<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
[ X ]
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
[   ]
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                         COMMISSION FILE NUMBER 0-18311

                              NEUROGEN CORPORATION
             (Exact name of registrant as specified in its charter)

              DELAWARE                                22-2845714
  (State or other jurisdiction of                  (I.R.S. Employer
   Corporation or organization)                    Identification No.)


                          35 NORTHEAST INDUSTRIAL ROAD
                           BRANFORD, CONNECTICUT 06405
               (Address of principal executive offices) (Zip Code)
                                 (203) 488-8201
              (Registrant's telephone number, including area code)
               Securities registered pursuant to Section 12(b) of
                                    the Act:
                                      None
           Securities registered pursuant to Section 12(g) of the Act:
          Common Stock, par value $.025 per share (the "Common Stock")
                                (Title of Class)

     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
filing  requirements  for the past 90 days.

                              YES X      NO
                                 ---       --- 
     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
     The  approximate  aggregate  market  value  of the  Common  Stock  held  by
non-affiliates of the registrant was $75,277,000 as of March 1, 1999, based upon
the closing price of the Common Stock as reported on The Nasdaq  National Market
on such date.  For purposes of determining  this number,  shares of Common Stock
held by  officers,  directors  and  stockholders  whose  ownership  exceeds five
percent were excluded.  This number is provided only for purposes of this report
and does not represent an admission by either the  registrant or any such person
as to the  status  of such  person.
     As of March 1, 1999, the  registrant had 14,704,488  shares of Common Stock
outstanding.  DOCUMENTS  INCORPORATED BY REFERENCE (1) The Neurogen  Corporation
Proxy  Statement for the Annual  Meeting of  Stockholders  to be held on May 26,
1999, is  incorporated  by reference into Items 10, 11, 12 and 13 of Part III of
this Form 10-K.

<PAGE>
                                     PART I

ITEM 1. BUSINESS

     Neurogen   Corporation   ("Neurogen"  or  the  "Company")  is  an  emerging
pharmaceutical  company  engaged  in  the  discovery  and  development  of a new
generation of drugs which are designed to selectively regulate the communication
between  cells in order  to  influence  cell  function  associated  with a given
disorder.  The Company has developed an integrated  platform of  technologies to
discover drug candidates which work through specific cellular  mechanisms within
the human body identified as drug "targets".  The mechanistic (cellular) targets
of the Company's  programs  consist of both existing  targets where  traditional
drug discovery methods have failed to produce successful drug candidates and new
targets  derived  from the rapid  advances  being made in industry  and academia
towards better understanding the genetic and cellular  underpinnings of disease.
A majority of the Company's  efforts are  dedicated to  developing  new drugs to
treat psychiatric and neurological  disorders.  Based on the Company's expertise
in neuronal (nerve cell) communication, Neurogen is developing "receptor subtype
specific"  drugs which target  subtypes of the receptors  located on the neurons
responsible for neuronal  communication  in the brain. The Company believes that
receptor  subtype  specific drugs offer the potential for equivalent or improved
efficacy  with fewer side  effects  than  currently  marketed  psychotherapeutic
drugs, most of which interact with multiple receptor subtypes. Neurogen has also
applied its receptor subtype strategy and drug discovery expertise to expand its
portfolio  of drug  programs to include  drugs to treat  obesity  and  metabolic
disorders  and, more  recently,  pain and  inflammatory  disorders.  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 five of its
drug development  programs  partnered with Pfizer Inc ("Pfizer") and one program
with 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,
pharmacology and molecular  biology,  combined with its Accelerated  Intelligent
Drug Design (AIDD)  program,  which  combines a biased  combinatorial  chemistry
program with high-throughput screening,  informatics and robotics, 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
drug  candidates  designed  to  treat  anxiety,   obesity  and  other  metabolic
disorders,  sleep disorders,  cognitive impairment,  schizophrenia,  depression,
asthma  and  other  inflammatory  disorders.   Industry  analysts  estimate  the
worldwide market for currently marketed drugs for such disorders to be in excess
of $33 billion annually.

     The Company was  incorporated  in Delaware in September  1987 and commenced
operations in July 1988.  The Company's  executive  offices and its research and
development  facility are located at 35  Northeast  Industrial  Road,  Branford,
Connecticut 06405. Its telephone number is (203) 488-8201.

BACKGROUND

     Neurogen's  operations  are  dedicated  wholly to research and  development
activities to discover and develop new drugs with  competitive  advantages  over
available therapies.

     The business of drug discovery  involves many  disciplines  and is changing
rapidly in  response to advances  in both the  scientific  understanding  of the
cause  and  treatment  of  disorders  as well as  advances  in the  technologies
available to discover and test new drugs.  Neurogen has  developed an integrated
platform of  technologies to discover new drug leads and to optimize these leads
into   drug   candidates    suitable   for   human   (clinical)    testing   and
commercialization.  Neurogen's lead discovery  technologies include the identity
of  biological  mechanisms  thought to have a role in treating a given  disorder
(drug targets);  the development of assays designed to identify  compounds which
have biological  activity at such targets;  the design and creation of libraries
of compounds  which can be screened for  biological  activity and the ability to
rapidly  screen  them.  Once  compounds  have  been  identified  as  active at a
particular drug target Neurogen  applies its integrated  technologies to develop
leads into clinical candidates, including the development of both in vitro (test
tube) and in vivo  (animal)  models to evaluate the  pharmacological  profile of
drug  candidates for potential  efficacy and side effects and the development of
preclinical tests to predict the metabolic,  toxicologic and physical properties
of drug candidates to assess their commercial potential.  Neurogen applies these
technologies in an iterative process where information  gathered at later stages
of the development process is continually fed to earlier stages.

     The  Company's  most  advanced  programs  are  focused  on  regulating  the
communication  between cells in the central nervous system (the "CNS").  The CNS
is  composed  of nerve  cells  (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  depression.  Such  disruption  can result from  abnormal
release  of  neurotransmitters,   aberrant  signaling  between  nerve  cells  or
heightened sensitivity of receptors to normal levels of neurotransmitters.

     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, made up of folded protein
sections  forming  the central  pore which  opens and closes as the  receptor is
stimulated. In the last decade, however,  scientists,  including current members
of Neurogen's  scientific  staff,  have  discovered  that each  neurotransmitter
typically  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.  Slight  differences in the folded protein  sections
making up the receptor  distinguish  one receptor  subtype from other members of
their  family.  Receptor  subtypes  from the same  family are often  distributed
differently   throughout  the  brain  and  may  control  distinct  physiological
functions from other receptor subtypes within the same family.

     Neurotransmitters  such as gamma-aminobutyric  acid ("GABA"),  dopamine and
various 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,  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.

     The Company  believes  certain  neuropeptides,  by interacting with certain
receptors, are associated with, among other things, eating, stress responses and
cognitive functions.  One neuropeptide,  neuropeptide Y ("NPY"), has for several
years  been  associated  with  eating  responses  as  well as  other  functions,
including metabolism and blood pressure.  Another  neuropeptide,  corticotrophin
releasing  factor  ("CRF") is believed to be associated  with stress  responses,
while a third  neuropeptide,  galanin,  is  thought  to be  involved  in  eating
responses  as  well  as   cognitive   functions.   Dopamine,   another  type  of
neurotransmitter,  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,  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.

     Outside of the central nervous system,  peptides and hormones interact with
cell  membrane  receptors  to cause  cellular  changes  in a similar  fashion as
synaptic  communication  occurs  within the CNS.  Neurogen has expanded its drug
development  programs to include a number of programs  which apply the Company's
drug  design  expertise  to  these  types of  mediators  of  cellular  activity,
including GLP1,  bradykinin,  and C5a. Like many of Neurogen's  neurotransmitter
receptor  targets,  these  receptors  consist of folded  protein chains that are
embedded in the cell membrane. Different sections of the protein chains may vary
to produce  different  receptor  subtypes.  Neurogen  believes that by designing
small  molecules that interact with the targeted  receptors,  the Company may be
able to develop new drugs which modulate different disease-linked  receptors, or
design new drugs which are more targeted than currently marketed drugs.

     The identity and role of various subtypes of the receptor  families of each
of the above  neurotransmitters,  neuropeptides  and  cellular  mediators is the
subject of ongoing  scientific  research  at  Neurogen  as well as at many other
institutions and companies.

     Neurogen's  drug  development  programs  design  drugs for targets that are
either  more  specific  than drugs  currently  available  to treat a  particular
disease,  or targets that have been newly  identified as mediators in a disease.
In both cases,  Neurogen  believes that by applying its drug design expertise to
designing drugs that  specifically  target a receptor,  such compounds offer the
potential for equivalent or improved efficacy with fewer side effects than drugs
currently  on the  market,  or may grow  markets  in areas  where few  effective
therapeutics currently exist.

BUSINESS STRATEGY

     Neurogen's  mission  is to be a  leader  in  the  design,  development  and
commercialization  of new drugs. The Company focuses its drug discovery programs
on small molecule compounds that target specific receptor subtypes implicated in
a variety of disorders. The key points of the Company's strategy are as follows:

     TARGET MULTIPLE  MARKETS WITH MULTIPLE DRUG CANDIDATES.  Neurogen  utilizes
its  expertise in the  discovery of novel drug  candidates  to develop a diverse
portfolio of candidates to treat common disorders,  such as anxiety, obesity and
other metabolic disorders, sleep disorders, cognitive impairment,  schizophrenia
and depression.  By targeting  multiple disorders which represent large markets,
the Company seeks to reduce its reliance on any single program.  Further, within
each program  Neurogen seeks to develop  multiple drug candidates with differing
chemical structures,  pharmacokinetic  profiles and, at times, differing subtype
profiles in order to further  enhance the  likelihood  of producing a successful
drug candidate from such 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 newest  class of  antidepressants  (e.g.,
Prozac(R),  Zoloft(R) and Paxil(R))  which  selectively  interact with serotonin
(another  neurotransmitter) reuptake 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  AIDD  program,  to  enhance  its  drug
discovery   capabilities  and  to  provide  new   opportunities   for  strategic
partnerships. Through its AIDD program, the Company employs biased combinatorial
chemistry  methodologies  to  develop  extensive  libraries  of  small  molecule
compounds.  Together with its combinatorial  chemistry  effort,  Neurogen's AIDD
program integrates advanced high-throughput screening techniques and informatics
systems  designed to  intelligently  optimize  library  synthesis  and screening
selection from a virtually  infinite  number of  alternatives.  This program has
been  instrumental  in providing new drug leads or optimizing  existing leads in
all of Neurogen's  programs.  The Company has also granted limited access to its
AIDD  technologies  to certain  third  parties in  exchange  for rights to other
technologies,  access fees  and/or a share of  commercial  rights to  successful
candidates derived from the technologies.

     RATCHET  GROWTH  THROUGH  STRATEGIC  COLLABORATIONS.  The Company  seeks to
ratchet its growth through successive strategic collaborations in which it seeks
to diversify the development  risk of its programs and to enhance the likelihood
of  commercialization  of its compounds.  Further,  through its  collaborations,
Neurogen hopes to progressively  retain additional  commercial rights and assume
additional  responsibilities to develop  incrementally its clinical development,
manufacturing  and sales  capabilities.  In its first  two  collaborations  with
Pfizer (1992 and 1994),  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  (June 1995),  in addition to leading the research and discovery
efforts,  Neurogen 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. In its third  collaboration  with Pfizer (November
1995),  in addition to retaining  similar rights relating to clinical trials and
manufacturing,  Neurogen retained an option to earn a portion of the profits, if
any, generated by sales of collaboration  drugs to the North American Free Trade
Agreement  ("NAFTA")  countries  by  funding a portion  of the cost of  clinical
trials and marketing in those countries.

