skills, memory loss and addiction. In addition, benzodiazepines can cause coma
or death if a patient consumes excess alcohol in conjunction with drug
treatment. The Company believes these side effects are due to benzodiazepines
interacting with and enhancing the activity of many or all GABA receptor
subtypes. Despite these side effects, based on studies by various market
sources, the Company estimates the annual market for currently marketed
anxiolytics to be approximately $3 billion worldwide and $1.5 billion in the
United States.

Neurogen's scientists have been leaders in defining the mechanism of action
of benzodiazepines at the GABA receptors. Based on their understanding of the
role which GABA receptor subtypes play in the side effects

24
<PAGE>

caused by benzodiazepines, Neurogen has developed small molecule, orally
administered anxiolytic compounds which it believes may avoid or reduce the
adverse side effects of currently marketed anxiolytics by binding to specific
subtypes in the GABA receptor family. The Company entered into the 1992 Pfizer
Agreement to jointly develop and commercialize with Pfizer anxiolytic and
cognition enhancing compounds that act through the GABA family of receptors,
including the Company's lead anxiolytic, NGD 91-1. See "--Collaborative
Research and Licensing Agreements."

NGD 91-1. Pursuant to the 1992 Pfizer Agreement, Pfizer filed an IND with
the FDA with respect to NGD 91-1 in March 1994. In a Phase I-B clinical trial
of situational anxiety, NGD 91-1 was compared to a known anxiolytic,
Valium(R), and to a control placebo. While Pfizer is developing NGD 91-1 for
use in patients with generalized anxiety disorder, a chronic condition, the
Phase I-B study was designed, in part, to obtain an early indication for the
efficacy of NGD 91-1 in an acute (situational) setting. The Phase I-B study
was "double-blinded" and involved 150 healthy men and women exposed to anxiety
caused by the anticipation of an unpleasant medical procedure. Both NGD 91-1
and Valium(R) demonstrated significant anxiolytic effects. However, while
Valium(R) caused significant sedation, NGD 91-1 did not cause any sedation.
Further Phase I safety studies of NGD 91-1 are currently underway. Under the
1992 Pfizer Agreement, Pfizer has the right to determine when to advance NGD
91-1 in the clinical process, if at all. The Company understands that Pfizer
is currently undertaking additional Phase I studies to determine the minimum
dose at which the existing formulation of NGD 91-1 is effective and the
relationship between blood levels achieved and variations in dosing levels.
The Company believes that Pfizer will use the results of these studies to
determine whether to begin Phase II clinical trials using the existing
formulation or whether adjustments to such formulation may be advisable. If
such adjustments were made, further Phase I studies would be required with
respect to the reformulated compound before Phase II clinical trials would
commence, if at all. As with all drugs that enter clinical testing, no
assurances can be given that NGD 91-1 will successfully complete the clinical
trials or advance through the regulatory approval process.

In order to increase the likelihood that Neurogen's portfolio will produce a
successful anxiolytic drug, Neurogen, in collaboration with Pfizer, has been
developing alternative anxiolytic candidates that act through the GABA family
of receptors and have properties similar to those of NGD 91-1 but which belong
to a different chemical series. Neurogen has filed patent applications with
respect to the composition of NGD 91-1 and the other compounds in its
anxiolytic program. See "--Collaborative Research and Licensing Agreements."

PSYCHOSIS PROGRAM. Schizophrenia refers to a group of mental illnesses of
unknown origin which have no known cure and are characterized by a variety of
symptoms including hallucinations, delusions and social withdrawal.
Schizophrenia is estimated to affect between one-half and one percent of the
population worldwide. Although the currently marketed antipsychotic drugs
Haldol(R) and Clozaril(R), which act at dopamine receptors among others, have
shown encouraging results in limiting mental deterioration, each may cause
impairment of motor function, orthostatic hypotension (a decrease in blood
pressure which may cause fainting) and numerous other side effects. In the
case of Clozaril(R), the possibility of life-threatening changes in the white
blood cell count (agranulocytosis) of patients requires blood monitoring of
all patients receiving the drug, adding significantly to the cost of the
therapy. Moreover, as many as 40% of all schizophrenics are unresponsive to
standard antipsychotic medications and as many as 60% of treated patients
subsequently relapse and require hospitalization. Industry analysts estimate
the current annual market for antipsychotic drugs to be approximately $1.5
billion worldwide and $560 million in the United States.

Neurogen's antipsychotic program has concentrated on the discovery and
development of drugs which block specific dopamine receptor subtypes. Research
indicates that dopamine and its receptors play a critical role in
schizophrenia. Neurogen scientists have investigated the pharmacology of
dopamine receptors and their interaction with the network of neurons involved
in emotional response and motor function. The Company believes that
selectively blocking certain dopamine receptor subtypes could be efficacious
in treating schizophrenia. Using a series of molecular biological,
biochemical, cellular biological and behavioral techniques, Neurogen has
selected three different lead antipsychotic candidates: NGD 94-1 (its most
advanced compound

25
<PAGE>

for the treatment of schizophrenia), NGD 94-2 and NGD 93-1. Each of these
compounds is subject to the Schering-Plough Agreement which the Company
entered into with Schering-Plough in June 1995 to jointly develop and
commercialize drugs to treat a variety of dopamine-mediated disorders. See "--
Collaborative Research and Licensing Agreements."

NGD 94-1. The Company's focus on dopamine receptor subtypes and the design
of specific binding agents for these subtypes is similar to its approach with
respect to GABA receptor subtypes. In recent years, distinct dopamine receptor
subtypes, known as D/1/, D/2/, D/3/, D/4/ and D/5/, have been discovered which
Neurogen believes may be involved in psychosis. Because elevated D/4/
receptors have been measured in the autopsied brains of schizophrenics,
Neurogen believes that high levels of D/4/ receptors may intensify signals in
the brain, thus causing many of the symptoms associated with schizophrenia. As
a result, Neurogen believes that a specific D/4/ antagonist might be an
effective antipsychotic agent and, because of its specificity, might have a
reduced side effect profile compared to currently marketed drugs. Neurogen
scientists have identified a series of small molecule, orally administered
compounds, including NGD 94-1, which preclinical research has indicated are
potent and highly selective antagonists for the D/4/ receptor subtype.

In November 1994, the Company initiated Phase I trials involving
approximately 60 normal male subjects. The Phase I-A trial involving single
escalating dose studies for safety was completed in January 1995 and indicated
that NGD 94-1 was safe and well-tolerated across a broad dose range.
Additional pharmacokinetic and pharmacodynamic data is currently being
gathered and analyzed, and a multiple dose trial is currently underway.
Pursuant to the Schering-Plough Agreement, Schering-Plough has the right to
determine when to advance NGD 94-1 in the clinical process, if at all. No
assurance can be given that NGD 94-1 will successfully complete the clinical
trials or advance through the regulatory approval process. In order to
increase the likelihood that Neurogen's portfolio will produce a successful
antipsychotic, Neurogen is developing alternative antipsychotic candidates,
including its broader spectrum compounds noted below, in collaboration with
Schering-Plough.

While NGD 94-1 is being evaluated primarily as a therapeutic agent, Neurogen
is also pursuing its potential for diagnosing schizophrenic patients. By
incorporating a radioisotope in the compound, NGD 94-1 may be able to identify
and diagnose potential D/4/ receptor abnormalities in patients. The Company
has filed patent applications with respect to the composition and use of NGD
94-1 and the other compounds in its antipsychotic program. See "--
Collaborative Research and Licensing Agreements."

Broader Spectrum Antipsychotics. Schizophrenia may not be a single disease,
but a syndrome or spectrum of diseases. As a result, the Company believes that
a single receptor subtype specific antipsychotic drug may not provide adequate
therapy for all patients. A complementary alternative to a selective agent,
such as NGD 94-1, would be a drug that possessed activity at a greater number
of, but not all, receptor subtypes to provide broad therapy for all possible
patients with fewer side effects than currently marketed antipsychotics.
Neurogen has identified a series of compounds with a balance of dopamine
receptor blocking activities (at D/2/, D/3/ and D/4/ receptors) and other
related receptor blocking activities. In this regard, the Company, together
with Schering-Plough, is investigating selected compounds with selectively
broader receptor blocking properties. These include NGD 94-2, which
selectively blocks the D/4/ receptor and the D/2/ receptor, NGD 93-1, which
blocks a broader spectrum of receptors, and other combinations of dopamine
antagonists. Neurogen believes that because of their activity at numerous
receptor sites, these drugs, which are currently in preclinical development,
could potentially be used to treat a spectrum of disorders associated with
schizophrenia.

EATING DISORDERS PROGRAM. Obesity is a major health problem in the United
States. Recent studies indicate that almost one-third of the population fits
the criteria for at least moderate obesity and that severe obesity affects a
large subgroup of this population. Many health problems, including
hypertension, arthritis, non-insulin dependent diabetes and elevated
cholesterol, are associated with obesity. In addition, it is estimated that as
many as one percent and three percent of females in the United States suffer
from anorexia nervosa and bulimia nervosa, respectively.

26
<PAGE>

Obesity has traditionally been treated with amphetamines or amphetamine-like
drugs which can be highly addictive. More recently antidepressants, such as
Prozac(R), have been used with limited success in treating obesity. Due to the
limited success of eating disorder therapy and side effects, including
nervousness, tremors and insomnia, associated with currently available
medications, Neurogen believes that an eating disorder therapy without these
side effects would have the ability to penetrate and potentially expand the
market for these drugs. The Company further believes that a receptor subtype
specific drug that moderates eating habits may have such a reduced side effect
profile and represent a step forward in the treatment of eating disorders.

In recognition of health risks associated with obesity, the FDA transferred
the review of anti-obesity drugs to its Endocrine and Metabolic Division in
1994. This move, together with its proposed FDA Guidance for Weight-Control
Drugs, suggests that the FDA is increasingly viewing obesity as a disorder
which may require chronic treatment. These events have increased interest in
the development of improved treatments for obesity in the pharmaceutical
industry.

