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                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549

                                  FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     For the quarterly period ended September 30, 1997

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     For the transition period from ________ to ________

                        Commission File Number 0-20954


                                 COCENSYS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        DELAWARE                                       33-0538836
(STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

                     201 TECHNOLOGY DRIVE, IRVINE, CA  92618
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (714) 753-6100
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act 
of 1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                             Yes   X     No  
                                 -----      -----

Indicate the number of shares outstanding of each of the issuer's classes of 
common stock, as of the latest practicable date.

            $.001 PAR VALUE                           22,792,364
        (CLASS OF COMMON STOCK)           (OUTSTANDING AT OCTOBER 29, 1997)

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<PAGE>

                               COCENSYS, INC.
                       (A development stage company)

                             TABLE OF CONTENTS

                                                                   PAGE NUMBER
                                                                   -----------
PART I.   FINANCIAL INFORMATION

          ITEM 1.  FINANCIAL STATEMENTS.

                   Condensed Balance Sheets as of 
                   September 30, 1997 and December 31, 1996               3

                   Condensed Statements of Operations for the 
                   three-month and nine-month periods ended 
                   September 30, 1997 and 1996 and the period 
                   from inception (February 15, 1989) through 
                   September 30, 1997                                     4

                   Condensed Statements of Cash Flows for the 
                   nine-month periods ended September 30, 1997 
                   and 1996 and the period from inception 
                   (February 15, 1989) through September 30, 1997         5

                   Notes to Condensed Financial Statements                6

          ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS.        11

PART II.  OTHER INFORMATION

          ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.                     15

SIGNATURES                                                               16

                                       2
<PAGE>

                                 COCENSYS, INC.
                         (A development stage company)

                           CONDENSED BALANCE SHEETS
              (In thousands, except share and par value amounts)


                                                SEPTEMBER 30,      DECEMBER 31,
                                                    1997              1996
                                                -------------      ------------
                                                (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                      $   2,513          $   1,050
  Short-term investments                             7,861             16,949
  Receivables from corporate partners                   70                659
  Other current assets                                 399                556
                                                 ---------          ---------
TOTAL CURRENT ASSETS                                10,843             19,214

Property and equipment, net                          2,754              2,685
Notes receivable from officers                         254                126
Other assets, net                                       57                 26
                                                 ---------          ---------
                                                 $  13,908          $  22,051
                                                 ---------          ---------
                                                 ---------          ---------

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                               $     975          $   1,437
  Other accrued liabilities                          1,814              2,556
  Advances from corporate partners                       -                446
  Capital lease obligation - current portion           287                341
                                                 ---------          ---------
TOTAL CURRENT LIABILITIES                            3,076              4,780

Capital lease obligation, less current portion         174                284
Other liabilities                                       36                 40

Commitments and contingencies

Stockholders' equity:
  Preferred stock - $.001 par value,
   5,000,000 shares authorized; 100,000 
   shares of Series B convertible issued and 
   outstanding at September 30, 1997 and 
   December 31, 1996; 100,000 shares of
   Series C convertible issued and outstanding 
   at September 30, 1997                            12,000              7,000
  Common stock - $.001 par value, 75,000,000 
   shares authorized; 22,792,051 shares 
   issued and outstanding at September 30, 
   1997 and 22,083,346 at December 31, 1996         96,165             93,986
Deficit accumulated during the development 
 stage                                             (97,078)           (83,162)
Deferred compensation                                 (497)              (905)
Unrealized gain on investments                          32                 28
                                                 ---------          ---------
TOTAL STOCKHOLDERS' EQUITY                          10,622             16,947
                                                 ---------          ---------
                                                 $  13,908          $  22,051
                                                 ---------          ---------
                                                 ---------          ---------

                            See accompanying notes.