PRODUCT RESEARCH AND DEVELOPMENT

     The Company  believes it is  well-positioned  to  capitalize on advances in
biochemistry, molecular biology, medicinal chemistry and neurobiology to develop
new  drugs.  The  Company  believes  that its  scientists  possess  an  advanced
understanding of the workings of receptor systems in cellular  communication and
the design of small molecule drug candidates to modulate these receptor systems.
This  understanding  has enabled the Company to develop a portfolio of compounds
which include product candidates for the treatment of anxiety, obesity and other
metabolic  disorders,  sleep  disorders,  cognitive  impairment,  schizophrenia,
depression, asthma and other inflammatory disorders.

ACCELERATED INTELLIGENT DRUG DESIGN

     Neurogen's  Accelerated  Intelligent Drug Design (AIDD) program  integrates
its  biased  combinatorial  chemistry  program  and  high-throughput   screening
capabilities  with  state-of-the-art  automation and an interactive data system.
Combinatorial  Chemistry  libraries and  high-throughput  screening systems like
those being  developed at Neurogen  can be used to find new  chemical  leads for
receptors or other targets where no leads exist as well as to optimize  chemical
leads  by  refining   candidates  into   structures   with  suitable   drug-like
characteristics.

     Neurogen's  drug  lead  discovery  technologies  include  both  traditional
medicinal chemistry  techniques and combinatorial  design techniques  integrated
into the AIDD program. 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 per day. Moreover,  advances in screening  techniques and
robotics now allow the rapid screening of thousands of compounds created through
combinatorial  efforts to identify possible new drug candidates.  These advances
in chemistry and screening  technologies  have  significantly  impacted the drug
discovery practices of the industry. Neurogen believes it has been, and believes
it can remain, a leader in the development and application of such technologies.

     Many  companies  with  combinatorial  chemistry  programs  have used  these
technologies to systematically  and randomly 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 AIDD libraries (rather
than randomly generate  compounds) toward the selection of molecules most likely
to  interact  with   receptor   families  of  interest  to  Neurogen  and  other
pharmaceutical companies. Neurogen also biases its libraries to create compounds
more likely to have drug-like characteristics such as oral availability. To bias
its  libraries,  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
numerous  compounds.  The pools of compounds are then screened through a variety
of high capacity  receptor-based assays to identify compounds that interact with
specific receptor subtypes.  Certain results of these tests of activity are then
utilized to aid in the development of new generations of compounds.

     To date,  Neurogen has generated a library of more than 1,000,000 compounds
using its AIDD program.  The Company  believes  that, to date,  the discovery of
active  compounds and the  optimization of drug leads in several of its programs
has  required  substantially  less time that would have been  needed  using only
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.
<PAGE>
PRODUCT DEVELOPMENT PROGRAMS
<TABLE>
<CAPTION>
The following  table lists the Company's most advanced programs and the current
status of these programs.

DISORDER                                TARGET MECHANISM           PROGRAM STATUS                COMMERCIAL RIGHTS
<S>                                     <C>                        <C>                           <C>

Anxiety                                 GABA                       NGD 91-2 Phase I               Pfizer (Neurogen royalty)
                                                                   (1) NGD 91-3 pre-
                                                                   clinical development (2)

Insomnia                                GABA                       NGD 96-1 Phase I human          Pfizer (Neurogen royalty)
                                                                   clinical trials (1)
                                                                   NGD 96-2 pre-clinical
                                                                   development (2)

Dementia, cognition deficits            GABA                       NGD 97-1 Phase I human          Pfizer (Neurogen royalty)
                                                                   clinical trials (1)

Depression and stress-related           CRF1                       NGD 98-1 pre-clinical           Neurogen
disorders                                                          development (2)

Obesity and other eating disorders      Neuropeptide Y             Evaluation of new pre-clinical  Pfizer (Neurogen royalty,
                                                                   candidates (2) following        manufacturing and profit
                                                                   safety test of NGD 95-1 in      sharing options)
                                                                   Phase I clinical trials (1)

Schizophrenia                           Dopamine                   Evaluation of new               Schering-Plough (Neurogen royalty
                                                                   candidates following            and manufacturing option)
                                                                   Phase I (1) trials of NGD 94-4
                                                                   and NGD 94-1

Inflammatory disorders,                 C5a                        Leads identified (3)             Neurogen
rheumatoid arthritis

Depression                              NK                         Leads Identified (3)             Neurogen

Asthma                                  Bradykinin                 Leads identified (3)             Neurogen

Type II diabetes, obesity               GLP1 - like                Leads identified (3)             Neurogen

Depression                              Neuropeptide Y             Leads identified (3)             Neurogen

Anxiety in companion animals (4)        GABA receptor subtypes     Leads identified (3)             Pfizer (Neurogen royalty)

Dementia in companion animals (4)       GABA receptor subtypes     Leads identified (3)             Pfizer (Neurogen royalty)

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

     (1) See  "Government  Regulation"  for a  description  of the  phases  of
clinical trials.

     (2)  "Pre-clinical  development"  indicates that Neurogen and/or one of its
collaborators   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 pre-clinical development.

     (4) "Companion animals" is a population,  consisting of household pets such
as dogs and cats, which is targeted by Pfizer's Animal Health Division.
</TABLE>
<PAGE>
     ANXIETY.  Estimates by the National Institute of Mental Health (the "NIMH")
suggest that anxiety  disorders,  characterized by a sense of irrational fear or
dread,  are the  most  common  CNS  disorders  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 market sources,  the
Company  estimates the annual market for currently  marketed  anxiolytics  to be
approximately $2.6 billion worldwide and $1.1 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 its scientists' understanding
of the role which GABA  receptor  subtypes  play in the side  effects  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  Collaborative  Research
Agreement  dated as of January 1, 1992 between the Company and Pfizer (the "1992
Pfizer Agreement") to research, develop and commercialize with Pfizer anxiolytic
and cognition enhancing compounds that act through the GABA family of receptors.
See "Collaborative Research and Licensing Agreements."

     Certain of Neurogen's  GABA-based compounds have also demonstrated efficacy
in animal models of depression.  Accordingly,  in a 1998 extension and expansion
of the  1992  and  1994  Agreements  with  Pfizer,  depression  was  added as an
additional  target  indication for Neurogen's  development  candidates  from the
anxiety drug development program. Recent academic research has indicated that as
many as 60 percent  of  depressed  patients  also have  anxiety.  Under the 1992
Pfizer Agreement,  Pfizer has the right to determine what disease indications to
pursue with development candidates in the clinical development process, if any.

     DRUG CANDIDATES.  Neurogen has discovered several drug candidates that have
the novel GABA binding  activity which the Company believes will relieve anxiety
while avoiding or reducing adverse side effects. Three of these candidates,  NGD
91-2, NGD 91-3 and NGD 91-1, have been the primary focus of development  efforts
of Pfizer and  Neurogen.  NGD 91-1,  the  initial  clinical  candidate  from the
collaboration,  was the  subject  of  Phase I  studies  to  explore  safety  and
pharmacokinetic  properties and to obtain preliminary indications of efficacy of
drugs which have the novel binding profile  discovered by Neurogen.  NGD 91-2 is
currently in a Phase I-B clinical  study.  NGD 91-3 is currently in pre-clinical
development.

     In order to obtain an early  indication of efficacy and the desired lack of
sedation of the novel binding  profile of  Neurogen's  drug  candidates,  Pfizer
designed  and  conducted  a Phase  I-B  study of NGD 91-1 to test the drug in an
acute  (situational)  anxiety setting. In this trial, NGD 91-1 was compared to a
marketed anti-anxiety drug,  Valium(R),  and to a control placebo. The 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   anti-anxiety  effects.   However,  while
Valium(R) caused significant  sedation,  NGD 91-1 did not cause sedation.  While
the  goal  of the  collaboration  with  Pfizer  is to  develop  drugs  to  treat
generalized  anxiety  disorder,  a chronic  condition,  the Company believes the
results of the Phase I-B study  demonstrate  that the  selective  GABA  activity
identified by Neurogen can relieve  anxiety without  causing  sedation.  In late
1996, Neurogen and Pfizer transferred the development focus of the collaboration
from  NGD  91-1  to  NGD  91-2,  a  newer  development  compound,   following  a
determination  that,  when  metabolized,   NGD  91-1  did  not  possess  optimal
pharmacokinetic  properties needed to provide a consistent level of the compound
in the bloodstream.

     In July  1997,  Pfizer  commenced  human  testing  of NGD 91-2 in a Phase I
clinical trial. In the fall of 1998, Pfizer commenced a Phase I-B human clinical
study of NGD 91-2  designed  to  explore  the safety  and  efficacy  in acute or
short-term  settings as a means of evaluating  the potential of NGD 91-2 for use
as a chronic  treatment for generalized  anxiety  disorder and to help set doses
for further  studies.  Similar to the  earlier  study  conducted  with NGD 91-1,
several  doses of NGD 91-2  were  compared  to the  marketed  anti-anxiety  drug
Valium(R), and to a control placebo. The study was "double-blinded" and involved
200 healthy men and women exposed to anxiety  caused by the  anticipation  of an
unpleasant medical procedure.  Interim results of this study suggest that Valium
has demonstrated an ability to reduce anxiety in the subjects tested to date and
also caused the side effect of sedation.  These interim results suggest that NGD
91-2 has not  exhibited a  significant  reduction in anxiety.  Consequently,  in
February 1999 Neurogen announced that the clinical  development timeline for NGD
91-2 would be extended  pending the final  results of this  situational  anxiety
trial and the results of two ongoing  short term  studies in patients  suffering
from generalized anxiety disorder (GAD).  Neurogen and Pfizer expect to evaluate
the data from all three studies before determining the next steps in development
for NGD 91-2.

     Neurogen   has   identified   another   development   compound   from   the
collaboration,  called NGD 91-3,  which,  similar to NGD 91-1 and NGD 91-2,  has
novel receptor  subtype  binding  activity that Neurogen  scientists  believe is
important  for  reducing  anxiety  without  producing  the side  effects such as
sedation,  memory  impairment  and  interaction  with  alcohol.  Animal  studies
conducted to date indicate that NGD 91-3 has better  pharmacokinetic  properties
than  NGD 91-1  and is more  potent  than NGD  91-2.  NGD 91-3 is  currently  in
pre-clinical development.

     Under the 1992 Pfizer Agreement,  Pfizer has the right to determine when to
advance  compounds  in the clinical  process,  if at all. As with all drugs that
enter  clinical  testing,  no assurances can be given that NGD 91-2, NGD 91-3 or
any other collaboration  compound 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  additional  alternative  anxiolytic  candidates that act through the
GABA family of  receptors  and have  properties  similar to those of the current
candidates but which belong to different  chemical series than these  compounds.
Neurogen has filed patent  applications  with respect to the  composition of NGD
91-2, NGD 91-3 and NGD 91-1 and other compounds in its anxiolytic  program.  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
$1.7 billion  worldwide and over $560 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.  GABA  receptor  subtypes are involved in sleep  regulation as well as
anxiety.  Neurogen's  research  suggests  that some  hypnotics may interact with
different  GABA receptor  subtypes than those which regulate  anxiety.  Further,
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.

     The  Company  has  identified  certain  compounds  in its  portfolio  which
interact selectively with the GABA receptor subtypes it believes are involved in
sleep  regulation.  Animal  studies,  to date,  suggest that these compounds are
efficacious in inducing  sleep with fewer side effects than existing  therapies.
Currently,   Pfizer,  Neurogen's  collaborative  partner  in  this  program,  is
evaluating  the  most  advanced  of these  compounds,  NGD 96-1 in Phase I human
clinical  studies.  A  second  candidate,   NGD  96-2  is  currently  undergoing
pre-clinical  development.  Neurogen is pursuing its sleep  disorder  program in
collaboration with Pfizer under 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  and the 1995 Pfizer  Agreement,  the
"Pfizer Agreements"). See "Collaborative Research and Licensing Agreements."

     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.  Industry  analysts
estimate the current annual market for drugs to treat cognitive  disorders to be
approximately $1.0 billion worldwide.