Academic research (both at Neurogen and at other institutions) has
demonstrated that the neurotransmitter NPY is closely connected with animal
feeding behavior and appetite control. In preclinical studies, injection of
NPY into the hypothalamic region of the brain has stimulated animals that have
just eaten to eat again. Studies indicate that animals develop no tolerance
for NPY and that those chronically exposed to NPY (over a period of days to
weeks) become obese. Independent of these studies, there has developed a
greater understanding of the existence and role of NPY receptor subtypes which
has stimulated interest in pursuing an NPY-mediated treatment of eating
disorders. Based on these studies and its understanding of receptor subtypes,
Neurogen believes that a drug which blocks the binding of NPY to one of its
receptor subtypes located in the hypothalamus, designated NPY/1/, may have the
opposite effect of chronic exposure to NPY and reduce the desire to eat.

Through its combinatorial chemistry program and throughput screening
capabilities, Neurogen has identified a number of antagonists for NPY/1/.
Neurogen has tested the most advanced of these orally available compounds,
which it has designated NGD 95-1, in rodents where it was shown to inhibit
NPY-induced eating. The compound was also shown in rodent studies to decrease
normal eating, both overnight and in a 21-day trial. NGD 95-1 is currently
undergoing additional rodent efficacy studies and preclinical safety and
toxicological testing to assess its suitability for human clinical testing.
The Company intends to commence human clinical testing of NGD 95-1 in early
1996, subject to the submission of an IND and no objection thereto by the FDA.

EPILEPSY AND SEIZURE DISORDERS. Approximately two million people in the
United States have epilepsy. Industry analysts estimate the current annual
market for anticonvulsant drugs to be approximately $800 million worldwide and
over $500 million in the United States.

Convulsive disorders may have many origins and are characterized by abnormal
neuronal activity in the brain. Instead of normal small bursts of electrical
impulses, neurons in a person suffering a seizure fire a storm of strong,
extremely rapid electrical signals, disturbing the normal activity of the
brain. Seizures can be local, affecting only part of the brain, or
generalized, affecting the entire brain and resulting in unconsciousness and
subsequent amnesia. Drugs currently used to control seizures, such as
phenobarbital, phenytoin (Dilantin(R)) and carbamazepine (Tegretol(R)),
include drugs that are directed toward specific kinds of epilepsies and
anticonvulsants that have a broad spectrum of activity. Epilepsy remains
difficult to treat, however, because of limited understanding of the neuronal
activity associated with the different forms of seizures and the toxic side
effects caused by medication.

In 1992, Neurogen entered into a licensing and cooperative research and
development agreement ("CRADA") with the NIH which provided the Company
exclusive access to a library of compounds for evaluation as potential
anticonvulsants. In preclinical trials conducted by the Company, one of these
compounds, ADCI, exhibited effective anticonvulsant activity in animal model
systems used to predict efficacy and potential therapeutic value in treating
epilepsy. The Company believes ADCI might be an effective anticonvulsant
because it possesses two important modes of action: blocking the NMDA receptor
and antagonism of voltage-dependent

27
<PAGE>

sodium channels, which is important in the treatment of seizures. Each of
these defined biological activities has been associated with the activity of
ADCI in different animal seizure models.

In contrast to many anticonvulsants currently on the market, ADCI shows a
therapeutic effect in animal models at doses substantially below doses which
cause side effects in preclinical animal models. However, ADCI is difficult to
synthesize in large scale. Neurogen intends to improve the route to synthesis
before pursuing further development of ADCI. However, there can be no
assurance that Neurogen will be successful in this regard or that ADCI will be
tested in clinical trials.

COGNITION DISORDERS. Memory loss is one of the most devastating symptoms of
neurodegenerative diseases such as Alzheimer's disease and Parkinson's
disease. Research sponsored by the NIMH indicates that in any given year as
many as five million people in the United States suffer from dementia, a
condition characterized by the impairment of learning and memory recall. A
1990 study by the U.S. Office of Science and Technology Policy indicates that
dementia afflicts approximately 10% of people over the age of 65. The Company
believes that GABA may affect and modulate the activity of other
neurotransmitters which contribute to the storage and retrieval of memory. By
understanding how GABA affects these other neurotransmitters, the Company
believes that it may be able to develop a drug candidate that acts through
GABA receptor subtypes to enhance brain function and cognition where brain
function has been impaired through neurodegenerative processes caused by
aging, chemical toxins, Alzheimer's disease or Parkinson's disease.

The Company believes that the benzodiazepines, which produce their desired
anxiolytic effect by enhancing the activity of certain GABA receptors, cause
memory impairment and other side effects due to their non-selective binding to
GABA receptor subtypes. Accordingly, the Company believes that inhibition of
certain GABA receptor subtypes in the cortex and hippocampal regions of the
brain may enhance the storage and retrieval of memory. Neurogen has identified
a number of compounds that inhibit activity at these GABA receptor subtypes.
Of these compounds, Neurogen has identified candidates which it believes are
suitable for further preclinical evaluation. Neurogen is pursuing its
cognition enhancement program in collaboration with Pfizer under the 1992
Pfizer Agreement. See "--Collaborative Research and Licensing Agreements."

SLEEP DISORDERS. Recent studies indicate that as many as 20 million people
in the United States experience chronic insomnia and an additional 20 to 30
million Americans experience intermittent sleep-disorders. Industry analysts
estimate that the annual market for drugs to treat insomnia is approximately
$1 billion worldwide and over $300 million in the United States. Neurogen is
developing drugs to treat sleep disorders, primarily insomnia. While currently
marketed drugs to treat sleep disorders, or hypnotics, are effective, they
cause numerous side effects, including "hangovers," rebound insomnia, short-
term memory loss and addiction.

Humans possess an internal "biological clock" that controls the timing of
different biological processes and affects the ability to sleep. This
mechanism influences many different processes well beyond those associated
with activity and rest. Because GABA receptor subtypes are involved in sleep
regulation as well as anxiety, the portfolio of compounds which have been
synthesized as part of Neurogen's anxiolytic effort are also being evaluated
in animal model systems to assess their potential as improved hypnotics.
Neurogen's research suggests that some hypnotics may interact with different
GABA receptor subtypes than those which regulate anxiety. The Company has
identified certain compounds in its portfolio which interact with these
receptor subtypes and which it believes are suitable for further preclinical
evaluation. Neurogen believes that the side effects associated with many
currently marketed medications arise from the fact that these drugs bind non-
specifically to many different
GABA receptor subtypes. Neurogen believes that drugs which are selective for
certain sleep-inducing GABA receptor subtypes will have fewer side effects
than the non-selective benzodiazepines currently on the market and could
represent a substantial improvement in the treatment of sleep disorders.
Neurogen is pursuing its sleep disorder program in collaboration with Pfizer
under the 1994 Pfizer Agreement. See "--Collaborative Research and Licensing
Agreements."

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<PAGE>

DEPRESSION AND STRESS DISORDERS. Depression is one of the most prevalent
mental illnesses in the United States, affecting approximately 17 million
people or 9% of the adult population annually according to the NIMH.
Depression occurs in a variety of forms, ranging from a single episode of
depressive symptoms to recurrent cycling of moods which can be severe in some
patients, alternating between manic "highs" and depressed "lows." Research
suggests that more than half of the people who have had one episode of major
depression will have another at some point in their lives. While many patients
function normally between episodes, it is believed that 20 to 35 percent of
the victims suffer chronic depression that prevents them from maintaining a
normal routine. Many depressed people sleep too much or too little, are
lethargic or agitated and experience feelings of worthlessness and guilt or
have recurring thoughts of death or suicide. Older generic antidepressants may
cause sedation, mouth dryness or heart irregularities and can be lethal in
overdose. Other classes of antidepressants exhibit toxicity when combined with
certain foods. While recent pharmaceutical research has led to improved drugs,
such as Prozac(R), for the treatment of depression, these medications have
limitations in their use primarily because of their slow onset of therapeutic
action (up to three weeks) and lack of efficacy in some patients. Neurogen
believes that exploring alternative mechanisms of action may lead to a new
class of antidepressants that act quickly, safely and effectively either by
themselves or in conjunction with existing medications.

Stress is a condition commonly associated with depression. A number of
neuropeptide receptors which appear to be involved in stress responses,
including receptors for NPY and CRF, are altered in depressed patients.
Neurogen does not believe drugs specifically targeting these receptors for the
treatment of depression have previously undergone clinical testing. By cloning
receptors thought to be involved in stress responses, Neurogen believes it may
be able to discover and develop small molecule chemical compounds that help to
relieve stress by acting as antagonists to NPY and CRF. Having identified
receptor subtypes it believes are relevant in stress-related responses,
Neurogen is in the process of drug discovery with respect to its depression
and stress disorder programs. Using its advanced drug discovery technologies,
Neurogen is currently screening its libraries for appropriate NPY and CRF
antagonists.

COLLABORATIVE RESEARCH AND LICENSING AGREEMENTS

As part of its business strategy, the Company seeks collaborative agreements
with pharmaceutical companies as a means to achieve ratcheted growth in its
own drug development, manufacturing and, possibly, sales and marketing
capabilities. In February 1992 and again in July 1994, Neurogen entered into
collaborations with Pfizer, and in June 1995, Neurogen entered into a
collaboration with Schering-Plough. Neurogen will strive through strategic
alliances with major pharmaceutical companies to balance its exposure to
market risks and to retain an increasing share in the success of its future
products. There can be no assurance that the Company will establish any
additional collaborative arrangements or that such future relationships, if
established, or its current relationships will result in marketed
pharmaceutical products.

PFIZER

In the first quarter of 1992, Neurogen and Pfizer entered into the 1992
Pfizer Agreement pursuant to which Neurogen and Pfizer are collaborating in
the discovery and development of anxiolytics and cognition enhancers which act
through the GABA family of receptors. Pursuant to the 1992 Pfizer Agreement,
Pfizer purchased 1.0 million shares of Common Stock for $13.8 million, and the
Company is entitled, subject to certain conditions, to receive approximately
$18.4 million during the four year period which commenced January 1, 1992, of
which approximately $15.0 million had been paid as of March 31, 1995, for
research and development funding of the Company's anxiolytic and cognition
enhancement programs. The Company may receive up to an additional $4.6 million
for a fifth year if Pfizer exercises its option to extend the collaboration
beyond December 1995. Neurogen could also receive milestone payments of up to
$12.5 million if it achieves certain development and regulatory objectives
regarding its anxiolytic and cognition enhancement products. In return, Pfizer
received the exclusive worldwide license to manufacture, use and sell GABA-
based anxiolytics and cognition enhancers developed in the collaboration.
Pfizer is required to pay Neurogen royalties based upon net sales levels, if
any, for such products. Any compound which acts through the GABA family of
receptors and is not an anxiolytic or cognition enhancer falls outside the
parameters of the 1992 Pfizer Agreement, but Pfizer has a right of first
review for a period of six months from disclosure of such compound to Pfizer
by Neurogen.