                                       3
<PAGE>

                                 COCENSYS, INC.
                          (A development stage company)

                       CONDENSED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                 PERIOD FROM
                                                                                                  INCEPTION
                                                      THREE MONTHS ENDED   NINE MONTHS ENDED     (FEBRUARY 15,
                                                         SEPTEMBER 30,         SEPTEMBER 30,       1989) TO
                                                      ------------------   --------------------  SEPTEMBER 30,
                                                        1997      1996        1997       1996       1997 
                                                      --------  --------   ---------  ---------  -------------
<S>                                                   <C>       <C>        <C>        <C>        <C>
REVENUES
  Co-promotion revenues from corporate partners       $    861  $    845   $   3,169  $   4,856  $   30,070
  Co-development revenues from corporate partners          951       450       7,900      4,999      15,943
                                                      --------  --------   ---------  ---------  ----------
Total revenues                                           1,812     1,295      11,069      9,855      46,013
                                                      --------  --------   ---------  ---------  ----------

OPERATING EXPENSES
  Research and development                               5,781     4,264      17,198     14,048      85,370
  Marketing, general and administrative                  2,855     3,158       8,358      8,747      45,988
  Acquired research and development                          -         -           -          -      14,879
                                                      --------  --------   ---------  ---------  ----------
Total operating expenses                                 8,636     7,422      25,556     22,795     146,237
                                                      --------  --------   ---------  ---------  ----------
OPERATING LOSS                                          (6,824)   (6,127)    (14,487)   (12,940)   (100,224)

Interest income                                            230       375         638      1,004       4,193
Interest expense                                           (16)      (55)        (67)      (113)     (1,047)
                                                      --------  --------   ---------  ---------  ----------

NET LOSS                                              $ (6,610) $ (5,807)  $ (13,916) $ (12,049) $  (97,078)
                                                      --------  --------   ---------  ---------  ----------
                                                      --------  --------   ---------  ---------  ----------

Net loss per share                                    $  (0.29) $  (0.26)  $   (0.62) $  (0.55)
                                                      --------  --------   ---------  ---------
                                                      --------  --------   ---------  ---------

Shares used in computing net loss per share             22,707    22,003      22,497     21,714
                                                      --------  --------   ---------  ---------
                                                      --------  --------   ---------  ---------
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                     CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                        PERIOD FROM
                                                                                                         INCEPTION
                                                                                 NINE MONTHS ENDED      (FEBRUARY 15,
                                                                                   SEPTEMBER 30,          1989) TO
                                                                             ------------------------   SEPTEMBER 30,
                                                                                1997          1996          1997
                                                                             ---------     ---------    -------------
<S>                                                                          <C>           <C>           <C>
OPERATING ACTIVITIES
Net loss                                                                     $ (13,916)    $ (12,049)    $ (97,078)

Adjustments to reconcile net loss to net cash used in 
 operating activities:
  Depreciation and amortization                                                    776         1,517         6,665
  Amortization of deferred compensation                                            203           547         3,541
  Issuance of stock and warrants for services                                       55             -         1,972
  Loss on sale of fixed assets                                                      65             -            91
  Acquired research and development                                                  -             -        12,279
  Increase in other assets                                                         157          (175)         (471)
  Decrease (increase) in receivable from corporate partner                         589             -           (70)
  Increase (decrease) in advances from corporate partners                         (446)        1,198             0
  Increase (decrease) in accounts payable and other accrued liabilities         (1,204)         (689)        2,553
                                                                             ---------     ---------     ---------
NET CASH USED IN OPERATING ACTIVITIES                                          (13,721)       (9,651)      (70,518)
                                                                             ---------     ---------     ---------

INVESTING ACTIVITIES
Decrease (increase) in short-term investments                                    9,092       (10,306)       (7,830)
Purchase of property and equipment                                                (931)         (636)       (6,556)
Increase in other assets and notes receivable from officers                       (159)          (73)         (467)
Cash received on sale of fixed assets                                                1             -            20
Increase in deferred sales organization costs                                        -             -        (1,571)
Increase in deferred patent costs                                                    -             -          (904)
Acquisition of Acea Pharmaceuticals, net of cash acquired                            -             -           (62)
                                                                             ---------     ---------     ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                              8,003       (11,015)      (17,370)
                                                                             ---------     ---------     ---------

FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock                                  2,329        15,0366        1,114
Net cash proceeds from issuance of preferred stock                               5,000         7,000        28,381
Proceeds from sale/leaseback of fixed assets and notes payable                     529           621         4,762
Payments on capital lease obligations and notes payable                           (677)         (947)       (3,856)
                                                                             ---------     ---------     ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                        7,181        21,710        90,401
                                                                             ---------     ---------     ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                        1,463         1,044         2,513
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                 1,050         6,895             -
                                                                             ---------     ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $   2,513     $   7,939     $   2,513
                                                                             ---------     ---------     ---------
                                                                             ---------     ---------     ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest                                                       $     55      $     113     $     809
                                                                             ---------     ---------     ---------
                                                                             ---------     ---------     ---------
</TABLE>

                            See accompanying notes.