     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.   Moreover,   the
benzodiazepines,  which produce their desired  anti-anxiety  effect by enhancing
the activity of certain GABA receptors,  also cause memory  impairment and other
side  effects.  The  Company  believes  this  memory  impairment  is  due to the
nonselective binding of benzodiazapines to GABA receptor subtypes.  Accordingly,
the Company  believes that modulating the GABA system in the opposite  direction
by  inhibiting  certain  GABA  receptor  subtypes in the cortex and  hippocampal
regions of the brain may enhance the storage and  retrieval of memory.  Neurogen
has  discovered  a number of  compounds  that  inhibit  activity  at these  GABA
receptor  subtypes.  Animal studies,  to date,  suggest that these compounds are
efficacious in enhancing memory.  Currently,  Pfizer,  Neurogen's  collaborative
partner in this program is evaluating the most advanced of these compounds,  NGD
97-1 in Phase I human  clinical  studies,  which  began in the first  quarter of
1999.  Neurogen is pursuing its cognition  enhancement  program in collaboration
with Pfizer under the 1992 Pfizer  Agreement.  See  "Collaborative  Research and
Licensing Agreements."

     Neurogen has also established a program to develop drugs which modulate the
neuropeptide  galanin for the treatment of cognitive deficits.  Galanin has been
demonstrated  in various  industry  studies  to  modulate  the  neurotransmitter
acetycholine,  a neurotransmitter which is thought to be involved in Alzheimer's
disease.  Neurogen  believes  that a drug which  blocks the  activity of galanin
could in turn  increase  acetycholine.  Through  its AIDD  program,  Neurogen is
conducting an early stage program to discover galanin leads suitable for further
testing and optimization.  Neurogen has, to date, retained all commercial rights
to its galanin program.

     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 (often greater than
10 days from the  commencement of dosing) and lack of efficacy in some patients.
Industry analysts estimate the current annual market for  antidepressants  to be
approximately $9.2 billion worldwide and over $6.1 billion in the United States.
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 CRF and NPY, are altered in depressed patients.

     CRF1.  The Company  believes that an orally  available  drug candidate that
blocks the CRF1 receptor may be  efficacious  in relieving  depression,  anxiety
and/or stress related disorders without  significant side effects.  Academic and
industry research indicates that administration of CRF into specific brain sites
produces a variety of behavioral  effects,  which are characterized as increases
in arousal or a behavioral  manifestation  of a state of stress.  Research  also
indicates  that by  exposing  laboratory  animals to a variety of  environmental
stressors,  levels  of CRF  increase  in  areas  of the  brain  that  have  been
associated with producing behavioral or autonomic responses to stress.  Industry
studies have demonstrated that  antagonists,  or blockers,  of the CRF1 receptor
subtype  can reduce  indications  of stress in animal  models.  Through its AIDD
program,  Neurogen has  discovered  a number of  compounds  which block the CRF1
receptor subtype and have  demonstrated  efficacy in animal models of depression
and  stress.  The most  advanced  of these,  called NGD 98-1,  is  currently  in
pre-clinical development.  Neurogen has, to date, retained all commercial rights
relating to the CRF drug discovery program.

     NK. Neurogen has applied its AIDD program to discover compounds which block
certain  types of  neurokinin  receptors,  which  the  Company  believes  may be
effective in treating depression. Neurogen has identified several lead compounds
which are NK blockers and is currently evaluating these leads in animal models.

     NPY2. The Company has also discovered compounds,  through its AIDD program,
which  block  the NPY2  receptor  subtype,  which  the  Company  believes  to be
implicated in  depression.  These  compounds are currently  being  evaluated for
testing in animal models.  Neurogen has, to date, retained all commercial rights
relating to the NPY2 for depression drug discovery program.

     OBESITY AND OTHER METABOLIC DISORDERS. Obesity is a major health problem in
the United States.  Recent studies  indicate that almost  one-third of the adult
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,  among females in the
United States,  it is estimated that as many as one percent suffer from anorexia
nervosa and three  percent  suffer  from  bulimia  nervosa.  Based on studies by
market  sources,  Neurogen  believes the annual  market for  currently  marketed
obesity drugs to be approximately $604 million worldwide and $351 million in the
United States.

     Obesity   has    traditionally    been   treated   with   amphetamines   or
amphetamine-like drugs which can be highly addictive.  Antidepressants,  such as
Prozac(R),  have also  been  used with  limited  success  in  treating  obesity.
Recently,  other  drugs to treat  obesity  by  modulating  the  neurotransmitter
serotonin  have been approved for marketing or gained  popularity.  These drugs,
like older  approaches  continue to be plagued by serious side effects,  some of
which have been severe enough to cause two drugs to be withdrawn from the market
in 1997.  Due to the  limited  success  of  obesity  therapy  and side  effects,
including nervousness,  tremors,  primary pulmonary  hypertension,  increases in
blood  pressure,  insomnia and  intestinal  tract  discomfort,  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.

     NPY.  Neuropeptide  Y (NPY) is a  neurotransmitter  which has been  closely
linked with animal feeding behavior and appetite control.  Certain NPY receptors
are  known to  localize  in the  hypothalamus,  a  section  of the  human  brain
associated  with  eating.  The Company  believes  that a drug which  selectively
blocks the effects of the  neurotransmitter NPY may moderate eating habits while
reducing  the  potential  for side  effects.  In  pre-clinical  animal  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 obesity. Based
on these  studies  and its  understanding  of  receptor  subtypes  and  receptor
modulation,  Neurogen  believes  that a drug which blocks the binding  (that is,
acts as an antagonist) of NPY to certain of its receptor subtypes located in the
hypothalamus  may have the opposite effect of chronic exposure to NPY and reduce
the desire to eat. In rodent studies several of Neurogen's NPY antagonists  have
been  shown  to  inhibit  normal  eating  as  well  as  eating  induced  by food
deprivation  or the  administration  of NPY. In a 21-day study of normal growing
rodents, NGD 95-1,  Neurogen's first NPY-blocking drug candidate to be tested in
humans,  was shown to reduce food intake and weight gain beginning  early in the
trial and showed no signs of tolerance during the balance of the trial.

     DRUG CANDIDATES. Through its AIDD program, Neurogen has identified a number
of antagonists for the NPY family of receptors. Neurogen's first NPY antagonist,
NGD 95-1,  demonstrated  efficacy in pre-clinical  animal models of feeding.  In
collaboration with Pfizer,  Neurogen has conducted Phase I human clinical trials
of the compound.  The Phase I human clinical trials of NGD 95-1,  believed to be
the first NPY  blocker to be tested in  humans,  examined  the drug's  safety in
obese, but otherwise  healthy,  volunteers.  In a Phase I-B human clinical study
conducted in the fall of 1997,  elevated  liver enzymes were  discovered in some
volunteers  taking the  highest  of three  doses  tested  over a period of three
weeks, and further development of that compound has been halted.  These findings
were unexpected  based on long-term drug safety testing in animal  studies,  and
were not seen in  earlier  human  testing  of the  compound.  Subsequently,  the
primary focus of the collaboration  research has turned to the identification of
additional  clinical  candidates.  Neurogen and Pfizer are examining several new
NPY antagonist candidates for pre-clinical development from classes of compounds
which are both chemically similar to and different from NGD 95-1.

     Neurogen is pursuing its NPY based obesity  program in  collaboration  with
Pfizer under the Collaborative  Research Agreement and the Commercialization and
Development  Agreement,  each dated as of November  1995 between the Company and
Pfizer (collectively, the "1995 Pfizer Agreement"). Under this agreement, Pfizer
has the  right to  determine  when to  advance  collaboration  compounds  in the
clinical  process,  if at all. No assurance can be given that any  collaboration
compound will  successfully  complete the clinical trials or advance through the
regulatory   approvals  process.  In  order  to  increase  the  likelihood  that
Neurogen's  portfolio  will  produce a  successful  obesity  drug,  Neurogen  is
developing alternative NPY blocker obesity drug candidates in collaboration with
Pfizer. See "Collaborative Research and Licensing Agreements."

     GLP1. Type II diabetes (adult-onset or noninsulin-dependent)  comprises the
majority of diabetes cases, and the American Diabetes Association estimates 14.9
million people in the US are afflicted with the disease. Current estimates place
the annual  market for drugs to treat Type II  diabetes  at  approximately  $3.6
billion  worldwide  and  $2.0  billion  in the US.  The  disease  arises  from a
reduction in insulin secretion by the pancreas. Although insulin secreting cells
are present in Type II diabetics, there is a reduced sensitivity and/or response
to insulin.  Type II diabetes is currently treated with oral hypoglycemic agents
(OHAs) to stimulate  insulin  secretion,  however the disease is progressive and
patients often require insulin injections as the disease continues. In addition,
overstimulation  of insulin  secretion  due to OHAs  often  results in low blood
sugar  levels,  or  hypoglycemia,  in Type II diabetic  patients.  Glucagon Like
Peptide1 (GLP1) is secreted from cells in the intestine and its glucose lowering
effect is  dependent  upon  circulating  glucose  levels.  Industry  tests  have
demonstrated  that GLP1 raises insulin  secretion from  pancreatic  cells in the
presence of elevated glucose levels without  overstimulating  insulin  secretion
and  has  no  effect  when  glucose  levels  are  in  normal  range,  preventing
hypoglycemia.  Industry  experiments  also  indicate  that GLP1  delays  stomach
emptying, a mechanism which may play a role in treating obesity.  Efforts to use
the natural peptide for Type II diabetes treatment have demonstrated that it has
a short half-life which renders it difficult to  commercialize as a therapeutic.
Through its AIDD program,  Neurogen has identified a number of non-peptide small
molecules which in in vitro tests indicate they have modulatory  effects similar
to GLP1.  The  Company  is  currently  in the  process of  further  testing  and
optimizing  these compounds and evaluating  them in its animal models.  Neurogen
has, to date, retained all of its commercial rights in its GLP1 program.

     GALANIN.  Neurogen has also established a program to explore the utility of
and develop drugs which modulate the  neuropeptide  galanin for the treatment of
obesity.  Galanin has been demonstrated in various industry studies to stimulate
eating,  and some researchers have  demonstrated  that galanin may stimulate the
consumption of fats in laboratory  animals.  Neurogen believes that a drug which
blocks the  activity  of  galanin  could  decrease  appetite.  Through  its AIDD
program, Neurogen is conducting an early stage program to discover galanin leads
suitable for further testing and optimization.  Neurogen has, to date,  retained
all commercial rights to its galanin program.


     RHEUMATOID  ARTHRITIS  AND  INFLAMMATION.  Rheumatoid  arthritis  (RA) is a
chronic inflammatory disease involving many systems of the body. While the cause
of RA is not  known,  the  spread of the  disease  is  believed  to be caused by
inflammatory  T-lymphocyte  cells,  a type of white blood cell,  which  starts a
cascade  resulting in the  activation of several  factors which  exacerbate  the
inflammatory  process including C5a. C5a attracts and promotes the immune system
to start attacking the body's own cells, an inappropriate  reaction causing this
autoimmune disease. Although there are a variety of systemic manifestations, the
characteristic  feature of RA is persistent  inflammation of the joint,  usually
involving  peripheral joints,  which also may be accompanied by pain,  swelling,
stiffness and loss of joint function. The potential of the joint inflammation to
cause  cartilage   destruction  and  bone  erosions,   and  subsequently   joint
deformities,  is the hallmark of the disease.  The onset of RA usually occurs in
40 to 50 year old individuals, is found throughout the world regardless of race,
and the National Institutes of Health estimate that it affects  approximately 1%
of the US population.