29
<PAGE>

In July 1994, Neurogen and Pfizer entered into the 1994 Pfizer Agreement.
Pursuant to this second agreement, Neurogen and Pfizer are collaborating in
the discovery and development of hypnotics which act through the GABA family
of receptors to treat sleep disorders. Pursuant to the 1994 Pfizer Agreement,
Pfizer purchased approximately 1.1 million shares of Common Stock for
approximately $9.9 million, and the Company is entitled, subject to certain
conditions, to receive approximately $7.4 million during the three-year period
which commenced July 1, 1994, of which approximately $2.6 million had been
paid as of March 31, 1995, for research and development funding of the
Company's sleep disorder program. The Company may receive additional funding
of up to approximately $2.4 million for a fourth year if Pfizer exercises its
option to extend the collaboration beyond July 1997. Neurogen could also
receive milestone payments of up to approximately $3.3 million if it achieves
certain development and regulatory objectives regarding its sleep disorder
compounds. As part of this second collaboration, Pfizer received the exclusive
worldwide license to manufacture, use and sell GABA-based sleep disorder
products developed in the collaboration. Pfizer is required to pay Neurogen
royalties based on net sales levels, if any, for such products.

Under both the Pfizer Agreements, in addition to making the equity
investments and the research and milestone payments noted above, Pfizer is
responsible for funding the cost of all clinical development and the
manufacturing and marketing, if any, of drugs developed pursuant to the
collaborations. As a result of these collaborations, Neurogen is dependent on
Pfizer to seek regulatory approvals for, to conduct trials for and to
determine the ultimate commercialization of compounds subject to the
collaborations.

SCHERING-PLOUGH

In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to collaborate in the discovery and development of antipsychotics
and drugs for other disorders which act through the dopamine family of
receptors. Pursuant to the Schering-Plough Agreement, the Company received an
up-front payment of $14.0 million for the rights to Neurogen's dopamine
compounds and $3.0 million for the right to test Neurogen's combinatorial
chemistry libraries in selected non-CNS assays. Schering-Plough also agreed to
pay an additional $3.0 million in 1996 for the right to test additional
libraries. Moreover, Neurogen is entitled to receive approximately $7.2
million during the two-year period which commenced June 28, 1995 for research
and development funding of the Company's antipsychotic program and may receive
additional research and development funding of up to $3.6 million per year for
three additional one-year periods depending on whether and the extent to which
Schering-Plough exercises its rights to extend the collaboration beyond July
1997. Neurogen could also receive milestone payments of up to approximately
$32.0 million if it achieves certain development and regulatory objectives
regarding its products subject to the collaboration. In return, Schering-
Plough received the exclusive worldwide license to market products subject to
the collaboration and Neurogen retained the rights to receive royalties based
on net sales levels, if any. In addition to the payments described above,
Schering-Plough is responsible for funding the cost of all clinical
development and marketing, if any, of drugs subject to the collaboration.
Pursuant to the Schering-Plough Agreement, Neurogen has retained the right to
participate on an advisory clinical development committee and an option to
manufacture any products resulting from the collaboration for the United
States market. As a result of this collaboration, Neurogen is dependent on
Schering-Plough to seek regulatory approvals for, to conduct clinical trials
for and to determine the ultimate commercialization of compounds subject to
this collaboration.

NIH

In January 1992, Neurogen licensed the anticonvulsant compound ADCI from the
NIH. Pursuant to the CRADA with the NIH, Neurogen and the NIH are
collaborating on the preclinical development of ADCI. The National Technical
Information Service ("NTIS") has granted Neurogen the worldwide, exclusive
right to manufacture, use or sell ADCI for a period of seven years commencing
with the first sale, if any, of ADCI. Neurogen currently plans to utilize
third-party vendors for any such manufacturing and marketing. Neurogen is
required to pay the NTIS a royalty on any net sales if ADCI is marketed.

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<PAGE>

PATENTS AND PROPRIETARY TECHNOLOGY

There can be no assurance that patent applications relating to the Company's
products or processes will result in patents being issued or, if issued, the
claims allowed will be adequate to protect the Company's technology from
competitors. Moreover, patent positions of pharmaceutical and biotechnology
firms and patent protection for products such as those the Company is
developing and proposes to develop are often highly uncertain and involve
complex legal and factual questions. No assurance can be given that any
patents issued or licensed to the Company will not be held unenforceable,
invalidated or circumvented, or that the rights granted under such patents
will provide competitive advantages to the Company. Because patent
applications in the United States are maintained in secrecy until patents
issue and because publication of technological developments in the scientific
or patent literature often lags behind actual developments, the Company cannot
be certain that it was the first to invent the subject matter covered by its
patent applications or patents or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to
participate in litigation or interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention, which
could result in substantial cost to the Company, even if the eventual outcome
is favorable to the Company. There can be no assurance that the Company's
patents would be held valid and infringed by a court of competent
jurisdiction. An adverse outcome with regard to a third-party claim could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, which could have a material adverse effect on the
Company's business.

The development of therapeutic products for CNS applications is intensely
competitive. A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in this field. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects
with claims made under the Company's applications. Such conflict could result
in a significant reduction of the coverage of the Company's patents, if
issued. In addition, if patents are issued to other companies which contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, the Company may be required to obtain licenses to these patents or
to develop or obtain alternative technology. If any licenses are required,
there can be no assurance that the Company will be able to obtain any such
licenses on commercially favorable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it
may require to commercialize its products may have a material adverse impact
on the Company.

In connection with the Pfizer Agreements and the Schering-Plough Agreement,
Neurogen has granted Pfizer and Schering-Plough, as the case may be, the
exclusive, worldwide license to manufacture (subject to Neurogen's option to
manufacture products for the United States pursuant to the Schering-Plough
Agreement), use and sell compounds subject to those agreements. To the extent
that Neurogen enters into future strategic alliances or collaborations with
third parties, it may have to share, or it may have no rights to, intellectual
property developed or patents obtained in connection with such arrangements.

In addition to patent protection, the Company also relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with collaborators, advisors, employees and
consultants.

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<PAGE>

There can be no assurance, however, that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors. The Company's business may be adversely affected by
competitors who independently develop substantially equivalent technology.

COMPETITION

The biopharmaceutical industry is highly competitive. The Company's most
significant competition comes from fully-integrated pharmaceutical companies,
including Eli Lilly, Merck, Upjohn and others, most of which have products and
major research and development programs in the CNS field, certain of which are
in late-stage clinical trials. In addition, there are many other entities,
both public and private, in the United States and overseas, including fully-
integrated chemical companies, specialized biotechnology firms, academic
institutions, government agencies and other research organizations which are
involved in the development of products similar to those of Neurogen.
Furthermore, these companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
Many of the Company's existing or potential competitors possess substantially
greater research and development, financial, technical, manufacturing,
marketing, and human resources than Neurogen. There can be no assurance that
the Company's competitors will not succeed in developing technologies and
products that are more effective than those developed by the Company or which
would render the Company's technology and products less competitive or
obsolete.

MANUFACTURING

Neurogen is currently relying, in part, on third-party manufacturers to
produce its compounds for research purposes and for preclinical and clinical
trials. The Company, which manufactures certain of its compounds to conduct
preclinical studies, may expand its facilities to produce sufficient
quantities of compounds for the clinical stage of development in certain
circumstances. Neurogen has focused its research on developing compounds that
are small molecules. The Company believes these compounds are more efficient
to manufacture and do not require purification associated with certain protein
compounds.

Pfizer manufactures drugs for clinical trials which are subject to the 1992
Pfizer Agreement and has the right to manufacture future products, if any, for
commercialization. Schering-Plough will be responsible for manufacturing for
clinical trials compounds which are subject to the Schering-Plough Agreement
and has the right to manufacture future products, if any, for
commercialization. Neurogen, however, has retained an option to manufacture
future products, if any, resulting from the collaboration for sales in the
United States. See "--Collaborative Research and Licensing Agreements." With
respect to compounds not currently subject to collaborations, the Company
plans either to establish supply arrangements with third-party manufacturers
for clinical trials and for commercial distribution or to develop its own
manufacturing capabilities. There can be no assurance that the Company will be
able to achieve third-party arrangements on terms acceptable to the Company or
that such arrangements will be successful. While the Company may attempt to
develop internal manufacturing capabilities for certain of its products, there
can be no assurance that the Company will be able to establish such
capabilities or to do so at an acceptable cost.

SALES AND MARKETING

The Company's strategy is to market products either directly or through co-
promotion arrangements or other licensing arrangements with large
pharmaceutical or biotechnology companies. Implementation will depend in large
part on the market potential of any products the Company develops as well as
on the Company's financial resources. The Company does not expect to establish
a direct sales capability for at least the next several years. Pfizer and
Schering-Plough each have the right to market worldwide future products, if
any, resulting from their respective collaborations.

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<PAGE>

GOVERNMENT REGULATION

The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous federal
regulation and to a lesser extent state regulation. The Federal Food, Drug and
Cosmetic Act, as amended ("FFDCA"), and the regulations promulgated
thereunder, and other federal and state statutes and regulations govern, among
other things, the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Product development and approval within this regulatory framework will take a
number of years and involve the expenditure of substantial resources.

The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an IND for
human clinical testing which must become effective before human clinical
trials can commence, (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug, (iv) the submission of a New
Drug Application ("NDA") or Product License Application ("PLA") to the FDA and
(v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of
the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and
approved by, the FDA. Domestic manufacturing establishments are subject to
biennial inspections by the FDA and must comply with the FDA's Good
Manufacturing Practices ("GMP") for both drugs and devices. To supply products
for use in the United States, foreign manufacturing establishments must comply
with GMP and are subject to periodic inspection by the FDA or by regulatory
authorities in such countries under reciprocal agreements with the FDA.