                                       5
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1997
                                   (UNAUDITED)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION

    The interim financial information for the three and nine-month periods 
    ended September 30, 1997 and 1996 is unaudited but includes all 
    adjustments (consisting only of normal recurring entries) which the 
    Company's management believes to be necessary for the fair presentation 
    of the financial position, results of operations and cash flows for the 
    periods presented.  The accompanying interim financial statements should 
    be read in conjunction with the financial statements and related notes 
    included in the Company's 1996 Annual Report on Form 10-K for the year 
    ended December 31, 1996.  Certain information and footnote disclosures 
    normally included in financial statements prepared in accordance with 
    generally accepted accounting principles have been condensed or omitted 
    pursuant to Securities and Exchange Commission rules and regulations.  
    Interim results of operations for the three-month and nine-month periods 
    ended September 30, 1997, are not necessarily indicative of operating 
    results to be expected for the full year.

    REVENUE AND EXPENSE RECOGNITION

    See Notes 2 through 6 for revenue recognition policies related to 
    co-promotion and co-development revenues from corporate partners. The 
    initial costs incurred in establishing the Company's sales and marketing 
    organization were deferred until initiation of the Company's sales 
    efforts on August 1, 1994.  Such costs were amortized over the contract 
    term (through December 31, 1996) of the Company's Promotion Agreement 
    with Novartis (formerly Ciba-Geigy Corporation).  On October 8, 1997, the 
    Company sold its Pharmaceutical Sales and Marketing Division (the "Sales 
    Division") to Watson Laboratories, Inc. ("Watson").  See Note 7.

    NET LOSS PER SHARE

    Net loss per share is computed using the weighted average number of 
    shares of common stock outstanding during the periods.  Common stock 
    equivalents from stock options and warrants are excluded from the 
    calculation as their effect would be antidilutive.

    RECLASSIFICATIONS

    Certain reclassifications have been made to the 1996 financial statements 
    to conform to the 1997 presentation.

                                       6
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

2.  MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY

    In October 1995, the Company entered into a collaboration with 
    Warner-Lambert Company and its Parke-Davis division to develop and market 
    therapeutic drugs for the treatment of certain central nervous system 
    disorders.  This arrangement consists of the Research, Development and 
    Marketing Collaboration Agreement (the "1995 Warner Collaboration 
    Agreement"), for the worldwide development and commercialization of a new 
    class of neurological and psychiatric drugs, termed subtype selective 
    NMDA receptor antagonists ("SSNRAs"), and the Parke-Davis Promotion 
    Agreement, pursuant to which the Company co-promoted Parke-Davis' CNS 
    drug, Cognex-Registered Trademark-, to United States neurologists for the 
    treatment of Alzheimer's disease.  As discussed more fully in Note 7, the 
    1995 Warner Collaboration Agreement was expanded in October 1997 to 
    include modulators of the AMPA receptor and extended until October 1999.

    Under the 1995 Warner Collaboration Agreement, both companies shared 
    technology and resources to develop SSNRA candidates.  The parties were 
    obligated to make specified contributions to development costs with 
    respect to any development candidates. Promotion costs of, and profits 
    from any products developed under the agreement will be shared equally in 
    the United States and Japan.  Warner-Lambert will have the exclusive 
    right to develop and market any product, at its own cost, for markets 
    outside the United States and Japan, subject to a specified royalty 
    payment to the Company. Warner-Lambert is obligated to pay its specified 
    portion of the development costs and to make certain milestone payments, 
    upon achievement of certain clinical development and regulatory 
    milestones, for each development compound.  Payments received under the 
    1995 Warner Collaboration Agreement are recognized as co-development 
    revenues by the Company.

    Pursuant to the Warner Collaboration Agreement, Warner-Lambert purchased 
    $2.0 million of CoCensys common stock in October 1995 and an additional 
    $2.0 million of CoCensys common stock in March 1997. 