     Current medications used to treat rheumatoid arthritis and inflammation are
targeted  towards  varying  aspects  of the  disease,  from  reducing  pain  and
inflammation  to attempts to slow down or stop joint damage.  In 1998,  industry
analysts  estimate that worldwide sales of drugs to treat  rheumatoid  arthritis
were $6.4 billion and $2.1 billion in the US. These estimates do not include low
dose    anti-inflammatories,    such   as   aspirin   and   other   nonsteroidal
anti-inflammatory  drugs (NSAIDS) which are commonly used to treat both pain and
inflammation, however gastrointestinal disturbances and ulcers are a common side
effect of these  drugs.  A newer  generation  of  anti-inflammatory  drugs which
inhibit the cyclooxygenase-2 enzyme specifically (COX-2 inhibitors) has recently
been  approved and may address this side  effect.  For more severe  inflammatory
flare-ups,  corticosteroids are used, however, particularly at high doses, these
have the  potential  for  serious  side  effects,  such as  osteoporosis,  fluid
retention, muscle weakness, hypertension,  increased risk of infection, diabetes
and easy  bruising.  Drugs which are  currently  used to alter the course of the
disease to prevent joint and cartilage  destruction and also restrain the overly
active immune system have been  efficacious for many patients,  however patients
often experience  diminishing  effectiveness  over time and serious side effects
are  common.  Many of these  drugs  produce  upset  stomach,  liver  and  kidney
problems,  and  suppress  the immune  system,  resulting in low white blood cell
counts and blood abnormalities.

     Neurogen  scientists  believe that  inhibiting  the  activation  of the C5a
receptor  through  a  small  molecule,  orally  available  antagonist  would  be
efficacious   in  the  treatment  of   rheumatoid   arthritis  by  blocking  the
inflammatory response and breakdown of tissue. This drug could also be effective
in treating other  inflammatory  diseases,  with the ease of delivery via a pill
and  without  many of the  side  effects  associated  with  currently  available
treatments.  Through  its AIDD  program,  the  Company  has  identified  several
compounds  which block the  activation  of C5a  receptors.  These  compounds are
currently being  evaluated in additional  pre-clinical  models of  inflammation.
Neurogen has, to date, retained all rights in its C5a antagonist program.

     ASTHMA. Asthma is a chronic, persistent disease of the airways in the lungs
characterized  by  chronic   inflammation  with  acute  flare-ups  of  coughing,
wheezing,  chest tightness, and difficult breathing that are usually reversible,
but that can be severe and sometimes fatal.  Recent academic research  indicates
that inflammation is a critical factor in the cause of asthma, and treating this
abnormal  inflammation  is  a  primary  goal  of  asthma  therapy.  Despite  the
development  of new  medications  to treat  asthma,  the disease is on the rise.
According to the Centers for Disease Control and  Prevention,  the prevalence of
asthma in the US  increased  61%  between  1982 and 1994,  with about 15 million
Americans having asthma. The National Institute of Health reports that asthma is
the single most common chronic disease causing absences from school,  with about
5 million children in the US having asthma. If not properly  controlled,  asthma
can be life  threatening,  and  asthma  deaths  have  increased  to  about  5600
Americans per year,  representing  a 45% increase in mortality  between 1985 and
1995,  according to the American Lung  Association.  Industry  analysts estimate
that worldwide sales of drugs used to treat the inflammatory component of asthma
were $3.9 billion in 1998 and $1.1 billion in the US.

     Asthma   has   traditionally   been   treated   by  two   types  of  drugs:
anti-inflammatories   and   bronchodilators.    Anti-inflammatory   drugs   like
corticosteroids  or cromolyn sodium interrupt the development of inflammation in
the bronchial tubes of the lungs and have a preventative action. Bronchodilators
act  principally to open airways by relaxing  bronchial  smooth muscle.  A third
class of drug, the nonsteroidal oral leukotriene inhibitors, was introduced late
in 1996, and are considered  daily  controller  medications  because they reduce
airway  inflammation  and are used to control  the  disease and not to treat its
sudden attack.  In an effort to manage the disease and prevent  tissue  damaging
attacks,  treatment focus has shifted to anti-inflammatory drugs from those used
to control symptoms such as constricted  airways.  Some clinical experts believe
that  preventative  care  is the key to  controlling  asthma.  Most  anti-asthma
medications   used  today  are  inhaled,   and  while  they  often  control  the
inflammatory symptoms, patient compliance is a concern. Neurogen believes that a
small molecule orally  available drug working through a novel mechanism to treat
asthma would offer an improved route to controlling asthma.

     Through its AIDD  program,  Neurogen  has  identified a number of compounds
active as bradykinin2 receptor subtype specific antagonists. Bradykinin (BK) and
its  metabolites  have been  implicated  in a variety of  physiological  disease
responses and bradykinin  may play a  participatory  role in asthma.  Bradykinin
receptors have been found on a variety of lung tissues which are involved in the
asthma  response.  Academic studies have  demonstrated  that bradykinin has been
found in fluid taken from the lungs of asthmatics  after allergen  challenge and
that inhalation of the BK peptide  provokes  constriction of the bronchial tubes
and induces a sensation  similar to that  experienced  during as asthma  attack.
This BK-induced  bronchoconstriction  is only observed in asthmatic patients and
not in normal control subjects.  Extensive  published  literature  classifies BK
receptors  into two types:  BK1 and BK2. The airway  effects of  bradykinin  are
believed to be mediated through the BK2 receptor as demonstrated by industry and
academic  studies  with  non-small   molecule,   peptide   formulations  of  BK2
antagonists  which have shown  inhibition of  allergen-induced  asthma in animal
models and improved  pulmonary  function in human  clinical  trials.  Neurogen's
small molecule BK2  antagonists  are currently  being  evaluated in pre-clinical
models  of  asthma.  Neurogen  has,  to date,  retained  all  rights  in its BK2
antagonist program.

     SCHIZOPHRENIA 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  recently  approved  drugs for the treatment of
schizophrenia,   including   Zyprexa(R)  and  Risperdal(R),   have  demonstrated
improvements over existing medications such as Clozapine(R) and Haldol(R),  they
do not  completely  alleviate  the  symptoms of  schizophrenia  and also produce
undesirable side effects themselves.  Weight gain, impairments of motor function
and other side effects have been  associated  with treatment with Zyprexa(R) and
Risperdal(R),  however  the newer  drugs  produce a lower  incidence  of adverse
movement disorders and serious blood disorders than seen with older medications.
Moreover,  as many as 40  percent  of all  schizophrenics  are  unresponsive  to
standard antipsychotic medications and as many as 60 percent of treated patients
subsequently relapse and require hospitalization. Industry analysts estimate the
current annual market for antipsychotic  drugs to be approximately  $3.9 billion
worldwide and $2.2 billion 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.   The
development of drug candidates under the Company's  dopamine program are subject
to the Collaboration and License Agreement dated as of June 28, 1995 between the
Company and Schering-Plough  (the  "Schering-Plough  Agreement").  In accordance
with the terms of the agreement, in June 1998 Neurogen's portion of the research
component of this  collaboration  expired,  and all drug discovery  research was
transferred  to  Schering-Plough.  See  "Collaborative  Research  and  Licensing
Agreements."

     DRUG CANDIDATES.  The Company's focus on dopamine receptor subtypes and the
design of specific binding agents for these subtypes originated similarly to its
approach  with respect to GABA  receptor  subtypes.  In recent  years,  distinct
dopamine receptor subtypes, known as D1, D2, D3, D4 and D5, have been discovered
which Neurogen  believes may be involved in  schizophrenia.  Because elevated D4
receptors have been measured in the autopsied brains of schizophrenics, Neurogen
believes that high levels of D4 receptors  may  intensify  signals in the brain,
thus causing many of the symptoms  associated with  schizophrenia.  As a result,
Neurogen believes that a compound which  specifically  blocks the D4 receptor or
which blocks the D4 receptor and has limited  activity at certain other dopamine
receptors  might  be an  effective  antipsychotic  agent  and,  because  of  its
selectivity,  might have a reduced  side effect  profile  compared to  currently
marketed drugs. 

     Neurogen has identified several series of compounds which selectively block
the D4 receptor or the D4 receptor and the D2 receptor,  and other  combinations
of dopamine  antagonists.  Neurogen  believes that because of their  activity at
alternate  receptor  sites,  these drugs,  which are  currently in  pre-clinical
development  or earlier stage  research,  could  potentially  be used to treat a
spectrum of  disorders  associated  with  schizophrenia.  At the  conclusion  of
Neurogen's research,  the Company provided  Schering-Plough with these compounds
and all accompanying data for further development.

     Pursuant to the Schering-Plough Agreement, Schering-Plough has the right to
determine when to advance collaboration compounds in the clinical process, if at
all. No assurance can be given that any collaboration compound 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  provided  Schering-Plough  with  multiple
chemical  series  which may  provide  alternative  antipsychotic  candidates  in
collaboration with Schering-Plough.

     ANIMAL HEALTH.  According to leading  veterinarians,  behavior  problems in
household pets are the leading cause of death in the pet population, responsible
for the  euthanasia  of between three and six million dogs and cats per year. In
many cases,  these behavior problems are treatable by behavior  modification and
pharmacotherapy when indicated. Few drugs to treat neuropsychiatric disorders in
dogs  and  cats  are   available,   and  those  that  are  available  are  often
broader-acting  human drugs that are provided in smaller doses. With the advance
of more targeted  medications  that offer relief from a disorder without reduced
side effects,  adapting a number of Neurogen's drug development programs for use
in companion animals becomes possible.

     In  September  1998,  Neurogen  announced a new  licensing  agreement  with
Pfizer's  Animal  Health  Group which  expands the 1992 Pfizer  Agreement.  This
expansion  covers the development of Neurogen's  small molecule  compounds which
work through the GABA  neurotransmitter  system for the treatment of anxiety and
cognitive  dysfunction in companion  animals,  such as dogs and cats. Pets often
suffer  undue  stress and  exhibit  disruptive  behavior  when placed in anxiety
producing  situations such as when an owner leaves or a stranger is present. The
initial goal of the  agreement is to develop a drug that will reduce  anxiety in
companion  animals  without  producing  side  effects  such  as  sedation.  From
Neurogen's  existing GABA drug development  programs for humans, the Company has
identified several lead candidates which are currently in pre-clinical testing.

     Neurogen will be eligible to receive milestone  payments on drug candidates
as they progress  through  development and royalty payments when such candidates
are marketed,  if at all. All development  costs will be borne by Pfizer.  Under
the 1992 Pfizer  Agreement,  Pfizer has the right to  determine  when to advance
compounds in the clinical process,  if at all. See  "Collaborative  Research and
Licensing Agreements."

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, July 1994 and again in November 1995,  Neurogen
entered into  collaborations  with Pfizer. 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
research  and  development  risks  inherent  in the  industry  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 the  Company's  Common Stock for $13.8
million. In addition,  the Company received  approximately $4.6 million per year
from 1992 through 1996 and has continued to receive  additional funding pursuant
to the December 1996  extension  referred to below for research and  development
funding of the Company's anxiolytic and cognition enhancement programs. Neurogen
could also receive  milestone  payments if certain  development  and  regulatory
objectives  are achieved  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.

     In July 1994,  Neurogen and Pfizer entered into the 1994 Pfizer  Agreement.
Under 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 the Company's Common Stock
for approximately $9.9 million. In addition,  the Company received approximately
$2.4 million per year during the period July 1994 to June 1997 and has continued
to receive  additional  funding pursuant to the December 1996 extension referred
to below for research and  development  funding of the Company's  sleep disorder
program.  Neurogen could also receive milestone  payments of up to approximately
$3.3  million if certain  development  and  regulatory  objectives  are achieved
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.

     In  December  1996,  Neurogen  announced  that it and  Pfizer had agreed to
extend the research  programs under both the 1992 Pfizer  Agreement and the 1994
Pfizer  Agreement  through  December  1998.  Pursuant to the agreement to extend
these  programs,  Pfizer has agreed to pay Neurogen an  additional  aggregate of
$11.5 million during 1997 and 1998 to fund Neurogen's research efforts.