Preclinical testing includes laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical testing are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA. There can be no assurance
that submission of an IND will result in commencement of clinical trials.

Clinical trials involve the administration of the new drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution where the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Compounds must be formulated according to GMP.

Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a
limited patient population (i) to determine the efficacy of the drug for
specific, targeted indications, (ii) to determine dosage tolerance and optimal
dosage and (iii) to identify possible adverse side effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
evaluate clinical efficacy and to test for safety within an expanded patient
population at geographically dispersed clinical study sites. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specified or targeted time period, if at all, with
respect to any of the Company's products subject to such testing. Furthermore,
the Company or the FDA may suspend clinical trials at any time if it is
believed that the individuals participating in such trials are being exposed
to unacceptable health risks.

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<PAGE>

The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort. The approval process
is affected by a number of factors including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, require additional testing
or information or require postmarketing testing and surveillance to monitor
the safety of the Company's products if it does not believe the NDA contains
adequate evidence of the safety and efficacy of the drug. Notwithstanding the
submission of such data, the FDA may ultimately decide that an NDA does not
satisfy its regulatory criteria for approval. Moreover, if regulatory approval
of a drug is granted, such approval may entail limitations on the indicated
uses for which it may be marketed. Finally, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.

Among the conditions for NDA approval is the requirement that any
prospective manufacturer's quality control and manufacturing procedures
conform to GMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by other federal, state
or local agencies.

Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
now will be required to pay three types of user fees: a one-time application
fee for a prescription NDA or PLA, an annual product fee imposed on
prescription drug products after FDA approval and an annual establishment fee
imposed on facilities used to manufacture prescription drugs. By 1997, the
user fee for the original submission of an NDA or PLA involving clinical data
will be $233,000 and the annual establishment fee could be up to $138,000;
annual product fees will be less significant, but will be required for each
specific strength or potency of the marketed drug. Although there are
exemptions for certain products, and deferrals of payment and significant
discounts for small businesses, it still is uncertain how the FDA will
interpret and apply these provisions of the legislation.

Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general,
each country at this time has its own procedures and requirements.

In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other present and potential future federal, state or
local regulations. The Company's research and development involves the
controlled use of hazardous materials, chemicals, and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
any accident, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company.

THIRD-PARTY REIMBURSEMENT

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<PAGE>

health care in the United States and the concurrent growth of organizations,
such as HMOs, which can control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care or reduce government insurance programs, may all result in lower
prices for the Company's products. The cost containment measures that health
care providers are instituting and the effect of any health care reform could
adversely affect the Company's ability to sell its products if successfully
developed and approved by the FDA and/or any other appropriate regulatory
authority.

SCIENTIFIC ADVISORY BOARD

Neurogen's Scientific Advisory Board is composed of certain of its
scientists and other leading scientists from Yale University (the
"University") who have been actively involved in pioneering research in the
field of neurobiology and the treatment of neurological disorders for a number
of years. Scientific Advisory Board members meet as a group with management
and key scientific employees of the Company approximately on a monthly basis.
Scientific Advisory Board members have taken an active role in helping the
Company identify scientific and product development opportunities and recruit
and evaluate the Company's scientific staff.

The Scientific Advisory Board presently consists of the following
individuals:

<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
John F. Tallman, Ph.D................... Chairman of the Scientific Advisory
Board, Executive Vice President and
Scientific Director of Neurogen
Corporation
George K. Aghajanian, M.D............... Professor of Psychiatry and
Pharmacology, Yale University
B. Stephenson Bunney, M.D............... Professor of Psychiatry and
Pharmacology, Chairman, Department
of Psychiatry, Yale University
Dennis S. Charney, M.D.................. Associate Professor of Psychiatry
and Director, Clinical Neuroscience
Research Unit, Yale University
Michael Davis, Ph.D..................... Professor of Psychiatry and
Psychology, Yale University
Dorothy W. Gallager, Ph.D............... Vice President--Pharmacology,
Neurogen Corporation
George R. Heninger, M.D................. Professor of Psychiatry and Director
of the Abraham Ribicoff Research
Facilities of the Connecticut Mental
Health Center, Yale University
Alan J. Hutchison, Ph.D................. Vice President--Drug Discovery,
Neurogen Corporation
Eric Nestler, M.D., Ph.D................ Associate Professor of Psychiatry
and Pharmacology, Yale University
D. Eugene Redmond, Jr., M.D............. Professor of Psychiatry, Yale
University
Robert H. Roth, Ph.D.................... Professor of Psychiatry and
Pharmacology, Yale University
</TABLE>

Each of the members has served on the Scientific Advisory Board pursuant to
consulting agreements (the "SAB Agreements") since 1988, with the exception of
Dr. Nestler, who has served on the Scientific Advisory

35
<PAGE>

Board since January 1993. The SAB Agreements contain confidentiality
provisions and restrict the members of the Scientific Advisory Board from
competing with the Company for the term of the agreement and for one year
thereafter. The SAB Agreements expire in 1998. Each member of the Scientific
Advisory Board who is not also an employee of the Company receives a fee of
$15,000 per year for providing consulting services to Neurogen at least
fifteen days per year and is eligible to participate in the Neurogen
Corporation 1993 Omnibus Incentive Plan. All non-employee members of the
Scientific Advisory Board are employed on a full-time basis by the University
and, accordingly, devote only a small portion of their time to Neurogen. The
University has regulations and policies which limit the ability of such
personnel to act as part-time consultants or in other capacities for a
commercial enterprise. A change in these regulations or policies could
adversely affect the Company. Furthermore, it is possible that inventions or
processes discovered by the outside members of the Scientific Advisory Board
will not become the property of Neurogen, but will remain the property of such
persons, the University or other entities to which the Scientific Advisory
Board members have obligations.

HUMAN RESOURCES

As of June 30, 1995, the Company had 79 full-time employees, including 64
scientists and 15 administrative staff members. The Company's staff includes
25 persons with Ph.D. degrees, all of whom are actively involved in research.
Neurogen believes that its success will be dependent largely upon its ability
to continue to attract and retain scientists and technical staff qualified in
pharmacology, neuroscience, medicinal chemistry and molecular biology. The
failure to retain such personnel or to develop expertise in such fields could
materially adversely affect prospects for the Company's success. None of the
Company's employees are covered by collective bargaining agreements, and the
Company considers relations with its employees to be good. In addition, the
failure to retain certain of the Company's current scientific personnel, some
of whom do not have employment contracts with the Company, could adversely
affect the Company. Each of the Company's current scientific personnel has
entered into confidentiality and non-competition agreements with the Company.

PROPERTIES

The Company conducts its operations in a facility located in Branford,
Connecticut, which it purchased in March 1989. Since that time, Neurogen has
completed two stages of construction which provide approximately 36,000 square
feet of laboratory and administrative space. The Company is currently
negotiating to obtain additional space. The Company expects that its expanded
facility will accommodate the anticipated administrative and research needs of
the Company for the foreseeable future.

LEGAL PROCEEDINGS

Neurogen knows of no material litigation or proceeding pending or threatened
to which the Company is, or may become, a party.

36
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Neurogen are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harry H. Penner, Jr....... 49 President, Chief Executive Officer and Director
John F. Tallman, Ph.D..... 48 Executive Vice President, Secretary, Scientific
Director, Chairman of the Scientific Advisory
Board and Director
Alan J. Hutchison, Ph.D... 41 Vice President--Drug Discovery
Stephen R. Davis.......... 34 Vice President--Finance, Chief Financial Officer
and Treasurer
Frank C. Carlucci (1)(2).. 64 Chairman of the Board of Directors
Barry M. Bloom, Ph.D. (3). 66 Director
Robert N. Butler, M.D. ... 68 Director
Jeffrey J. Collinson (1)(3) 53 Director
Robert M. Gardiner (1)(3). 72 Director
Richard D. Harrison (1)... 71 Director
Mark Novitch, M.D. (2).... 62 Director
Robert H. Roth, Ph.D. .... 55 Director
John Simon (2)(3)......... 52 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Finance Committee.

Harry H. Penner, Jr., has been President, Chief Executive Officer and a
director of Neurogen since December 1993. Mr. Penner was employed by Novo
Nordisk A/S from 1981 to 1993, most recently serving as an Executive Vice
President of Novo Nordisk A/S and as President of Novo Nordisk of North
America Inc. Mr. Penner holds an L.L.M. in International Law from New York
University and a J.D. from Fordham University. Mr. Penner is a director of
Anergen, Inc.

John F. Tallman, Ph.D., has been Executive Vice President, Scientific
Director, Chairman of the Scientific Advisory Board and a director of Neurogen
since July 1988. Dr. Tallman has served as Secretary of the Company since
August 1994. Prior to joining Neurogen, Dr. Tallman was an Associate Professor
of Psychiatry and Pharmacology at Yale University and currently serves as an
Adjunct Professor in such departments. Dr. Tallman had previously served in
research director positions at the National Institute of Mental Health in
Bethesda, Maryland. Dr. Tallman received his Ph.D. in Biology from Georgetown
University.

Alan J. Hutchison, Ph.D., has been Vice President--Drug Discovery since 1992
and a member of Neurogen's Scientific Advisory Board since 1989. Dr. Hutchison
joined Neurogen in 1989 as Director of Chemistry. From 1981 through 1989, Dr.
Hutchison was employed by Ciba Giegy, most recently as a Distinguished
Research Fellow. Dr. Hutchison received his B.S. in Chemistry from Stevens
Institute of Technology and received his Ph.D. from Harvard University.

Stephen R. Davis has been Vice President--Finance, Chief Financial Officer
and Treasurer of Neurogen since July 1994. From 1990 through June 1994, Mr.
Davis was employed by Milbank, Tweed, Hadley & McCloy as a corporate and
securities attorney. Mr. Davis practiced as a Certified Public Accountant with
Arthur Andersen & Co. from 1984 to 1987. Mr. Davis studied at Vanderbilt
University School of Law, where he received his J.D. degree in 1990. Mr. Davis
received his B.S. in Accounting from Southern Nazarene University.