    The original Parke-Davis Promotion Agreement, entered into in October 
    1995, was terminated on December 31, 1996, when a revised promotion 
    agreement relating to Cognex took effect. Under the original Parke-Davis 
    Promotion Agreement for Cognex, the Company realized co-promotion 
    revenues from its share of sales of Cognex above certain baseline levels 
    specified in the contract.  Under the revised Parke-Davis Promotion 
    Agreement for Cognex, the Company realized co-promotion revenues based 
    upon the number of prescriptions for Cognex written by certain targeted 
    neurologists and other doctors during each quarter, with a specified 
    minimum payment.  The revised Cognex agreement was terminated in June 
    1997. 

    In July 1997, the Company entered into a new Parke-Davis Promotion 
    Agreement, pursuant to which the Company, through its Sales Division, 
    co-promoted Zarontin-Registered Trademark-, Parke-Davis' drug for 
    pediatric epilepsy.  Under the terms of the new agreement, the Company 
    realized co-promotion revenue on the basis of the number of prescriptions 
    for Zarontin written each quarter over a specified baseline.  As 
    discussed more fully in Note 7, in October 1997 the Company sold the 
    Sales Division, and all related co-promotion agreements, to Watson.

                                       7
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

3.  PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS, INC.

    In January 1996, the Company and Somerset Pharmaceuticals, Inc. 
    ("Somerset") entered into the Somerset Promotion Agreement, pursuant to 
    which the Company, through its Sales Division, promoted Somerset's drug 
    Eldepryl-Registered Trademark- to neurologists in the United States for 
    the treatment of Parkinson's disease.  Effective January 1, 1997, the 
    initial agreement was superseded by the 1997 Somerset Promotion 
    Agreement.  Under the 1997 Somerset Promotion Agreement, CoCensys had the 
    exclusive right to detail Eldepryl to certain neurologists and other 
    physicians in the United States and was compensated based upon the number 
    of details undertaken and gross sales of Eldepryl.  As discussed more 
    fully in Note 7, in October 1997 the Company sold its Sales Division, and 
    all related co-promotion agreements, to Watson.

4.  DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH G.D. SEARLE & CO.

    In May 1996, the Company entered into an agreement with G.D. Searle & Co. 
    ("Searle") to co-develop and co-promote CCD 3693, the Company's lead 
    compound for the treatment of insomnia along with its back-up compounds.  
    Pursuant to the agreement, Searle paid a $3.0 million license fee and 
    purchased 100,000 shares of the Company's Series B Convertible Preferred 
    Stock for $7.0 million.  The license fee was recognized as co-development 
    revenue in 1996.  The preferred stock is convertible to common stock on 
    May 17, 1998, or earlier at the Company's option.  The number of shares 
    issuable upon conversion shall be equal to $7.0 million divided by the 
    then current common stock price (subject to certain minimum and maximum 
    limits). 

    Under the agreement, both companies are obligated to pay a portion of the 
    development costs of the compound and its back-up compounds.  In 
    addition, the Company will receive nonrefundable milestone payments upon 
    the occurrence of certain events in the development of the compound.  The 
    parties will co-promote any products derived from the collaboration in 
    the United States, while Searle will have the right to develop, register 
    and market the products in the rest of the world, subject to specified 
    royalty payments.  

5.  MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS PHARMA, A.G. 

    In May 1994, the Company entered into a marketing and development 
    collaboration with Novartis Pharma, A.G. (formerly Ciba-Geigy Limited) 
    for the co-promotion by the Company of certain Novartis products and the 
    development and commercialization of ACEA 1021, a compound being 
    developed by the Company.  This collaboration consisted of the Novartis 
    Promotion Agreement and the Novartis Research and Development Agreement.

                                       8
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

    Pursuant to the Novartis Promotion Agreement, CoCensys established a 
    sales force to co-promote and market certain Novartis products in the 
    United States initially to psychiatrists.  The agreement provided for the 
    advance of funds to the Company to cover a portion of the expenses 
    incurred by the CoCensys sales force in promoting the Novartis products.  
    CoCensys realized co-promotion revenues from its share of sales of 
    Novartis products above certain baseline levels specified in the 
    contract.  The Novartis Promotion Agreement terminated at the end of 
    1996. 