     In December  1998,  Neurogen  announced that it and Pfizer had agreed to an
additional  extension  of the  research  programs  under  both the  1992  Pfizer
Agreement and the 1994 Pfizer  Agreement,  through December 2000. As part of the
extension,  Pfizer and Neurogen also  announced that  GABA-based  drugs to treat
depression would also be explored as a part of the research  programs.  Pursuant
to the  agreement  to extend these  programs,  Pfizer has agreed to pay Neurogen
$6.24 million each year in 1999 and 2000 to fund Neurogen's  research efforts in
its GABA-based drug discovery  programs to treat anxiety,  depression,  insomnia
and dementia.

     In  September  1998,  Neurogen  announced  that it and Pfizer had agreed to
expand the  anxiety  and  cognition  enhancement  license  agreement  to include
developing drugs to treat anxiety  disorders and memory  impairment in companion
animals,  such as dogs  and  cats.  As part of this  agreement,  Neurogen  could
receive milestone payments if certain development and regulatory  objectives are
achieved  regarding  its animal  health  compounds.  In exchange  for  receiving
exclusive  worldwide  license to manufacture,  use and sell GABA-based  drugs to
treat  anxiety and or  cognition  impairment  in companion  animals,  Pfizer has
agreed to pay Neurogen  royalties  based on net sales  levels,  if any, for such
products.

     Under each of the first two 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.

     In  November  1995,  Neurogen  and  Pfizer  entered  into the  1995  Pfizer
Agreement.   Pursuant  to  this  third   agreement,   Neurogen  and  Pfizer  are
collaborating  in the  discovery and  development  of drugs for the treatment of
NPY-mediated disorders,  including obesity and eating disorders. Pursuant to the
1995 Pfizer  Agreement,  Pfizer purchased 750,000 shares of the Company's common
stock for  approximately  $16.5  million and paid Neurogen a license fee of $3.5
million. The Company has received or, subject to certain conditions,is  entitled
to receive  approximately  $2.4 million per year during the period from November
1, 1995  through  October  1999,  for research  and  development  funding of the
Company's  eating  disorder  program and may  receive  additional  research  and
development  funding of up to $2.4  million for an  additional  one-year  period
depending  on whether  and the extent to which  Pfizer  exercises  its rights to
extend the  research  program  under the  collaboration  beyond  November  1999.
Neurogen  could also  receive  milestone  payments  of up to  approximately  $28
million if certain development and regulatory  objectives are achieved regarding
compounds  subject to the  collaboration.  As part of this third  collaboration,
Pfizer  received the  exclusive  worldwide  rights to products  developed in the
collaboration subject to certain rights retained by Neurogen as described below.
While Pfizer is responsible  for Phase II and later stage clinical  trials under
this collaboration,  Neurogen has primary responsibility for the preparation and
filing of INDs and for the  conduct  the Phase I studies.  Pursuant  to the 1995
Pfizer Agreement, Neurogen will fund a minority share of early stage development
costs and has retained the right to manufacture any products  resulting from the
collaboration  for markets in NAFTA  countries and has retained a profit sharing
option with respect to future sales in NAFTA  countries.  If Neurogen  exercises
this  profit  sharing  option,  it will fund a portion of the cost of late stage
clinical  trials and  marketing  and in return share in any profit  generated by
sales of products developed pursuant to the collaboration in NAFTA countries. If
Neurogen  chose not to exercise  its  profit-sharing  option,  Pfizer  would pay
Neurogen  royalties  on drugs  marketed  in NAFTA  countries  and  would  fund a
majority of early stage and all late stage  development and marketing  expenses.
In either case,  Neurogen  would be entitled to  royalties on drugs  marketed in
non-NAFTA countries.

SCHERING-PLOUGH

     In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement  to  collaborate  in  the  discovery  and  development  of  drugs  for
schizophrenia  and other  disorders  which act  through the  dopamine  family of
receptors.  Pursuant to the  Schering-Plough  Agreement,  the Company received a
license fee of $14.0 million for rights relating to Neurogen's  dopamine program
and $3.0  million  for the right to test  certain  of  Neurogen's  combinatorial
chemistry  libraries in selected  non-CNS assays.  Schering-Plough  also paid an
additional  $3.0  million  in 1996 for the right to test  additional  libraries.
Neurogen  received  approximately  $3.6  million per year during the period from
July  1995  through  June  1998 for  research  and  development  funding  of the
Company's schizophrenia program. In June 1998 Neurogen concluded its role in the
research stage of the collaboration and transferred  collaboration candidates to
Schering-Plough  for any further research and  development.  Neurogen could also
receive  milestone  payments  of up to  approximately  $32.0  million if certain
development and regulatory  objectives are met 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  on a cost plus  basis 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.

AMERICAN HOME PRODUCTS AND NIH

     In January  1992,  Neurogen  licensed a class of  compounds  including  the
anticonvulsant  compound ADCI, from the NIH. In November 1996,  Neurogen entered
into the American Home Products Agreement pursuant to which Neurogen licensed to
American Home  Products its worldwide  development  and  commercial  rights with
respect  to ADCI  and the  related  compounds  licensed  from  NIH.  Under  this
agreement, American Home Products agreed to conduct and fund all future research
and development and  commercialization  activities under the program and subject
to certain  requirements in its agreement with Neurogen and Neurogen's agreement
with the NIH. The November 1996 agreement  with American Home Products  provides
that  American Home  Products is entitled to make all  determinations  regarding
research,  development and commercialization of ADCI. In February 1999, Neurogen
announced  that due to toxicities  discovered  through long term animal  studies
conducted  by  American  Home  Products,  further  development  of ADCI has been
discontinued.  It is  unlikely  that  development  of ADCI will  resume and as a
result,  Neurogen  expects,  upon  reviewing  the final data from  American Home
Products that it will terminate its agreements regarding ADCI with both American
Home Products and the NIH.


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,  as it deems  appropriate,  for
protection  of both its  products  and  processes.  To date,  Neurogen has filed
numerous  patent  applications in the United States and foreign  countries,  and
intends to file additional domestic and foreign applications in the near future.
Presently,  the Company is the sole  assignee  of  seventy-eight  issued  United
States patents and several foreign  patents.  Forty-five of the Company's issued
United  States  patents  and several  pending  patent  applications  concern the
compounds in its GABA-based  program to discover  drugs to treat anxiety,  sleep
disorders and dementia. Twenty-six of the Company's issued United States patents
and  several   pending  patent   applications   concern  the  compounds  in  its
antipsychotic  program.  Five of the Company's  issued United States patents and
several pending patent  applications are in Neurogen's drug discovery program to
treat  depression  through the CRF receptor.  Except in the case of the NIH with
respect to ADCI,  the Company has engaged in no technology  transfer which would
obligate it to pay royalties to any third party.

     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.

     As scientific advances have rapidly changed the business of drug discovery,
significant  uncertainties  have  arisen as to the scope and  enforceability  of
patents in the  pharmaceutical  and  biotechnology  industries  which purport to
enable  competitors  to restrict  others from  pursuing  certain drug targets or
technologies  potentially useful in drug discovery and development.  Because the
Company's  programs and  technologies are focused in such areas of rapid change,
these uncertainties are particularly  significant to Neurogen. While the Company
believes that it does not currently infringe any third party patents,  it cannot
be certain of the  ultimate  scope and  validity of  existing or future  patents
which could limit the areas in which the Company works or the technologies which
the Company uses.

     The   development   of  drugs  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, the Schering-Plough Agreement and
the  American   Home   Products   Agreement,   Neurogen   has  granted   Pfizer,
Schering-Plough,  and American Home Products 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 and for
NAFTA  countries  pursuant to 1995  Pfizer  Agreement),  use and sell  compounds
subject to those  agreements.  To the extent  that  Neurogen  enters into future
collaborations or license  agreements 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. 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,
most of which have products and major research and  development  programs in the
neuroscience  field,  certain of which are in  late-stage  clinical  trials.  In
addition,  many  biotechnology  companies,  including  many  public and  private
companies formed in recent years,  have dedicated  significant  resources to the
discovery  and  development  of  drugs  to treat  neurological  and  psychiatric
disorders.  Further, there are many other entities,  both public and private, in
the United States and overseas,  including  fully-integrated chemical companies,
academic  institutions,  government  agencies and other  research  organizations
which are involved in the development of products  similar to those of Neurogen.
Furthermore, many of the above-noted companies and institutions compete with the
Company in developing competing  technologies for drug discovery and development
and 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  pre-clinical  and clinical
trials.  The Company,  which  manufactures  certain of its  compounds to conduct
pre-clinical 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  or will be responsible  for  manufacturing  drugs for
clinical  trials  which are  subject to the 1992 Pfizer  Agreement  and the 1994
Pfizer Agreement and has the right to manufacture  future products,  if any, for
commercialization.  Pfizer will also be responsible for manufacturing  drugs for
Phase II and later stage  clinical  trials  which are subject to the 1995 Pfizer
Agreement and subject to Neurogen's  option  described  below,  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,  subject to Neurogen's  option described
below,   has  the  right  to   manufacture   future   products,   if  any,   for
commercialization.  Neurogen,  however,  has  retained an option to  manufacture
future products, if any, developed pursuant to the Schering-Plough Agreement for
sales in the United States and developed  pursuant to the 1995 Pfizer  Agreement
for  sales  in  NAFTA  countries.  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,  except for Neurogen's option to
co-market products under the 1995 Pfizer Agreement.

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) pre-clinical  laboratory  tests, in vivo  pre-clinical
studies  and  formulation  studies,  (ii)  the  submission  to  the  FDA  of  an
Investigational  New Drug  Application  ("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.

     Pre-clinical  testing includes  laboratory  evaluation of product chemistry
and  formulation,  as well as animal studies to assess the potential  safety and
efficacy  of the  product.  Pre-clinical  safety  tests  must  be  conducted  by
laboratories  that  comply  with  FDA  regulations   regarding  Good  Laboratory
Practices.  The results of the pre-clinical  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.

     The results of the  pharmaceutical  development,  pre-clinical  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  post-marketing  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.

     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

     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.

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 with  management  and key  scientific
employees  of the  Company  on both a  formal  and  informal  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:

     NAME                               POSITION
     ----                               --------

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..... Senior 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


     Each member of the Scientific Advisory Board who is not also an employee of
the Company receives a fee of $15,000 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 December 31, 1998, the Company had 148 full-time employees,  of which
122 persons were scientists and 48 had Ph.D. degrees. 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,  almost  all  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.

RESEARCH AND DEVELOPMENT EXPENSES

     In each of 1998, 1997 and 1996 Neurogen  incurred  research and development
expenses of $20,914,000, $19,710,000 and $13,934,000,  respectively.  Neurogen's
operations  are  dedicated  wholly to  supporting  its research and  development
programs.

ITEM 2. PROPERTIES

     The Company  conducts  its  operations  in  laboratory  and  administrative
facilities  on a single site located in  Branford,  Connecticut.  The  Company's
facilities total approximately 78,000 square feet, of which approximately 54,000
square feet are owned by the Company and  approximately  24,000  square feet are
leased  under a ten-year  lease which  commenced  in July 1995.  Pursuant to the
lease agreement, the Company has an option to extend the lease for an additional
ten-year  period and an option to purchase the  facility  during the term of the
lease.  The Company  expects that its expanded  facility  will  accommodate  the
anticipated administrative and research needs of the Company for the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On November 5, 1998 the Company held a meeting of the stockholders to adopt
an amendment  to the  Neurogen  Corporation  1993  Omnibus  Incentive  Plan (the
"Plan") to increase the shares in the Plan by 1,500,000.  The Plan as originally
adopted  provided for the granting of awards  aggregating up to 3,000,000 shares
of Common Stock.  As of November 1998,  approximately  400,000  shares  remained
available for future awards.  The  stockholders  approved the proposal voting as
follows:

                  For         Against       Abstained
               ----------    ----------    ----------    
               7,551,617     1,757,624       17,728  

<PAGE>
                    CAUTIONARY STATEMENT FOR PURPOSES OF THE
               "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
                         LITIGATION REFORM ACT OF 1995.