Frank C. Carlucci has served as a director and Chairman of the Board of
Neurogen since February 1989. Mr. Carlucci is principally employed as Chairman
of The Carlyle Group, a private merchant bank. Mr. Carlucci

37
<PAGE>

served as Secretary of Defense of the United States from November 1987 through
January 1989. Prior to his appointment as Secretary of Defense, Mr. Carlucci
was assistant to the President of the United States for National Security
Affairs. Mr. Carlucci had been Chairman and Chief Executive Officer of Sears
World Trade Inc. from 1984 to 1986, after having served as President and Chief
Operating Officer since 1983. Mr. Carlucci is also a director of Ashland Oil,
Inc., BDM International, Inc., Bell Atlantic Corporation, CB Commercial Real
Estate Group, Inc., Connecticut Mutual Life Insurance Company, General
Dynamics Corporation, Kaman Corporation, Northern Telecom Limited, The Quaker
Oats Company, Sun Resorts, The Upjohn Company and Westinghouse Electric
Corporation.

Barry M. Bloom, Ph.D., has served as a director of Neurogen since December
1993. Dr. Bloom retired in 1993 from Pfizer where he had been Executive Vice
President, Research and Development and a member of the board of directors.
Dr. Bloom is a director of Southern New England Telecommunications Company,
Vertex Pharmaceuticals, Inc., Incyte Pharmaceuticals, Inc. and Cubist
Pharmaceuticals, Inc.

Robert N. Butler, M.D., has served as a director of Neurogen since July
1989. Dr. Butler has served as the Brookdale Professor and Chairman of the
Department of Geriatrics and Adult Development at Mount Sinai Medical Center
since 1982. From 1976 until 1982, Dr. Butler was the founding director of the
National Institute of Aging of the National Institutes of Health. Dr. Butler
won the 1976 Pulitzer Prize for his book, Why Survive? Being Old in America.
He is the editor-in-chief of Geriatrics, a journal for primary care
physicians, and serves on the editorial board of several other professional
publications. Dr. Butler is a member of the Institute of Medicine of the
National Academy of Sciences, and a founding Fellow of the American Geriatrics
Society. He has served as a consultant to the United States Special Committee
on Aging, the National Institute of Mental Health, the Commonwealth Fund, the
Brookdale Foundation and numerous other foundations.

Jeffrey J. Collinson has served as a director of Neurogen since May 1989.
Mr. Collinson has served as President of Collinson Howe Venture Partners Inc.,
a venture capital firm, since 1990 and was President of Schroder Venture
Managers, Inc., a venture capital firm, from 1981 to 1990. Mr. Collinson is
chairman of the board of Incyte Pharmaceuticals, Inc. and is a director of
Envirogen, Inc.

Robert M. Gardiner has served as a director of Neurogen since June 1989. Mr.
Gardiner is currently a Senior Advisor to Dean Witter, Discover & Co., having
retired as Chairman and Chief Executive Officer of Dean Witter Financial
Services Group Inc. in August 1986. Prior to becoming Chairman and Chief
Executive Officer in 1982, Mr. Gardiner served as President of Dean Witter
Reynolds Inc., the predecessor of Dean Witter Financial Services Group Inc.
Mr. Gardiner has served as Chairman and President of the National Association
of Securities Dealers, Inc., as Chairman of the Securities Industry
Association and of its governing council, as Chairman of the National
Securities Processing Committee and as Vice Chairman of the New York Stock
Exchange, Inc. He is also a former governor or officer of the Association of
Stock Exchange Firms, the Investment Bankers Association of America, the
National Clearing Corporation, the Central Market System Advisory Committee of
the Securities and Exchange Commission, and the Securities Industry
Association. He is a director of Dean Witter, Discover & Co.

Richard D. Harrison has served as a director of Neurogen since July 1989.
Mr. Harrison has been Honorary Chairman of the Board of Fleming Companies,
Inc., a food distribution company, since April 1989. Prior to that date, he
served as Chairman of the Board and Chief Executive Officer since 1981 and
President and Chief Executive Officer since 1964.

Mark Novitch, M.D., has served as a director of Neurogen since December
1993. Dr. Novitch was appointed Professor of Health Care Sciences at The
George Washington University in 1994. He worked in senior executive positions
at The Upjohn Company from 1985 until his retirement as Vice Chairman of the
Board in 1993. Dr. Novitch served at the United States Food and Drug
Administration as Deputy Commissioner and as Acting Commissioner from 1983-
1984. Dr. Novitch is a director of Alteon, Inc. and Guidant Corporation.

38
<PAGE>

Robert H. Roth, Ph.D., has served as a director of Neurogen since December
1988 and as a member of the Company's Scientific Advisory Board since July
1988. Dr. Roth has been a Professor of Psychiatry and Pharmacology at Yale
University since 1974. Dr. Roth has a Ph.D. in Pharmacology from Yale
University.

John Simon has served as a director of Neurogen since May 1989. Mr. Simon is
a Managing Director of the investment banking firm of Allen & Company
Incorporated. Mr. Simon is a director of Lunn Industries, Inc., T Cell
Sciences, Inc., Immune Response Corporation and The Right Start, Inc.

CERTAIN TRANSACTIONS

Pfizer, a beneficial owner of more than five percent of the Common Stock,
paid $4,600,000 to the Company in the last fiscal year pursuant to the terms
of the 1992 Pfizer Agreement which governs their research and development
collaboration with respect to anxiolytics and cognition enhancers which act
through the GABA family of receptors. In addition, in 1994 the Company entered
into the 1994 Pfizer Agreement to develop drugs for the treatment of sleep
disorders pursuant to which Pfizer paid the Company $1,189,333 in the last
fiscal year. These amounts constituted payments in excess of five percent of
Neurogen's consolidated gross revenues for the last fiscal year. Neurogen
expects to receive amounts in excess of five percent of its consolidated gross
revenues from Pfizer in fiscal year 1995. In connection with the 1994 Pfizer
Agreement, the Company granted Pfizer registration rights with respect to
shares of Common Stock purchased in connection with the Pfizer Agreements as
well as the right to maintain its level of investment in the Company in public
offerings of Common Stock.

In July 1994, the Company granted registration rights to Allen & Company
Incorporated, Allen Value Limited, Allen Value Partners L.P., Allen Capital
L.P. and Allen Capital (International) L.P. (such entities, together with
Allen Holdings Inc., the "Allen Group") and certain other persons, including
John Simon, a director of the Company, in connection with the purchase of
1,131,583 shares of Common Stock from a stockholder of Neurogen. The Allen
Group purchased 675,057 shares of Common Stock and John Simon purchased 34,754
shares of Common Stock in this transaction.

39
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of June 30, 1995, certain information
with respect to the beneficial ownership of Common Stock by each person known
by Neurogen to own beneficially more than five percent of its outstanding
Common Stock, by each director and officer of Neurogen and by all directors
and officers as a group:
<TABLE>
<CAPTION>
PRECENT OF COMMON
STOCK OWNED(2)
--------------------
AMOUNT AND
NATURE OF BENEFICIAL BEFORE THE AFTER THE
NAME OWNERSHIP(1) OFFERING OFFERING
- ---- -------------------- ---------- ---------
<S> <C> <C> <C>
Pfizer Inc. (3)...................... 2,096,000 20.7% 16.6%
235 East 42nd Street
New York, NY 10017
Allen Holdings Inc. (4).............. 675,678 6.7 5.4
711 Fifth Avenue
New York, NY 10022
Harry H. Penner, Jr. (5)............. 66,219 * *
John F. Tallman, Ph.D. (6)........... 177,800 1.7 1.4
Alan J. Hutchison, Ph.D. (7)......... 64,000 * *
Stephen R. Davis..................... 10,000 * *
Barry M. Bloom, Ph.D. (8)............ 13,232 * *
Robert N. Butler, M.D. (8)........... 17,232 * *
Frank C. Carlucci (8)(9)............. 118,557 1.2 *
Jeffrey J. Collinson (8)(10)......... 176,449 1.7 1.4
Robert M. Gardiner (8)............... 47,232 * *
Richard D. Harrison (8).............. 17,232 * *
Mark Novitch, M.D. (8)............... 16,232 * *
Robert H. Roth, Ph.D. (8)(11)........ 53,832 * *
John Simon (8)(12)................... 46,986 * *
All directors and officers as a group
(13 persons)......................... 825,003 7.9 6.4
</TABLE>
- --------
* Less than one percent.

(1) Share ownership in each case includes shares issuable upon exercise of
outstanding stock options that may be exercised within 60 days of June 30,
1995.

(2) Percentage of the outstanding shares of Common Stock, treating as
outstanding for each beneficial owner all shares of Common Stock which
such beneficial owners indicated are issuable on exercise of stock options
within 60 days of June 30, 1995.

(3) See "Certain Transactions" for a description of certain of Pfizer's rights
as a stockholder pursuant to the 1994 Pfizer Agreement.

(4) Includes 237,761 shares of Common Stock beneficially owned by Allen &
Company Incorporated, 29,610 shares of Common Stock beneficially owned by
Allen Value Limited, 248,420 shares of Common Stock beneficially owned by
Allen Value Partners L.P., 139,015 shares of Common Stock beneficially
owned by Allen Capital L.P. and 20,852 shares of Common Stock beneficially
owned by Allen Capital (International) L.P. Allen Holdings Inc. owns 100%
of the outstanding common stock of Allen & Company Incorporated and
through its subsidiaries has a controlling interest in the general
partners of Allen Value Partners L.P., Allen Capital L.P. and Allen
Capital (International) L.P. and has voting control of Allen Value
Limited. Because of these relationships, Allen Holdings Inc. may be deemed
to beneficially own Common Stock owned by such entities. Does not include
114,965 shares of Common Stock owned by officers or directors of Allen &
Company Incorporated or Allen Holdings Inc. (including 34,754 shares of
Common Stock beneficially owned by John Simon, a director of the Company
and a Managing Director of Allen & Company Incorporated), of which shares
Allen Holdings Inc. disclaims beneficial ownership.