    In connection with the Novartis Research and Development Agreement, 
    Novartis purchased $7.0 million of CoCensys common stock and agreed to 
    make certain nonrefundable milestone payments in connection with 
    specified events in the course of the development of ACEA 1021.  In April 
    1997, Novartis advised the Company that it would not continue the 
    development of ACEA 1021, and the agreement terminated in October 1997.  
    The Company is seeking a new partner to develop ACEA 1021.  There can be 
    no assurance that the Company will be able to secure another partner to 
    continue the development of this compound.

6.  DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH WYETH-AYERST 
    LABORATORIES 

    In May 1997, the Company entered into a development and commercialization 
    agreement for Co 2-6749, its lead anxiolytic compound, with Wyeth-Ayerst 
    Laboratories, the pharmaceutical division of American Home Products 
    Corporation ("AHP"). Under the terms of the agreement, Wyeth-Ayerst made 
    upfront payments to CoCensys of $5.0 million in licensing fees and AHP 
    paid $5.0 million to purchase the Company's Series C Convertible 
    Preferred Stock.  Additionally, CoCensys will receive specified milestone 
    payments dependent upon the achievement of key development events and 
    $3.0 million per year for up to three years to identify back-up 
    compounds. Beginning in May 1997, payments due to CoCensys for work 
    performed identifying back-up compounds are due quarterly. Wyeth-Ayerst 
    will be responsible for the development of Co 2-6749.  The Company and 
    Wyeth-Ayerst will co-promote any resulting product in certain market 
    segments in the United States, while Wyeth-Ayerst will have rights to 
    develop, register and market any drugs derived from the collaboration in 
    the rest of the world, subject to royalty obligations to CoCensys.  The 
    preferred stock is convertible into common stock after May 12, 1999, into 
    a number of shares of common stock equal to $5.0 million divided by the 
    conversion price, which will be determined pursuant to a formula based 
    partially on the market price of the common stock at the time of 
    conversion (subject to a  minimum price of $4.37  and a maximum price of 
    $7.76).

7.  SUBSEQUENT EVENTS

    DISPOSITION OF PHARMACEUTICAL SALES AND MARKETING DIVISION

    On October 8, 1997, the Company entered into an Asset Purchase Agreement 
    (the "Watson Agreement") to sell its Sales Division to Watson.  Under the 
    terms of the Watson Agreement, Watson assumed the Sales Division's 
    co-promotion agreements, acquired certain of its operating assets and has 
    the right to hire approximately 70 former employees of the Sales 
    Division.  As consideration

                                       9
<PAGE>

                                COCENSYS, INC.
                        (A development stage company)

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

    for these assets, Watson paid $8.0 million, with up to $1.0 million more 
    due to the Company if Watson is able to hire and retain, as of specified 
    dates, certain percentages of the employees from the Sales Division.

    In order to satisfy certain provisions of the Watson Agreement, the 
    Company entered into, and transferred to Watson, agreements with two 
    pharmaceutical companies for marketing rights and New Drug Approvals 
    ("NDAs") for two drugs at an aggregate cost of $2.0 million, of which the 
    Company paid $1.0 million during October 1997.  An additional $1.0 
    million is payable by the Company in future installments.  Pursuant to 
    the Watson Agreement, $1.0 million of the $8.0 million in proceeds from 
    the sale of the Sales Division was deposited into an escrow account to 
    satisfy the Company's future obligations related to the acquisition of 
    these marketing rights and NDAs.

    EXPANDED WARNER-LAMBERT COLLABORATION AGREEMENT

    In October 1997 the Company and Warner-Lambert Company entered into an 
    agreement (the "1997 Warner Collaboration Agreement") to extend and 
    expand the 1995 Warner Collaboration Agreement to include the discovery 
    and commercialization of therapeutic glutamate receptor antagonists.  As 
    discussed in Note 2 above, the original two-year collaboration focused on 
    the discovery of SSNRAs, compounds that block the activity of one 
    specific class of glutamate receptor.  The expanded collaboration also 
    covers modulators of the AMPA receptor, a second class of glutamate 
    receptor. Pursuant to the terms of the expanded agreement, Warner-Lambert 
    purchased $1.0 million of CoCensys Series D preferred stock, and will 
    purchase an additional $6.0 million in January 1988, pay up to $16.5 
    million in milestone payments if all key targets are met and pay 
    royalties on sales of resulting compounds.  The Company will provide drug 
    discovery expertise under the two-year term of the collaboration's 
    research component and will retain an option to participate in the US 
    development, commercialization and profit sharing for any resulting 
    compounds.