     Except for historical  matters,  the matters discussed in this Form 10K are
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of 1995 or any rules,  regulations  or  releases  of the
Securities  and  Exchange  Commission  with  respect  thereto.   Forward-looking
statements in this Form 10K include,  but are not limited to, statements in Item
1 under the caption "Business--Product Research and Development" with respect to
the Company's  various  product  development  programs and  statements in Item 7
under the caption  "Management's  Discussion and Analysis of Financial Condition
and Results of Operations" with respect to the sufficiency of the Company's cash
balance to fund planned  operations.  In addition,  the Company may from time to
time make forward-looking statements in the future.

     Neurogen  wishes to caution  readers,  and  others to whom  forward-looking
statements  are  addressed,  that any such  forward-looking  statements  are not
guarantees of future  performance and that actual results may differ  materially
from estimates in the forward-looking  statements.  In addition to the important
factors  described  elsewhere in this Form 10K and the  Company's  other filings
with the Securities and Exchange  Commission,  the following  important factors,
among others, could affect Neurogen's actual future results and could cause such
results to differ  materially  from estimates  expressed in any  forward-looking
statements made by, or on behalf of, Neurogen:

     o    Difficulties or delays in discovery, research,  development,  testing,
          regulatory approval,  production and marketing of any of the Company's
          drug  candidates,   including  without  limitation  any  unanticipated
          pre-clinical or clinical delays, delays in regulatory  approvals,  the
          failure  to  develop  follow-on  candidates  in a given  program,  the
          failure to attract or retain scientific and management personnel,  any
          unexpected  adverse side effects or  inadequate  therapeutic  efficacy
          which could slow or prevent product  development  efforts at any stage
          of product  development  by delaying or  preventing  clinical  trials,
          delaying or preventing  regulatory approval for  commercialization  or
          adversely affecting acceptance by the market.

     o    Vigorous competition within the Company's anticipated product markets,
          including  without   limitation   competition  from   fully-integrated
          pharmaceutical companies and specialty biotechnology  companies,  many
          or  all  of  which  may  have  substantially   greater   capabilities,
          experience and resources than the Company.

     o    Risk  that  competitors   will  succeed  in  developing   technologies
          (including  drug  discovery  techniques)  and  products  that are more
          effective than those of the Company or that are  commercialized  prior
          to similar technologies or products of the Company.

     o    Neurogen's  dependence  on its  corporate  partners  with  respect  to
          research and  development  funding,  pre-clinical  evaluation  of drug
          candidates,  human  clinical  trials  of drug  candidates,  regulatory
          filings and manufacturing and marketing  expertise with respect to its
          most advanced compounds.

     o    Risk that  Neurogen's  interest  will not  coincide  with those of its
          collaborators  with  respect  to the  timing or  conduct  of  clinical
          development of compounds, the future productions of developed products
          and strategies with respect to marketing such products.

     o    Risk that actual  research and  development  costs may exceed budgeted
          amounts for a variety of reasons linked to the  uncertainty of product
          development in the pharmaceutical industry.

     o    Inability to obtain  sufficient  funds  through  future  collaborative
          arrangements,  equity or debt  financings or other sources to continue
          the operation of the Company's  business which may require the Company
          to  reduce   substantially  or  eliminate   expenditures  for  product
          development or to relinquish  rights to certain of its technologies or
          potential products.

     o    Risk that the Company's patents and confidentiality  agreements of the
          Company with collaborators, employees, consultants or vendors will not
          adequately  protect  the  Company's  intellectual  property  or  trade
          secrets.

     o    Uncertainty  of  the  scope  and  enforceability  of  patents  in  the
          pharmaceutical  and  biotechnology  industries which purport to enable
          competitors to restrict  others from pursuing  certain drug targets or
          technologies potentially useful in drug discovery and development.

     o    The Company's dependence upon third parties for the manufacture of its
          potential products and the Company's  inexperience in manufacturing if
          the Company establishes internal manufacturing  capabilities,  each of
          which could adversely affect the Company's  future profit margins,  if
          any, and its ability to develop and  manufacture  products on a timely
          and competitive basis.

     o    Neurogen's  dependence on third parties to market  potential  products
          and Neurogen's lack of sales and marketing capabilities, each of which
          could adversely affect the success of any sales and marketing  efforts
          for the Company's products.

     o    Unavailability or inadequacy of medical insurance or other third-party
          reimbursement for the cost of purchases of the Company's products.
<PAGE>
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common stock of Neurogen is traded on The NASDAQ Stock Market under the
symbol NRGN. As of March 1, 1999, there were approximately 380 holders of record
of the Company's  common stock.  No dividends have been paid on the common stock
to date,  and the Company  currently  intends to retain any earnings for further
development of the Company's business.

     The following  table sets forth the high and low closing bid prices for the
common stock as reported by NASDAQ.

                                                                HIGH     LOW
                                                                ----     ---
FISCAL 1998:
First Quarter.................................................. 17 3/4  13 3/8
Second Quarter................................................. 20 1/2  16 1/8
Third Quarter.................................................. 18 3/8  10 5/8
Fourth Quarter................................................. 18      13 5/8
FISCAL 1997:
First Quarter.................................................. 22      17 1/4
Second Quarter................................................. 23 1/8  13 3/4
Third Quarter.................................................. 27      18 3/4
Fourth Quarter................................................. 28 1/5  13


ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

For the Year Ended December 31

                                                     (in thousands, except per share data)
                                                -----------------------------------------------
                                                  1998     1997     1996      1995      1994
<S>                                                <C>      <C>      <C>       <C>       <C>
                                                -------- -------- --------- --------- ---------
Total operating revenues.......................$ 11,081   $17,979  $ 18,286 $ 26,929  $ 5,789
Total operating expenses.......................$ 24,834   $23,276   $17,229 $ 15,585  $12,924
Net income (loss)..............................$ (9,458)     (257)  $ 5,894 $ 13,353  $(6,651)
Net income (loss) per share-basic (1)..........$   (.66)     (.02)    $ .42   $ 1.19   $ (.70)
Net income (loss) per share-diluted (1)........$   (.66)     (.02)    $ .38   $ 1.07   $ (.70)
Total assets...................................$101,810  $111,869  $113,869 $104,856  $25,889
Long-term debt.................................$      -      $ 74     $ 279    $ 460    $ 620
Stockholders' equity...........................$ 98,567  $106,918   106,245 $ 98,076  $24,080
Weighted average number of shares outstanding-
basic..........................................  14,419    14,348    14,145   11,267    9,528

(1) All per share data conforms to SFAS No. 128, Earnings Per
    Share - See footnote 1 to the financial statements.
</TABLE>

Item 7.   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 drugs. The Company has not derived any revenue from
product  sales  and,   excluding  the  effect  of  certain  license  fees  of  a
non-recurring  nature  received in  connection  with  entering into research and
development  collaborations,  expects to incur significant  losses in most years
prior to deriving  any such  product  revenues.  Revenues to date have come from
three   collaborative   research   agreements  entered  into  with  Pfizer,  one
collaboration  with  Schering-Plough,  one license  agreement with American Home
Products and from interest income.

RESULTS OF OPERATIONS

     Results of operations may vary from period to period  depending on numerous
factors,  including  the  timing  of  income  earned  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.

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

     The Company's fiscal 1998 operating  revenues decreased 38 percent to $11.1
million from 1997  operating  revenues of $18.0 million,  which were  relatively
consistent with 1996 fiscal operating revenues of $18.3 million. The decrease in
1998 is due to a decrease in license fees which were recognized in both 1997 and
1996,  the  scheduled  conclusion  in June  1998 of the  research  phase  of the
Schering-Plough  Agreement (as described below), a reduction in reimbursement of
costs under a cost sharing  arrangement  for certain  expenses  associated  with
human clinical trials conducted by Neurogen under its NPY obesity  collaboration
with Pfizer.  The amount of the above  described  reimbursements  may  fluctuate
significantly  depending on the level of clinical  trials being  conducted.  The
amount of scheduled research funding may also fluctuate  significantly depending
on the level of funded  staffing  and the  extent to which  Pfizer  extends  the
research programs.

     Neurogen's  license fees of $3.0 million in 1997,  and $3.8 million in 1996
represent  non-recurring,  nonrefundable  fees which  relate to the  granting of
certain  commercial  licenses and rights to collaborative  partners as described
below.  License  fees in 1997  represented  a previously  unearned  $3.0 million
library  access fee from  Schering-Plough  for access to a portion of Neurogen's
combinatorial  chemistry  libraries.  License  fees in 1996 were  composed  of a
similar $3.0 million  library  access fee from  Schering-Plough  together with a
$0.8  million  fee from  American  Home  Products  received in  connection  with
entering  into the American  Home  Products  Agreement.  The amount of the above
described  reimbursements may fluctuate  significantly depending on the level of
clinical trials being  conducted.  The amount of scheduled  research funding may
also fluctuate  significantly  depending on the level of funded staffing and the
extent to which Pfizer extends the research programs.

     Research and development costs increased 6 percent to $20.9 million for the
year ended  December  31, 1998 as compared to the same period in 1997.  Research
and development  costs increased 41 percent to $19.7 million in 1997 compared to
$13.9  million in 1996.  These  increases  are due  primarily  to an increase in
research and development  personnel to staff the company's  growing portfolio of
drug  development  programs  and  an  expansion  of  Neurogen's  drug  discovery
capabilities  through its growing  AIDD  (Accelerated  Intelligent  Drug Design)
program and fluctuations in clinical  development  activities which increased in
1997 and then decreased in 1998.  Research and development  costs represented 84
percent,  85 percent and 81 percent of total  operating  expenses  for the years
ended December 31, 1998, 1997 and 1996, respectively.

     General and administrative expenses increased 10 percent to $3.9 million in
1998 from $3.6  million in 1997 and 8 percent in 1997 from $3.3 million in 1996.
The increases in both years were due primarily to an increase in  administrative
activities  and the  addition of related  facilities  to support  the  Company's
expanded research programs.

     Other income,  consisting primarily of interest income and gains and losses
from marketable  securities,  was $4.3 million in 1998, $5.0 million in 1997 and
$4.9 million in 1996,  respectively.  The decrease in 1998  compared to 1997 and
1996 was due primarily to a lower level of invested funds.

     The  Company  recognized  a net loss of $9.5  million  for the  year  ended
December  31, 1998 a net loss of $0.3  million for the year ended  December  31,
1997 and net income of $5.9 million for the year ended  December  31, 1996.  The
decrease in earnings is primarily due to the decrease in operating  revenues and
the increase in operating expenses described above.

LIQUIDITY AND CAPITAL RESOURCES

     At December  31,  1998 and 1997,  cash,  cash  equivalents  and  marketable
securities were in the aggregate $75.0 million and $84.2 million,  respectively.
The decrease in 1998 was due primarily to a decrease in operating revenue and an
increase in operating  expenses,  all as described above,  together with capital
expenditures  for plant and equipment.  The Company's  aggregate  level of cash,
cash equivalents and marketable  securities has fluctuated  significantly in the
past and is expected to do so in the future as a result of the factors described
below.

     Neurogen's  cash  requirements to date have been met by the proceeds of its
financing  activities,  amounts received pursuant to collaborative  arrangements
and  interest  earned on invested  funds.  The  Company's  financing  activities
include  three  private  placement  offerings  of its common  stock prior to its
initial public offering,  underwritten  public offerings of the Company's common
stock in 1989,  1991 and 1995, and the private sale of common stock to Pfizer in
connection  with  entering  into the  Pfizer  Agreements  and to  American  Home
Products in the American Home Products  Agreement.  Total funding  received from
these  financing  activities was  approximately  $105.6  million.  The Company's
expenditures  have been primarily to fund research and  development  and general
and  administrative  expenses  and to  construct  and  equip  its  research  and
development facilities.