(5) Includes 60,000 shares of Common Stock that Harry H. Penner, Jr. has the
right to acquire under stock options exercisable within 60 days of June
30, 1995. Does not include 100 shares of Common Stock owned by Mr.
Penner's son. Mr. Penner and his son disclaim beneficial ownership of each
other's shares.

40
<PAGE>

(6) Includes 52,000 shares of Common Stock that John F. Tallman, Ph.D., has
the right to acquire under stock options exercisable within 60 days of
June 30, 1995. Does not include 12,500 shares of Common Stock owned by
Kathleen Person, Dr. Tallman's spouse. Kathleen Person and Dr. Tallman
disclaim beneficial ownership of each other's shares.
(7) Includes 64,000 shares of Common Stock that Alan J. Hutchison, Ph.D., has
the right to acquire under stock options exercisable within 60 days of
June 30, 1995.
(8) Includes 12,232 shares of Common Stock subject to stock options
exercisable within 60 days of June 30, 1995.
(9) Does not include 40,000 shares of Common Stock owned by Mr. Carlucci's
wife. Mr. Carlucci and his wife disclaim beneficial ownership of each
other's shares.
(10) Includes 23,500 shares, 107,200 shares and 26,800 shares of Common Stock
held by Schroder's Incorporated, Schroder Ventures Limited Partnership
and Schroder Ventures US Trust, respectively, for which Mr. Collinson
shares investment and voting power. Mr. Collinson disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(11) Includes 5,600 shares of Common Stock subject to stock options
exercisable by Robert H. Roth, Ph.D., within 60 days of June 30, 1995.
(12) Does not include an aggregate of 746,437 shares of Common Stock held by
members of the Allen Group and by persons who may be deemed to be
affiliated with Allen & Company Incorporated or other members of the
Allen Group, of which shares Mr. Simon disclaims beneficial ownership.

Statements contained in the table as to securities beneficially owned by
directors and officers or over which they exercise control or direction are,
in each instance, based upon information received from such directors and
officers. Statements as to securities beneficially owned by the Allen Group
are based upon information in the Schedule 13D filed by the Allen Group with
the Securities and Exchange Commission on July 21, 1994.

41
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each of the Underwriters (the "Underwriters")
named below has severally agreed to purchase, and the Company has agreed to
sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc. ....................................................
Robertson, Stephens & Company, L.P....................................
Pacific Growth Equities...............................................
---------
Total................................................................ 2,500,000
=========
</TABLE>

The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters, for whom Smith Barney Inc., Robertson, Stephens & Company,
L.P., and Pacific Growth Equities are acting as Representatives, propose to
offer part of the shares directly to the public at the public offering price
set forth on the cover page of this Prospectus and part to certain dealers at
a price which represents a concession not in excess of $ per share under
the public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the offering of the shares of Common Stock, the public offering
price and such concessions may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 375,000 additional
shares of Common Stock at the price to public set forth on the cover page of
this Prospectus less the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the sale of the shares offered hereby.
To the extent such option is exercised, each Underwriter will be obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
listed in such table.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

The Company and the executive officers, directors and certain other
stockholders of the Company, who hold, in the aggregate, approximately
3,291,193 shares of Common Stock, have agreed that, for a period of 90 days
from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, Common Stock except, in the case of the
Company, in certain limited circumstances.

42
<PAGE>

The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in
the Common Stock in accordance with Rule 10b-6A under the Exchange Act. Rule
10b-6A permits, upon the satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also market
makers in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit such activity. In general, under Rule 10b-6A, any
Underwriter or selling group member engaged in passive market making in the
Common Stock (i) may not effect transactions in, or display bids for, the
Common Stock at a price that exceeds the highest bid for the Common Stock
displayed by a market maker that is not participating in the distribution of
the Common Stock, (ii) may not have net daily purchases of the Common Stock
that exceed 30% of its average daily trading volume in such stock for the two
full consecutive calendar months immediately preceding the filing date of the
registration statement of which this Prospectus forms a part and (iii) must
identify its bids as bids made by a passive market maker.

LEGAL MATTERS

Certain legal matters relating to the shares offered by this Prospectus have
been passed upon by Milbank, Tweed, Hadley & McCloy, New York, New York,
counsel for the Company. Certain legal matters will be passed upon for the
Underwriters by Dewey Ballantine, New York, New York, counsel for the
Underwriters.

EXPERTS

The financial statements as of December 31, 1993 and 1994 and for the years
ended December 31, 1992, 1993 and 1994 included herein and in the Registration
Statement have been included in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

Except as to statements qualified by the Company's knowledge, the statements
included in this Prospectus under the captions "Risk Factors--Patents and
Proprietary Technology," "Business--Patents and Proprietary Technology" and
all other disclosure in this Prospectus relating to U.S. patent matters have
been reviewed and approved by Banner & Allegretti, Ltd., special patent
counsel for the Company, as experts on U.S. patent matters, and are included
herein in reliance upon that review and approval.

43
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................... F-2
Balance Sheets at December 31, 1993, 1994.............................. F-3
Statements of Operations for the years ended December 31, 1992, 1993
and 1994 ............................................................. F-4
Statements of Stockholders' Equity for the years ended December 31,
1992, 1993 and 1994 .................................................. F-5
Statements of Cash Flows for the years ended December 31, 1992, 1993
and 1994 ............................................................. F-6
Notes to Financial Statements, December 31, 1994....................... F-7
Balance Sheet at March 31, 1995 (Unaudited)............................ F-13
Statements of Operations and Accumulated Deficit for the three months
ended March 31, 1994 and 1995 (Unaudited)............................. F-14
Statements of Cash Flows for the three months ended March 31, 1994 and
1995 (Unaudited)...................................................... F-15
Notes to Financial Statements, March 31, 1995 (Unaudited).............. F-16
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Neurogen Corporation:

We have audited the accompanying balance sheets of Neurogen Corporation as
of December 31, 1994 and 1993, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neurogen Corporation at
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1994,
in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Hartford, Connecticut
February 3, 1995

F-2
<PAGE>

NEUROGEN CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 6,403,987 $ 9,439,727
Marketable securities............................ 5,921,786 6,040,434
Other current assets............................. 199,564 398,542
------------ ------------
Total current assets........................... 12,525,337 15,878,703
Property, plant & equipment: (note 3)
Land............................................. 425,000 425,000
Building......................................... 8,327,696 8,379,703
Equipment........................................ 1,775,432 2,297,728
Furniture........................................ 95,904 110,668
Equipment and furniture under capital lease...... 1,200,000 1,200,000
------------ ------------
11,824,032 12,413,099
Less accumulated depreciation.................... 1,735,059 2,588,476
------------ ------------
Net property, plant and equipment.............. 10,088,973 9,824,623
Other assets, net.................................. 89,858 185,752
------------ ------------
$ 22,704,168 $ 25,889,078
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accrued expenses (note 10)....................... $ 555,019 $ 949,717
Current portion of mortgage payable (note 3)..... 124,623 141,125
Current portion of capital lease obligation
(note 3)...................................... 348,768 30,863
------------ ------------
Total current liabilities...................... 1,028,410 1,121,705
Mortgage payable, excluding current portion
(note 3)...................................... 761,011 619,887
Obligation under capital lease, excluding current
portion (note 3).................................. 30,863 --
Deferred gain on sale of assets (note 3)........... 30,625 4,375
Other compensation................................. 82,587 62,587
------------ ------------
Total liabilities.............................. 1,933,496 1,808,554
------------ ------------
Stockholders' equity: (notes 2, 4, 5 and 7)
Preferred stock, par value $.025 per share.
Authorized 2,000,000 shares; none issued...... -- --
Common stock, par value $.025 per share.
Authorized 30,000,000 shares in 1994 and
20,000,000 shares in 1993; issued and
outstanding 10,082,763 shares at December 31,
1994 and 8,961,763 at December 31, 1993....... 224,044 252,069
Additional paid-in capital....................... 35,661,615 45,607,590
Accumulated deficit.............................. (15,114,987) (21,766,182)
Unrealized loss on marketable securities......... -- (12,953)
------------ ------------
Total stockholders' equity..................... 20,770,672 24,080,524
------------ ------------
Commitments (notes 2, 7 and 8) $ 22,704,168 $ 25,889,078
</TABLE>

(See accompanying notes to financial statements)

F-3
<PAGE>

NEUROGEN CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Research revenue (note 2)............... $ 4,595,476 $ 4,604,524 $ 5,789,333
Operating expenses:
Research and development.............. 4,721,248 6,451,876 10,149,633
General and administrative............ 2,043,360 2,474,647 2,774,380
----------- ----------- -----------
Total operating expenses............ 6,764,608 8,926,523 12,924,013
Other income (expense):
Investment income..................... 735,352 615,112 573,127
Interest expense ..................... (159,506) (109,244) (89,642)
----------- ----------- -----------
Total other income.................. 575,846 505,868 483,485
Net loss.............................. $(1,593,286) $(3,816,131) $(6,651,195)
----------- ----------- -----------
Net loss per common share............. $ (.18) $ (.43) $ (.70)
----------- ----------- -----------
Weighted average number of shares
outstanding........................ 8,752,000 8,962,000 9,528,000
</TABLE>

(See accompanying notes to financial statements)

F-4
<PAGE>

NEUROGEN CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994

<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- UNREALIZED
ADDITIONAL LOSS ON
SHARES PAID-IN ACCUMULATED MARKETABLE
ISSUED AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
---------- -------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1991................... 7,847,663 $196,192 $21,574,260 $ (9,705,570) $ -- $12,064,882
Issuance of shares for
cash pursuant to
corporate partner
agreement.............. 1,000,000 25,000 13,725,000 -- -- 13,750,000
Exercise of
noncompensatory stock
options and warrants... 114,100 2,852 362,355 -- -- 365,207
Net loss for the year... -- -- -- (1,593,286) -- (1,593,286)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1992................... 8,961,763 $224,044 $35,661,615 $(11,298,856) $ -- $24,586,803
Net loss for the year... -- -- -- (3,816,131) -- (3,816,131)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1993................... 8,961,763 $224,044 $35,661,615 $(15,114,987) $ -- $20,770,672
Issuance of shares for
cash pursuant to
corporate partner
agreement.............. 1,096,000 27,400 9,836,600 -- -- 9,864,000
Exercise of warrants.... 25,000 625 109,375 -- -- 110,000
Net loss for the year... -- -- -- (6,651,195) -- (6,651,195)
Unrealized loss on
marketable securities.. -- -- -- -- (12,953) (12,953)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31,
1994................... 10,082,763 $252,069 $45,607,590 $(21,766,182) $(12,953) $24,080,524
---------- -------- ----------- ------------ -------- -----------
</TABLE>