    RESULTS OF GANAXOLONE PHASE II CLINICAL TRIALS

    The Company's lead Epalon compound, CCD 1042 (ganaxolone), an 
    anticonvulsant and anti-migraine compound, completed separate Phase II 
    clinical trials for adult epilepsy and migraine in the third quarter of 
    fiscal 1997.  In November 1997, the Company announced that in these 
    trials CCD 1042 demonstrated clinical activity in both indications and 
    the Company intends to pursue further clinical development and partnering 
    discussions.

                                       10
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS 

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING 
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND 
UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY.  
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE 
NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE COMPANY'S 1996 ANNUAL REPORT 
ON FORM 10-K.

OVERVIEW

CoCensys, Inc. is a biopharmaceutical company dedicated to the discovery, 
development, marketing and sales of small molecule drugs to treat 
neurological and psychiatric disorders.  The Company's product discovery and 
development programs are focused on the exploration of novel receptors and 
enzymes and their ligands and inhibitors through three technology platforms: 
GABA receptor enhancers, or Epalons; glutamate antagonists; and ICE-like 
protease inhibitors.

The Company's lead Epalon compound, CCD 1042 (ganaxolone), an anticonvulsant 
and anti-migraine compound, completed separate Phase II clinical trials for 
adult epilepsy and migraine in the third quarter of fiscal 1997. In November 
1997, the Company announced that in these trials CCD 1042 demonstrated 
clinical activity in both indications and the Company intends to pursue 
further clinical development and partnering discussions. The Company's lead 
compound for the treatment of insomnia, CCD 3693, began preliminary testing 
in humans during the third quarter of fiscal 1997.  Also, during the third 
quarter of 1997, the Company presented new preclinical data for ACEA 1021 
(licostinel), its lead drug candidate for stroke.  The ACEA 1021 data suggest 
that the minimum dose required for efficacy in an animal model of stroke may 
be three to four times lower than the doses that were well tolerated in Phase 
I clinical (human) infusion studies and are considerably below the doses that 
had previously indicated the potential for kidney toxicity.  The company 
currently does not intend to initiate Phase II trials of ACEA 1021 until the 
compound is repartnered.

Since its inception in February 1989, the Company has devoted substantially 
all of its resources to the discovery and development of neuropharmaceutical 
products for the treatment of disorders affecting the central nervous system. 
The Company has incurred losses since inception and expects losses to 
continue for the foreseeable future, primarily due to the expansion of 
programs for research and development.  Operating results are expected to 
fluctuate as a result of uncertainty in the timing and amount of revenues to 
be earned from co-development activities and from achievement of research and 
development milestones, and uncertainty in the timing and amount of expenses 
for product development, including clinical trials. As of September 30, 1997, 
the Company's accumulated deficit was approximately $97.1 million.

RESULTS OF OPERATIONS

The Company recognized $0.9 and $3.2 million in co-promotion revenues for the 
three and nine-month periods ended September 30, 1997, respectively, compared 
to $0.8 and $4.9 million during the same periods in 1996.  The decrease for 
the nine-month period compared to the same period a 

                                       11
<PAGE>

year earlier is due primarily to a nonrecurring adjustment of $2.3 million, 
relating to settlement of co-promotion activities with Novartis Pharma A.G. 
("Novartis"), that was recorded in the second quarter of fiscal 1996. 

The Company recognized $1.0 and $7.9 million in co-development revenues for 
the three and nine-month periods ended September 30, 1997, respectively, 
compared to $0.5 and $5.0 million for the comparable periods of 1996.  The 
increases in both the three and nine-month periods of the current year are 
primarily due to co-development revenue under the Wyeth-Ayerst development 
and commercialization agreement that was signed in May of 1997.  The Company 
recognized $0.8 million of co-development revenue in the third quarter and 
$5.8 million in the nine months ended September 30, 1997 related to the 
Wyeth-Ayerst agreement.  For the same periods in fiscal 1996, co-development 
revenue was generated by the CCD 3693 program with Searle and the terminated 
ACEA 1021 program with Novartis.