     In the first  quarter of 1992,  the  Company  entered  into the 1992 Pfizer
Agreement pursuant to which Pfizer made a $13.8 million equity investment in the
Company.  Under  this  agreement,  the  Company  received  $4.6  million to fund
research  and  development  programs in each of the five years from 1992 through
1996. The Company has received and is receiving  additional  funding pursuant to
the December 1996 and December 1998 extensions,  as described below. Neurogen is
eligible  to  receive  milestone  payments  of up to $12.5  million  if  certain
development  and  regulatory  objectives  are  achieved  regarding  its products
subject to the collaboration. In return, Pfizer received the exclusive rights to
manufacture and market  collaboration  anxiolytics and cognition  enhancers that
act through the family of receptors  which  interact with the  neuro-transmitter
gamma-aminobutyric  acid, or GABA. Pfizer will pay Neurogen royalties based upon
net sales levels, if any, for such products. As of December 31, 1998, Pfizer had
provided $31.6 million of research  funding to the Company  pursuant to the 1992
Pfizer Agreement, as extended, (as described below), and $0.3 million due to the
completion of a clinical development milestone.

     Neurogen and Pfizer entered into their second collaborative  agreement, the
1994 Pfizer Agreement, in July 1994, pursuant to which Pfizer made an additional
$9.9 million equity investment in the Company. Under this agreement, the Company
received approximately $7.4 million during the three-year period which commenced
July 1, 1994,  to fund  Neurogen's  sleep  disorder  program.  The  Company  has
received and is receiving  additional  funding pursuant to the December 1996 and
December  1998  extensions,  as  described  below.  Neurogen  could also receive
milestone  payments of up to $3.3 million if certain  development and regulatory
objectives are achieved regarding its products subject to the collaboration.  In
return,   Pfizer  received  the  exclusive  rights  to  manufacture  and  market
GABA-based  sleep  disorder  products for which it will pay  Neurogen  royalties
based  upon net sales  levels,  if any.  As of  December  31,  1998,  Pfizer had
provided $10.3 million of research  funding to the Company  pursuant to the 1994
Pfizer Agreement, as extended, (as described below).

     In  1996  and  1997,  Neurogen  and  Pfizer  extended  the  1992  and  1994
Agreements. Pursuant to the extension agreements, Neurogen received $6.5 million
and  $6.3  million  in  1998  and  1997,  respectively,  to  fund  research  and
development  programs. In the fourth quarter of 1998, Neurogen announced that it
had agreed with Pfizer to further extend the 1992 and 1994 Pfizer  Agreements to
provide  research  funding  of $6.2  million  per year in both  1999  and  2000.
Additionally,  the  companies  agreed to expand  the 1992  Agreement  to include
depression  as a new  target.  Pursuant  to  this  agreement,  Neurogen  will be
eligible  to  receive  certain  milestone   payments  upon  the  achievement  of
development  and regulatory  objectives and royalties based on net sales levels,
if any. Pfizer received the exclusive right to manufacture and market GABA based
drugs for depression from the collaboration.

     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 the manufacturing and marketing, if any, of drugs developed from
the collaborations.

     Neurogen and Pfizer entered into their third collaborative  agreement,  the
1995 Pfizer  Agreement,  in  November  1995,  pursuant  to which  Pfizer made an
additional  $16.5 million  equity  investment in the Company  bringing  Pfizer's
ownership of the Company's common stock up to approximately  21% and paid a $3.5
million license fee. The Company has received  approximately $7.5 million during
the three year  period  which  commenced  November 1, 1995,  to fund  Neurogen's
neuropeptide Y (NPY) eating disorders program. Pfizer has also elected to extend
the research program through October 1999 and to increase Neurogen's staffing on
the program and pay  Neurogen  $3.1 million to fund the fourth year of research.
Neurogen  may also  receive  funding for a fifth year at  staffing  levels to be
determined by Neurogen and Pfizer  should Pfizer  exercise its option to further
extend the research program and return to the original staffing levels. Neurogen
could also  receive  milestone  payments of up to  approximately  $28 million if
certain  development  and  regulatory  objectives  are  achieved  regarding  its
products subject to the collaboration.  Pfizer received the exclusive  worldwide
rights to manufacture and market NPY-based collaboration  compounds,  subject to
certain  rights  retained by  Neurogen.  Pursuant to the 1995 Pfizer  Agreement,
Neurogen  will fund a minority  share of early stage  development  costs and has
retained the right to manufacture any collaboration products in NAFTA countries.
Neurogen has also retained a profit sharing option with respect to product sales
in NAFTA  countries.  If Neurogen  exercises the profit sharing option,  it will
fund a portion of the cost of late stage clinical trials and marketing costs and
in return will receive a specified  percentage of any profit  generated by sales
of  collaboration  products  in NAFTA  countries.  If  Neurogen  chooses  not to
exercise its profit-sharing option, Pfizer would pay Neurogen royalties on drugs
marketed in NAFTA countries and will fund a majority of early stage and all late
stage  development  and marketing  expenses.  In either case  Neurogen  would be
entitled to royalties on drugs marketed in non-NAFTA  countries.  As of December
31, 1998,  Pfizer had provided $8.3 million in research  funding  (including $.3
million in unearned revenues) pursuant to the 1995 Pfizer Agreement.

     In June 1995, Neurogen and Schering-Plough entered into the Schering-Plough
Agreement to  collaborate  in the  discovery  and  development  of drugs for the
treatment of  schizophrenia  and other  disorders which act through the dopamine
family of  receptors.  Pursuant to the  Schering-Plough  Agreement,  the Company
received  one-time license fees of $14 million for rights relating to Neurogen's
dopamine program and $3.0 million in each of 1995 and 1996 for the right to test
certain of  Neurogen's  combinatorial  chemistry  libraries in selected  non-CNS
assays.  Neurogen received  scheduled funding  aggregating  approximately  $10.8
million  during the  three-year  period from June 1995  through  June 1998,  for
research and  development  funding of the Company's  dopamine  program.  In July
1998,  Neurogen announced that the Company and Schering-Plough had concluded the
research phase of the collaboration and that Schering-Plough planned to continue
the development of drug candidates identified during such research. Accordingly,
Neurogen has reassigned  personnel  formerly  conducting  such research to other
Neurogen  projects  and the funding of $3.6 million per year  formerly  received
from  Schering-Plough came to its scheduled conclusion on July 1, 1998. Neurogen
could also  receive  milestone  payments of up to  approximately  $32 million if
certain  development  and  regulatory  objectives  are  achieved  regarding  its
products subject to the collaboration.  In return,  Schering-Plough received the
exclusive  worldwide  license to market products  subject to the  collaboration.
Neurogen  retained the rights to receive royalties based on net sales levels, if
any, and an option to manufacture  products for the United States market.  As of
December  31,  1998,  Schering-Plough  had  provided  $10.8  million in research
funding pursuant to the Schering-Plough  Agreement.  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.

     The  Company  plans  to use  its  cash,  cash  equivalents  and  marketable
securities  for its research and  development  activities,  working  capital and
general corporate purposes.  Neurogen anticipates that its current cash balance,
as supplemented by research  funding  pursuant to the Pfizer  Agreements will be
sufficient to fund its current and planned  operations  through  2001.  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 may
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, 1998, the Company had approximately $24.3 million of net
operating  loss  carryforwards  available for federal  income tax purposes which
expire from the years 2004 through  2013.  The Company had  approximately  $19.8
million of Connecticut state tax net operating loss carryforwards as of December
31,  1998 which  expire in the years 1999  through  2003.  Because of "change in
ownership"  provisions of the Tax Reform Act of 1986, the Company's  utilization
of its net operating loss and researh and development  credit  carryforwards may
be subject to an annual limitation in future periods.

Discussion of the Year 2000 issue

     General.  The Year 2000  issue is the  result of  computer  programs  being
written using two digits rather than four to define the applicable  year. Any of
the Company's computer programs that have date-sensitive  software may recognize
a date using "00" as the year 1900 rather than the year 2000.  This could result
in  a  system  failure  or  miscalculations  causing  disruption  of  operations
including,  among other things, a temporary inability to access scientific data,
process transactions, or engage in similar normal business activities.

     Program.  The  Company  has begun a program to resolve the Year 2000 issue.
This  program  consists of four  phases:  assessment,  remediation,  testing and
contingency  planning.  The Company  completed the assessment  phase in December
1998 and is currently in the remediation phase. During the assessment phase, the
Company  assessed its products,  key  financial and operating  systems and other
systems  for Year 2000  compliance.  The  assessment  included  identifying  all
critical information technology systems and non-information  technology critical
systems  on which the  Company  relies,  testing  Year 2000  compliance  of such
systems,  and  recommending  steps for replacing or making  corrective  fixes to
non-compliant   systems.   Additionally,   the   Company   obtained   compliance
verification from key third party vendors  supplying  critical parts or services
to the Company in order to determine  their plans to address their own Year 2000
issues.

     Upon  completion of the detailed  assessment,  the Company  concluded  that
substantially all its key financial operating systems and other systems are Year
2000  compliant.   However,   certain  software  and  hardware  components  were
identified as non-compliant.  The Company has established a plan to replace this
non-compliant  software  and  hardware  by  September  1999.  Also,  the Company
believes that its processes will be unaffected by the Year 2000 issue.

     The testing phase of the program has been on-going, and will continue to be
conducted as  non-compliant  software and  hardware  are  replaced.  The Company
estimates that the testing phase is  approximately  60% completed as of December
31, 1998. The Company  currently plans to develop a contingency  plan during the
third quarter of 1999 for any systems not expected to be Year 2000  compliant by
December 31, 1999.

     Costs.  The Company plans completion of all phases,  including  contingency
planning,  of the Year 2000 program by the end of the third quarter of 1999. All
costs  associated  with the  Company's  Year 2000 program are being  expensed as
incurred.  The  estimated  total cost of the Year 2000 program is  approximately
$200,000, which primarily includes the cost of employee time spent on the issue,
and the cost of replacing or upgrading  non-compliant software identified during
the assessment  phase.  Costs incurred  through  December 31, 1998 have totalled
approximately $125,000.

     Risks. The Company presently  believes that with  modifications to existing
software and conversions to new software,  the Year 2000 issue can be mitigated.
However,  the Company may not timely identify and remediate all significant Year
2000 problems and remedial  efforts may involve greater time and expense than is
currently anticipated.  If such modifications and conversions fail to be made,or
are not timely  completed,  the Year 2000 issue could have a material  impact on
the results of  operations,  financial  position  or cash flows of the  Company.
Furthermore, there can be no assurance that any Year 2000 compliance problems of
the  Company or its  customers  or  suppliers  will not have a material  adverse
effect on the  results of  operations,  financial  position or cash flows of the
Company.

     The Company believes that the most reasonably likely worst case scenario is
that a temporary  disruption of operations  would occur due to any or all of the
following:  unavailability of services from utility companies,  delay in receipt
of supplies from  vendors,  having to access  archived  back-ups of databases of
stored  information,  or delays in accessing the Company's  financial  resources
caused by problems in the banking industry.

     The estimates and conclusions herein contain forward-looking statements and
are based on management's  best estimates of future events.  Risks to completing
the program  include the  availability  of resources,  the Company's  ability to
discover  and  correct  Year 2000  problems  which  could  have an impact on the
Company's  operations  and the ability of suppliers to bring their  systems into
Year 2000 compliance.
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Interest rate risk. The Company's  investment portfolio includes investment
grade debt instruments. These bonds are subject to interest rate risk, and could
decline in value if interest  rates  fluctuate.  Due to the short  duration  and
conservative  nature of these instruments,  the Company does not believe that it
has a material  exposure to interest rate risk.  Additionally,  funds  available
from investment  activities are dependent upon available investment rates. These
funds may be higher or lower than anticipated due to interest rate volatility.

     Capital Market Risk. The Company  currently has no product  revenues and is
dependent  on funds  raised  through  other  sources.  One  source of funding is
through further equity  offerings.  The ability of the Company to raise funds in
this manner is dependent upon capital market forces affecting the stock price of
the Company.