(See accompanying notes to financial statements)

F-5
<PAGE>

NEUROGEN CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................... $(1,593,286) $(3,816,131) $(6,651,195)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense. 570,937 877,944 889,307
Unrealized loss on marketable
securities............................ -- -- 76,209
Net gain on sale of assets............ (22,007) (16,815) (26,250)
Changes in operating assets and
liabilities:
Increase (decrease) in accrued
expenses............................. 618,843 (457,084) 394,698
(Increase) decrease in other current
assets............................... (50,284) 29,387 (198,978)
Increase in other assets, net......... (35,000) (64,015) (131,783)
----------- ----------- -----------
Net cash used in operating
activities.......................... (510,797) (3,446,714) (5,647,992)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment........ (1,399,898) (3,075,347) (589,067)
Purchases of marketable securities..... (4,782,753) (21,515,226) (14,957,765)
Sales of marketable securities......... 1,347,959 18,839,865 14,749,954
----------- ----------- -----------
Net cash used in investing
activities.......................... (4,834,692) (5,750,708) (796,878)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock,
net................................... 13,750,000 -- 9,864,000
Exercise of employee stock options..... 37,058 -- --
Exercise of warrants................... 320,000 -- 90,000
Principal payments under mortgage
payable............................... (97,183) (110,050) (124,622)
Principal payments under capital lease
obligations......................... (278,871) (311,867) (348,768)
----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 13,731,004 (421,917) 9,480,610
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 8,385,515 (9,619,339) 3,035,740
Cash and cash equivalents at beginning
of period.............................. 7,637,811 16,023,326 6,403,987
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $16,023,326 $ 6,403,987 $ 9,439,727
----------- ----------- -----------
</TABLE>

(See accompanying notes to financial statements)

F-6
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Neurogen Corporation ("Neurogen" or the "Company") is an emerging
neuropharmaceuticals company engaged in the discovery and development of
therapeutic products to treat psychiatric and neurological disorders by
regulating nerve cell communications in the brain. Neurogen's strategy is to
discover and develop highly specific drugs without the negative side effects
typically associated with many currently prescribed psychotherapeutic
medications.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets.
Included in property, plant and equipment at December 31, 1994 and 1993 is
furniture and equipment leased under a capitalized lease of $1,200,000 with
related accumulated depreciation of $1,150,000 at December 31, 1994 and
$850,000 at December 31, 1993.

CASH EQUIVALENTS

All cash and cash equivalents consist primarily of highly liquid investments
with a maturity from date of purchase of three months or less.

MARKETABLE SECURITIES

The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" effective
January 1, 1994. Adoption of this method of accounting did not have a
significant impact on the Company's financial statements. During the first
three quarters of 1994, the Company's marketable securities were all
classified as trading securities. The change in net unrealized loss on trading
securities that has been included in earnings during the nine months ended
September 30, 1994 is approximately $76,000.

In the fourth quarter of 1994, the Company transferred marketable securities
from the trading category to the available for sale category and for that
quarter recorded a $13,000 unrealized loss as a separate component of
stockholders' equity and also during which time, received proceeds from sales
of securities of approximately $3,225,000. Realized gains and losses have been
determined by the specific identification method. Marketable securities at
December 31, 1994 have contractual maturities of three to eighteen months and
are carried at fair values which are estimated based on quoted market prices.
The aggregate cost at December 31, 1994 is approximately $6,138,000. During
1994, the Company recognized gross realized gains of $6,000 and gross realized
losses of $87,000.

REVENUE RECOGNITION

Payments under the Pfizer agreements are recorded as earned based on the
performance requirements of the contracts, while related costs are expensed as
incurred.

NET LOSS PER SHARE

Net loss per share is calculated by dividing net loss by the weighted
average common shares and common share equivalents outstanding during the
period.

F-7
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES

The Company uses the asset and liability method in determining the tax
effect of temporary differences in the recognition of income and expense
reported in the financial statements and those reported for income tax
purposes.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1993 financial statements to
conform to the 1994 presentation.

2. PFIZER AGREEMENTS

On February 7, 1992, the Company entered into a collaborative research
agreement (the "1992 Pfizer Agreement") with Pfizer Inc ("Pfizer"), pursuant
to which Pfizer has provided $13,750,000 in equity financing. Pursuant to the
1992 Pfizer Agreement, the Company expects to receive approximately
$18,400,000 during the four year period which commenced January 1, 1992 for
research and development funding of the Company's anxiolytic and cognitive
enhancer projects, and may receive an additional $4,600,000 for a fifth year
should Pfizer exercise its option to extend the collaboration. Neurogen could
also receive additional milestone payments totaling $12,500,000 during the
development and regulatory approval of its products. In return, Pfizer
received the exclusive rights to manufacture and market GABA-based anxiolytics
and cognition enhancers developed in the collaboration for which it will pay
Neurogen royalties based upon net sales levels, if any, for such products. In
each of 1994, 1993 and 1992, Neurogen received approximately $4,600,000 in
research funding, which approximates the costs incurred by Neurogen in
connection with the collaboration in such years.

The Company entered into its second agreement (the "1994 Pfizer Agreement")
with Pfizer in June 1994 pursuant to which Pfizer provided $9,864,000 for
1,096,000 shares of common stock, bringing Pfizer's ownership of the Company's
common stock up to 21%. Pursuant to the 1994 Pfizer Agreement, the Company
expects to receive approximately $7,386,000 during the three-year period which
commenced July 1, 1994, for research and development funding of the Company's
sleep disorder project and may receive additional funding of $2,379,000 for a
fourth year should Pfizer exercise its option to extend the collaboration.
Neurogen could also receive additional milestone payments totaling $3,250,000
during the development and regulatory approval of its sleep disorder
compounds. As part of this second collaboration, Pfizer received the exclusive
right to manufacture and market GABA-based sleep disorder products developed
in the collaboration for which it will pay Neurogen royalties depending upon
levels of any net sales. In 1994 the Company received and earned its first
semiannual research funding payment of $1,189,000 which approximates the costs
incurred in connection with the second collaboration.

3. LONG-TERM DEBT AND LEASE OBLIGATIONS

At December 31, 1994, the Company had a $761,012 mortgage payable on, and
secured by, its Branford, Connecticut office and research facility, payable in
monthly installments over ten years. The interest rate is adjusted quarterly
to the prime rate plus 1%. At December 31, 1994, the prime rate was 8.5%.

F-8
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Aggregate annual principal payments applicable to the mortgage payable for
the five years subsequent to December 31, 1994 are:

In February 1991, the Company entered into a capital lease for certain
furniture and equipment under a sale and lease back arrangement. At December
31, 1994 the company owed $30,863 under this obligation.

In connection with the sale of these assets, the Company incurred a gain of
$105,000 which it deferred and is amortizing over the four year life of the
lease. The lease expires in February 1995 and the Company has entered into a
commitment to buy back the equipment in 1995 for approximately $240,000.

4. STOCK OPTIONS

In November 1988, the Board of Directors of the Company adopted the Neurogen
Corporation Stock Option Plan (the "Plan"), which provided for the issuance of
incentive stock options for up to 600,000 shares of common stock.

On January 17, 1992, the stockholders approved an amendment to the Plan to
increase the number of option shares available for issuance under the plan
from 600,000 shares of common stock to 1,200,000 shares of common stock and to
include grants of non-qualified stock options. All options expire not later
than ten years after the date of grant.

In August 1993, the Board of Directors approved a resolution allowing
employees to exchange higher-priced options to purchase 410,050 shares of
common stock for new options having an exercise price of $6.50 per share, the
fair market value of the Company's stock on the date of the Board's action.

In May 1994, the stockholders approved the 1993 Omnibus Incentive Plan which
makes a total of 3,000,000 shares available for grant and the 1993 Non-
Employee Directors Stock Option Program which makes 500,000 shares available
for grant. The new plans allow for stock appreciation rights, restricted
shares, and performance units.

Shares under option for all plans are summarized as follows:

<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------- --------------
<S> <C> <C> <C>
Options outstanding at January 1. 1,485,725 668,450 497,600
Options granted.................. 528,750 1,240,525 183,550
Options canceled................. (13,890) (423,250) (3,600)
Options exercised................ -- -- (9,100)
------------ ------------- --------------
Options outstanding at
December 31.................... 2,000,585 1,485,725 668,450
Option price range...............$5.38 to 9.00 $6.00 to 6.75 $2.38 to 13.00
Options exercisable at Decem-
ber 31......................... 700,428 380,514 181,020
</TABLE>

F-9
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. WARRANTS

As of December 31, 1994, a total of 159,058 shares of common stock were
issuable under outstanding warrants. Such warrants have been issued to members
of the Company's scientific advisory board, and to the lessor in a sale and
lease back of certain of the Company's furniture and equipment. During the
year ended December 31, 1994, 25,000 warrants were exercised at an average
price of $3.60 per share. Deferred compensation of $20,000 was credited to
additional paid in capital at time of exercise of the warrants.

The outstanding warrants expire and are exercisable for the number of shares
of common stock as shown below:

<TABLE>
<CAPTION>
NUMBER
OF EXERCISABLE AT EXERCISE
EXPIRATION DATE SHARES DECEMBER 31, 1994 PRICE
--------------- ------- ----------------- --------
<S> <C> <C> <C>
February 2001............................. 47,058 47,058 $2.55
November 2002............................. 98,000 39,200 $6.50
January 2003.............................. 14,000 2,800 $6.50
------- ------
159,058 89,058
</TABLE>

In August 1993, the Board of Directors approved a resolution allowing
members of the Company's scientific advisory board to exchange higher-priced
warrants to purchase 112,000 shares of common stock for new warrants having an
exercise price of $6.50 per share, the fair market value of the common stock
on the date of the Board's action. In February 1995, the Board of Directors
approved the conversion of all of the above warrants expiring in 2002 and 2003
to options under the 1993 Omnibus Incentive Plan. The new options have
substantially the same terms as the warrants.