Research and development expenses increased to $5.8 and $17.2 million for the 
three and nine-month periods ended September 30, 1997, respectively, from 
$4.3 and $14.0 million in the comparable periods of the prior year.  These 
increases resulted primarily from higher product development costs incurred 
to support Phase II clinical trials of CCD 1042 in both migraine and epilepsy 
and pre-clinical development of CCD 3693, partially offset by lower product 
development costs associated with the ACEA 1021 program.  Clinical 
development of ACEA 1021 was suspended in April 1997 following the decision 
of Novartis, the Company's development partner, not to continue participation 
in the development of ACEA 1021.  The Company does not intend to resume 
clinical development of ACEA 1021 until it secures another partner.  There 
can be no assurance that the Company will be able to secure another partner 
to continue the clinical development of ACEA 1021.

Marketing, general and administrative expense decreased to $2.9 and $8.4 
million for the three and nine-month periods ended September 30, 1997, 
respectively, from $3.2 and $8.7 million in the same periods of the prior 
year.  The decreases in the three and nine-month periods of the current year 
in comparison to the same periods in the prior year are primarily 
attributable to reductions in certain promotional and marketing expenses, 
partially offset by increases in salaries and other general corporate 
expenses. 

Net interest income decreased to $0.2 and $0.6 million for the three and 
nine-month periods ended September 30, 1997, respectively, from $0.3 and $1.0 
million in the same periods of the prior year.  The decrease was due to lower 
average levels of cash and short-term investment balances in the current year.

LIQUIDITY AND CAPITAL RESOURCES

From its inception in February 1989 through September 30, 1997, the Company 
has financed its operations by raising approximately $89.5 million 
through private and public offerings of its equity securities, $30.1 million 
through co-promotion revenue and $15.9 million through co-development 
revenue. As of September 30,

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<PAGE>

1997, the Company's balance of cash, cash equivalents and short-term 
investments totaled $10.4 million, compared to $18.0 million at December 31, 
1996. 

As of September 30, 1997, the Company had invested $6.6 million in leasehold 
improvements, laboratory and computer equipment and office furnishings and 
equipment since inception.  The Company has financed $3.7 million of these 
capital additions through capital lease lines.  In addition, the Company 
leases its laboratory and office facilities under operating leases.  
Additional equipment will be needed as the Company increases its research and 
development activities.  The Company has no material commitments for the 
acquisition of property and equipment.

Pursuant to the Watson Agreement, in October 1997 the Company sold its Sales 
Division, related co-promotion agreements and certain other assets to Watson 
for $9.0 million in cash, of which $8.0 million was paid by Watson in October 
1997 and $1.0 million is payable in installments over the next twelve months 
subject to the occurrence of specified events.  Of the $8.0 million received 
to date, the Company expects to net approximately $5.4 million in cash after 
expenditures necessary to fulfill its obligations related to the Watson 
Agreement.  These obligations include the acquisition of specified NDAs, the 
purchase of leased assets, a portion of which were transferred to Watson, and 
payment of certain transaction and severance costs.

As a result of selling the Sales Division to Watson, the Company will no 
longer realize co-promotion revenues or related expenses after the fourth 
quarter of 1997.  The Company estimates that, based on annualized 1997 
results, the Sales Division was consuming approximately $3.0 million annually.

Pursuant to the 1995 and 1997 Warner Collaboration Agreements, Warner-Lambert 
is obligated to make certain milestone payments for each compound selected 
for development, as well as pay for its share of development costs.  Under 
the terms of the 1995 agreement, Warner-Lambert purchased $2.0 million of 
CoCensys common stock in October 1995 and an additional $2.0 million of 
CoCensys common stock in March 1997.  Under the terms of the 1997 agreement, 
Warner-Lambert purchased $1.0 million of CoCensys preferred stock in October 
1997 and is obligated to purchase an additional $6.0 million of CoCensys 
preferred stock in January 1998.

Pursuant to the 1997 Wyeth-Ayerst Development and Commercialization 
Agreement, Wyeth-Ayerst is obligated pay all development costs related to Co 
2-6749, as well as make milestone payments upon the occurrence of certain 
agreed upon events.  Furthermore, Wyeth-Ayerst is required to pay the Company 
$3.0 million per year for up to three years to identify back-up compounds.  

CoCensys' operations to date have consumed substantial amounts of cash.  The 
negative cash flow from operations is expected to continue and will likely 
increase over the foreseeable future.  The Company anticipates that its 
existing capital resources, including funding expected to be available 
through current partner collaborations (including milestone payments), will 
be adequate to satisfy its capital needs for at least the next 12 months.  
There can be no assurance that milestone-based payments or co-development 
revenues will be sufficient to meet the Company's capital requirements.  The 
Company will need to obtain substantial additional funds to continue to 
conduct the costly and time-consuming research, preclinical development and 
clinical trials necessary to bring its products to market.  The Company 
intends to seek additional funding through additional research, development 
and commercialization

                                       13
<PAGE>

collaborations with suitable corporate partners and/or through public or 
private financing.  There can be no assurance that additional financings or 
suitable collaborations will be available on favorable terms, if at all.  
Insufficient funds may require the Company to delay, scale back or eliminate 
some or all of its research and product development programs or to license 
third parties to commercialize products or technologies that the Company 
would otherwise seek to develop itself. 

The Company's future capital requirements will depend on many factors, 
including the progress of the Company's research and development programs, 
the scope and results of preclinical testing and clinical trials, the time 
and costs involved in obtaining regulatory approvals, the rate of 
technological advances, determinations as to the commercial potential of the 
Company's products under development, the status of competitive products, the 
expansion of sales and marketing agreements, the establishment of third-party 
manufacturing arrangements and the establishment of additional collaborative 
relationships. 

ADDITIONAL RISKS

In addition to those discussed above, the Company is subject to the following 
risks:

The Company's products are in an early stage of development and face a high 
degree of technological, regulatory and competitive risks.  Drug discovery 
and development are capital intensive activities, and there can be no 
assurance the Company will be able to raise the additional capital necessary 
to develop and commercialize products.  The Company's strategy for the 
development, clinical testing and commercialization of its products includes 
entering into various collaborations with corporate partners, licensors, 
licensees and others.  There can be no assurance that the Company will be 
able to negotiate further collaborative arrangements on acceptable terms, if 
at all, or that the current collaborative efforts will be successful.  Human 
clinical trials require considerable time and funding, and results from any 
stage of testing may not predict results of later stages.  In addition, if 
results of any clinical trial fail to meet the Company's requirements, the 
study plan for such compound may be adjusted or another compound may be 
substituted, either of which may result in delays in future clinical studies. 
Unfavorable clinical trials could result in cancellation of future clinical 
studies.  Inherent in the fact that CoCensys is an early stage 
biopharmaceutical company are a range of additional risks, including those 
associated with obtaining and enforcing patents and protecting proprietary 
technology and the risk of regulatory change, among others.

The securities markets have from time to time experienced significant price 
and volume fluctuations that may be unrelated to the operating performance of 
particular companies.  The market prices of the common stock of many publicly 
traded biopharmaceutical companies have in the past been, and can in the 
future be expected to be, especially volatile due to various external 
factors, including but not limited to, announcements of technological 
innovations or new products by the Company or its competitors, developments 
or disputes concerning patents or proprietary rights, publicity regarding 
actual or potential results relating to products under development, 
regulatory developments in both the United States and foreign countries and 
public concern as to the safety of biotechnology products.


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<PAGE>

PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.


(a)  Exhibits

10.1(1)    Asset Purchase Agreement, dated October 8, 1997, between the 
           Company and Watson.  

27         Financial Data Schedule.


(b)  Reports on Form 8-K.


     The Company filed a Form 8-K/A on July 3, 1997, reporting under Item 5 
     that the Company  entered into a license agreement with Massachusetts 
     General Hospital ("MGH") pursuant to which the Company licensed from MGH 
     certain patent rights relating to the treatment of migraine.


__________________________

(1) Filed as an exhibit to the Company's Current Report on Form 8-K dated 
October 8, 1997 and incorporated herein by reference.

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<PAGE>

                                    SIGNATURES


Pursuant to the requirements of the Securities and Exchange Act of 1934, the 
registrant has duly caused this report to be signed in its behalf by the 
undersigned thereunto duly authorized.

                                       CoCensys, Inc.



Date: November 14, 1997                By:      /s/ Peter E. Jansen
      -----------------                    -------------------------------
                                                   Peter E. Jansen
                                              Chief Financial Officer
                                              (PRINCIPAL FINANCIAL AND
                                                 ACCOUNTING OFFICER)




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