6. INCOME TAXES

The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" as of January 1, 1993. There was no cumulative
effect of the change in the methods of accounting for income taxes as of
January 1, 1993.

Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.

The significant components of deferred income taxes for the year ended
December 31, are as follows:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax benefit............................... $ 2,945,421 $ 2,077,023
Increase in beginning of year balance of the
valuation allowance for deferred tax assets....... (2,945,421) (2,077,023)
----------- -----------
$ -- $ --
----------- -----------
</TABLE>

F-10
<PAGE>

COMPANY NAME

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, are presented below.

<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation............................. $ 26,036 $ 34,356
Contribution carryforward......................... 46,249 20,030
Research & development credit..................... 490,957 308,194
Federal tax operating loss carryforwards.......... 7,679,462 5,434,270
State tax operating loss carryforwards............ 2,386,555 1,769,211
Other miscellaneous............................... 58,327 23,920
----------- ----------
10,687,586 7,589,981
Valuation allowance................................. 10,389,107 7,443,686
----------- ----------
Net asset........................................... 298,479 146,295
----------- ----------
Deferred Tax Liability:
Depreciation...................................... (298,479) (146,295)
----------- ----------
Net asset/liability............................... $ -- $ --
----------- ----------
</TABLE>

A valuation allowance in the amount of $10,389,107 and $7,443,686 has been
established at December 31, 1994 and 1993, respectively. This allowance has
been established due to the uncertainty in the ability of the Company to
benefit from the federal and state operating loss carryforwards as the Company
has no prior earnings history.

The Company did not pay federal income taxes for the period September 29,
1987 (date of incorporation) to December 31, 1994. As of December 31, 1994,
the Company had approximately $22,800,000 of net operating loss carryforwards
available for federal income tax purposes which expire from the years 2003
through 2009. The Company had approximately $20,800,000 of state tax net
operating loss carryforwards as of December 31, 1994 which expire in the years
1995 through 1999. Because of "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss
carryforwards may be subject to an annual limitation in future periods.

7. COMMITMENTS

The Company has entered into consulting agreements with eight members of its
scientific advisory board pursuant to which each such member will receive a
fee of $15,000 per year for five years for consulting services to the Company
for a minimum of 15 days per year. The agreements expire in July 1998. During
the year ended December 31, 1994, the Company paid $120,000 under these
agreements.

In connection with the July 1988 and March 1989 private placements, the
Company entered into shareholder agreements with investors pursuant to which,
among other matters, the Company granted:

. Registration rights with respect to the shares of common stock acquired
if and to the extent registration rights are granted to any other
purchaser in the July 1988 offering.

. Limited preemptive rights with respect to future private offerings of
common stock by the Company.

. Limited rights of co-sale with two specific stockholders.

F-11
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

. The right to require the approval of 75% of the Company's stockholders
should 50% or more of the Company's shares of common stock be sold to
any party other than two stockholders.

. The right to one of the investors to a seat on the Board of Directors as
long as such investor holds at least 125,000 shares of common stock
purchased in the March 1989 offering.

The Company has granted Pfizer certain registration rights with respect to
2,096,000 shares of Common Stock and limited preemptive rights with respect to
future public offerings pursuant to stock purchase agreements entered into in
connection with the Pfizer Agreements.

The Company has granted certain registration rights with respect to
1,131,583 shares of Common Stock to Allen & Company Incorporated and certain
other persons in connection with the purchase of such Common Stock from a
prior stockholder in 1994.

The Company has also granted certain registration rights to the lessor in a
sale and lease back of certain of the Company's furniture and equipment with
respect to 47,058 shares of Common Stock underlying a warrant held by such
lessor.

8. BENEFIT PLANS

The Company maintains a 401(k) Plan under which all of the Company's
employees are eligible to participate. Each year the Company may, but is not
required to, make a discretionary matching contribution to the Plan. In 1992,
the Company made its first contribution to the Plan. On a quarterly basis the
Company matches employee contributions at a rate of 25% of up to 6% of an
employee's salary. Such contributions totaled approximately $36,000 in 1994,
$29,000 in 1993 and $17,700 in 1992.

9. SUPPLEMENTAL CASH FLOW INFORMATION

The Company made interest payments of approximately $90,000 in 1994,
$109,000 in 1993, and $160,000 in 1992. Interest capitalized in construction
in progress in these years was $13,000 in 1993 and 1992.

10. ACCRUED EXPENSES

Accrued expenses at December 31 are summarized as follows:

<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Accrued compensation....................................... $323,995 $ 50,000
Accounts payable........................................... 625,722 505,019
-------- --------
$949,717 $555,019
</TABLE>

F-12
<PAGE>

NEUROGEN CORPORATION

BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
1995
------------
ASSETS
------
<S> <C>
Current Assets:
Cash and cash equivalents...................................... $ 7,837,401
Marketable securities.......................................... 6,207,790
Other current assets........................................... 299,433
------------
Total current assets......................................... 14,344,624
Property, plant & equipment:
Land........................................................... 425,000
Building....................................................... 8,384,368
Equipment...................................................... 2,636,658
Furniture...................................................... 137,085
------------
11,583,111
Less accumulated depreciation.................................. 1,586,282
------------
Net property, plant and equipment............................ 9,996,829
Other assets, net................................................ 190,316
------------
$ 24,531,769
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accrued expenses............................................... $ 538,740
Unearned revenue from collaborative partner.................... 719,666
Current portion of mortgage payable............................ 145,581
------------
Total current liabilities.................................... 1,403,987
Mortgage payable, excluding current portion...................... 581,777
Other compensation............................................... 62,587
------------
Total liabilities............................................ 2,048,351
------------
Stockholders' Equity:
Preferred stock, par value $.025 per share.
Authorized 2,000,000 shares; none issued.................... --
Common stock, par value $.025 per share.
Authorized 30,000,000 shares; issued and outstanding
10,098,663 shares........................................... 252,467
Additional paid-in capital..................................... 45,681,091
Accumulated deficit............................................ (23,466,643)
Unrealized gain on marketable securities....................... 16,503
------------
Total stockholders' equity................................... 22,483,418
------------
$ 24,531,769
============
</TABLE>

(See accompanying notes to financial statements)

F-13
<PAGE>

NEUROGEN CORPORATION

STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Research revenue................................... $ 1,150,000 $ 1,869,667
Operating Expenses:
Research and development......................... 2,359,756 3,043,972
General and administrative....................... 797,527 688,432
------------ ------------
Total operating expenses....................... 3,157,283 3,732,404
Other income (expense):
Investment income................................ 55,661 180,375
Interest expense ................................ (25,211) (18,099)
------------ ------------
Total other income, net........................ 30,450 162,276
------------ ------------
Net loss......................................... $ (1,976,833) $ (1,700,461)
------------ ------------
Net loss per common share........................ $ (.22) $ (.17)
============ ============
Weighted average shares outstanding.............. 8,970,000 10,084,000
------------ ------------
Accumulated deficit:
Beginning of period.............................. $(15,114,987) $(21,766,182)
------------ ------------
End of period.................................... $(17,091,820) $(23,466,643)
============ ============
</TABLE>

(See accompanying notes to financial statements)

F-14
<PAGE>

NEUROGEN CORPORATION

STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(1,976,833) $(1,700,461)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense.............. 212,285 202,264
Unrealized loss on marketable securities........... 26,080 --
Net gain on sale of assets......................... (6,562) (4,375)
Changes in operating assets and liabilities:
Decrease in accrued expenses....................... (77,504) (410,977)
Increase in unearned revenue from collaborative
partner........................................... -- 719,666
Decrease in other current assets................... 57,682 99,109
Increase in other assets........................... (35,490) (9,022)
----------- -----------
Net cash used in operating activities............. (1,800,342) (1,103,796)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment..................... (58,414) (370,012)
Purchases of marketable securities.................. (6,044,316) (4,116,343)
Sales of marketable securities...................... 5,998,748 3,978,444
----------- -----------
Net cash used in investing activities............. (103,982) (507,911)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options.................. -- 73,898
Exercise of warrants................................ 30,000 --
Principal payments under mortgage payable........... (29,718) (33,654)
Principal payments under capital lease obligations.. (83,574) (30,863)
----------- -----------
Net cash provided by (used in) financing
activities....................................... (83,292) 9,381
----------- -----------
Net decrease in cash and cash equivalents............ (1,987,616) (1,602,326)
Cash and cash equivalents at beginning of period..... 6,403,987 9,439,727
----------- -----------
Cash and cash equivalents at end of period........... $ 4,416,371 $ 7,837,401
----------- -----------
</TABLE>

(See accompanying notes to financial statements)

F-15
<PAGE>

NEUROGEN CORPORATION

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1995
(UNAUDITED)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited financial statements have been prepared from the books and
records of Neurogen in accordance with generally accepted accounting
principles for interim financial information pursuant to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the fiscal year.

(2) EXPIRATION OF CAPITAL LEASE OBLIGATIONS

In March 1995, the Company purchased for $245,000 equipment which was the
subject of an earlier sale/leaseback transaction and which the Company had
leased over a four year period. Leased assets of $1,200,000 and related
accumulated depreciation were removed from the Company's balance sheet when
the assets were reacquired.

F-16
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SE-
CURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAW-
FUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.

------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
Use of Proceeds............................................................ 13
Dilution................................................................... 13
Price Range of Common Stock................................................ 14
Dividend Policy............................................................ 14
Capitalization............................................................. 15
Selected Financial Data.................................................... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................................. 17
Business................................................................... 20
Management................................................................. 37
Certain Transactions....................................................... 39
Principal Stockholders..................................................... 40
Underwriting............................................................... 42
Legal Matters.............................................................. 43
Experts.................................................................... 43
Index to Financial Statements.............................................. F-1
</TABLE>

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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 SHARES

NEUROGEN CORPORATION

COMMON STOCK

------------

PROSPECTUS

, 1995

------------

SMITH BARNEY INC.

ROBERTSON, STEPHENS & COMPANY

PACIFIC GROWTH EQUITIES

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------