<PAGE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS
                                                                            Page
                                                                            ----
Balance Sheets at December 31, 1998 and 1997...............................40,41

Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................................  42

Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996...........................................   43

Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996...........................................   44

Notes to Financial Statements..............................................   45

Report of Independent Accountants..........................................54,55



<PAGE>
<TABLE>
<CAPTION>
                                               NEUROGEN CORPORATION

                                                  BALANCE SHEETS


                                                                           December 31
                                                                       -------------------
                                                                         1998      1997
                                                                       --------- ---------
                                                                      (In thousands, except
                                                                         per share data)
<S>                                                                       <C>       <C>
                                Assets
Current Assets:
Cash and cash equivalents............................................. $ 26,066  $ 66,924
Marketable securities.................................................   48,944    17,227
Receivable from corporate partners....................................      656     1,192
Other current assets..................................................    1,298     1,122
                                                                       --------- ---------
Total current assets..................................................   76,964    86,465
Property, plant & equipment:
Land and land improvements............................................      542       542
Building and building improvements....................................   16,704    16,377
Leasehold improvements................................................    4,026     4,026
Equipment.............................................................    9,949     8,422
Furniture.............................................................      534       484
                                                                       --------- ---------
                                                                         31,755    29,851
Less accumulated depreciation and amortization........................    7,265     4,950
                                                                       --------- ---------
Net property, plant and equipment.....................................   24,490    24,901
Other assets, net.....................................................      356       503
                                                                       --------- ---------
                                                                       $101,810  $111,869
                                                                       ========= =========

                                  See accompanying notes to financial statements

<PAGE>
                                               NEUROGEN CORPORATION

                                            BALANCE SHEETS--(Continued)
                                                                           December 31
                                                                       -------------------
                                                                         1998      1997
                                                                       --------- ---------
                                                                      (In thousands, except
                                                                         per share data)


              Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses.................................  $ 2,861     4,418
Unearned revenue from corporate partners..............................      260       200
Current portion of mortgage payable...................................       74       205
                                                                       --------- ---------
Total current liabilities.............................................    3,195     4,823
Mortgage payable, excluding current portion...........................        -        74
Other compensation....................................................       48        54
                                                                       --------- ---------
Total liabilities.....................................................    3,243     4,951
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.025 per share authorized 2,000 shares;
none issued...........................................................       -         -
Common stock, par value $.025 per share authorized 30,000 shares;
issued and outstanding 14,656 shares in 1998 and 14,390 in 1997.......      366       360
Additional paid-in capital............................................  113,901   110,231
Accumulated deficit...................................................  (12,234)   (2,776)
Deferred compensation.................................................   (3,540)     (894)
Accumulated other comprehensive income................................       74        (3)
                                                                       --------- ---------
Total stockholders' equity............................................   98,567   106,918
                                                                       --------- ---------
                                                                       $101,810  $111,869
                                                                       ========= =========


                                  See accompanying notes to financial statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                             STATEMENTS OF OPERATIONS

                                                          For the Years Ended December 31
                                                         ---------------------------------
                                                            1998        1997       1996
                                                         ----------- ---------- ----------
<S>                                                          <C>        <C>         <C>
                                                       (In thousands, except per share data)
Operating revenues:
License fees............................................    $   -       $3,000     $3,750
Research and development................................     11,081     14,979     14,536
                                                         ----------- ---------- ----------
Total operating revenues................................     11,081     17,979     18,286
Operating expenses:
Research and development................................     20,914     19,710     13,934
General and administrative..............................      3,920      3,566      3,295
                                                         ----------- ---------- ----------
Total operating expenses................................     24,834     23,276     17,229
                                                         ----------- ---------- ----------
Operating income (loss).................................    (13,753)    (5,297)     1,057
Other income (expense):
Investment income.......................................      4,312      5,075      4,988
Interest expense........................................        (17)       (35)       (51)
                                                         ----------- ---------- ----------
Total other income, net.................................      4,295      5,040      4,937
                                                         ----------- ---------- ----------
Income (loss) before provision for income taxes.........     (9,458)      (257)     5,994
Provision for income taxes..............................        -          -          100
                                                         ----------- ---------- ----------
Net income (loss).......................................    $(9,458)     $(257)    $5,894
                                                         =========== ========== ==========
Earnings (loss) per share:
Basic...................................................      $(.66)     $(.02)      $.42
                                                         ----------- ---------- ----------
Diluted.................................................      $(.66)     $(.02)      $.38
                                                         ----------- ---------- ----------
Shares used in calculation of earnings (loss) per share:
Basic...................................................     14,419     14,348     14,145
                                                         ----------- ---------- ----------
Diluted.................................................     14,419     14,348     15,449
                                                         ----------- ---------- ----------





                                  See accompanying notes to financial statements
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                        STATEMENTS OF STOCKHOLDERS' EQUITY

                                                     For the Years Ended December 31, 1998, 1997 and 1996
                                                                        (in thousands)
                                                 --------------------------------------------------------------------------

                                                                                                     Accumulated
                                                                Additional                           Other
                                                   Common Stock   Paid-in  Accumulated   Deferred    Comprehensive
                                                  Shares Amount   Capital    Deficit   Compensation  Income          Total

                                                  ------ ------ ---------- ----------- ------------  ------------- --------
<S>                                                <C>    <C>       <C>          <C>        <C>          <C>       <C>



Balance at December 31, 1995....................  13,949  $349   $106,040   $(8,413)      $ -            $100      $98,076
Issuance of shares for cash to American
Home Products Corporation.......................     37      1        749         -         -             -            750
Exercise of stock options.......................    260      6      1,623         -         -             -          1,629
Exercise of warrants............................      6      -          8         -         -             -              8
Tax benefit relating to stock option exercises..     -       -         71        -          -             -             71
Comprehensive income:
  Net income....................................     -       -          -     5,894         -             -          5,894
  Unrealized loss on marketable securities......     -       -          -        -          -            (183)        (183)
                                                 ------ ------ ---------- ----------- ------------  ------------- ---------
Balance at December 31, 1996.................... 14,252    356    108,491    (2,519)        -             (83)    $106,245
Deferred compensation...........................     -       -        894        -       (894)            -             -
Exercise of stock options.......................    138      4        846        -          -             -            850
Comprehensive income:
  Net loss......................................     -      -          -       (257)        -             -           (257)
  Unrealized gain on marketable securities......     -      -          -          -         -              80           80
                                                 ------ ------ ---------- ----------- ------------  ------------- ---------
Balance at December 31, 1997.................... 14,390    360    110,231    (2,776)     (894)             (3)     106,918
Issuance of restricted stock....................    145      4      2,536        -     (2,540)            -             -
Deferred compensation ..........................     -      -         265        -       (106)            -            159
Exercise of stock options.......................     98      2        564        -         -              -            566
Stock issued in 401(k) match....................     19     -         299        -         -              -            299
Exercise of warrants............................      4     -           6        -         -              -              6
Comprehensive income:
  Net loss......................................     -      -          -     (9,458)       -              -         (9,458)
  Unrealized gain on marketable securities......     -      -          -         -         -               77           77
                                                 ------ ------ ---------- ----------- ------------  ------------- ---------
Balance at December 31, 1998                     14,656   $366   $113,901  $(12,234)  $(3,540)            $74      $98,567
                                                 ====== ====== ========== =========== ============  ============= =========






                                  See accompanying notes to financial statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                             STATEMENTS OF CASH FLOWS

                                                                For the Years ended December 31
                                                                --------------------------------
                                                                   1998       1997       1996
                                                                ---------- ---------- ----------
<S>                                                                 <C>        <C>        <C>
                                                                         (In thousands)
Cash flows from operating activities:
Net income (loss)..............................................   $(9,458)    $ (257)    $5,894
Adjustments to reconcile net income (loss) to net cash provided
     by (used in) operating activities:
Depreciation and amortization expense..........................     2,365      1,849      1,020
Noncash compensation expense...................................       458        -          -
(Gain) loss on sale of assets..................................         6          4        (15)
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued expenses...    (1,557)     1,408        999
Increase (decrease)in unearned revenue from corporate partners.        60     (3,900)       -
(Increase) decrease in other current assets....................      (176)        10         62
(Increase) decrease in receivable from corporate partners......       536       (732)      (136)
(Increase) decrease in other assets, net.......................       127       (110)        67
                                                                ---------- ---------- ----------
Net cash provided by (used in) operating activities............    (7,639)    (1,728)     7,891
                                                                ---------- ---------- ----------
Cash flows from investing activities:
Purchase of plant and equipment................................    (1,974)   (10,033)    (6,600)
Purchases of marketable securities.............................   (66,242)   (35,060)   (42,584)
Maturities and sales of marketable securities..................    34,602     50,227     75,784
Proceeds from sale of assets...................................        34         26        109
                                                                ---------- ---------- ----------
Net cash provided by (used in) investing activities............   (33,580)     5,160     26,709
                                                                ---------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options......................................       566        850      1,629
Principal payments under mortgage payable......................      (205)      (181)      (160)
Proceeds from sales of common stock, net.......................        -         -          750
                                                                ---------- ---------- ----------
Net cash provided by financing activities......................       361        669      2,219
                                                                ---------- ---------- ----------
Net increase (decrease)in cash and cash equivalents............   (40,858)     4,101     36,819
Cash and cash equivalents at beginning of year.................    66,924     62,823     26,004
                                                                ---------- ---------- ----------
Cash and cash equivalents at end of year.......................   $26,066    $66,924    $62,823
                                                                ========== ========== ==========



                                  See accompanying notes to financial statements
</TABLE>


<PAGE>


                              NEUROGEN CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BUSINESS--Neurogen   Corporation   ("Neurogen"   or  the  "Company")  is  a
neuropharmaceuticals  Company engaged in the discovery and development of drugs.
Neurogen's   strategy  is  to  discover   and  develop   drugs  which   modulate
communications  between cells in such a way as to avoid or minimize the negative
side effects typically  associated with many currently  prescribed  medications.
The Company has not derived any revenue from product sales to date.

     USE OF  ESTIMATES--The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

     CASH  EQUIVALENTS  AND MARKETABLE  SECURITIES--The  Company  considers cash
equivalents  to be only  those  investments  which are  highly  liquid,  readily
convertible  to cash and which mature within three months from date of purchase.
The  carrying  values of cash  equivalents  at  December  31, 1998 and 1997 were
approximately $26,310,000 and $66,789,000, respectively.

     The Company  considers its  investment  portfolio to be  available-for-sale
securities as defined in Statement of Financial  Accounting  Standards  ("SFAS")
No. 115.  Marketable  securities  at December  31, 1998 and 1997 consist of debt
securities  with  maturities  of three  months  to four  years.  Securities  are
available  for  sale  and  are  carried  at  fair  value  with  the   unrealized
gains/losses  reported as a separate  component  of  stockholders'  equity.  The
aggregate  cost of  marketable  securities  at  December  31,  1998 and 1997 was
approximately  $48,870,000  and  $17,230,000,  respectively.  Realized gains and
losses have been determined by the specific  identification  method. The Company
recognized  gross  realized  gains of  $52,000  and  $116,000  in 1998 and 1997,
respectively.  Gross realized  losses were $60,000 and $65,000 in 1998 and 1997,
respectively.

     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,  ranging  from  three to  forty  years.  Leasehold
improvements are amortized over the life of the lease.

     REVENUE RECOGNITION--Revenue under research and development arrangements is
recognized  as  earned  under the terms of the  respective  agreements.  License
payments are recorded when received and the license agreements are signed and no
further  efforts  are  required  of the  Company.  Product  research  funding is
recorded  as revenue,  generally  on a quarterly  basis,  as research  effort is
incurred. Deferred revenue arises from payments received which have not yet been
earned  under  research and  development  arrangements.  The Company  recognizes
milestone payments when the milestones are achieved.

     STOCK-BASED  COMPENSATION--The Company grants qualified stock options for a
fixed  number of shares to  employees  with an exercise  price equal to the fair
market value of the shares at the date of grant.  The Company accounts for stock
option  grants in  accordance  with APB  Opinion No. 25,  "Accounting  for Stock
Issued to Employees," and,  accordingly,  recognizes no compensation expense for
qualified stock option grants.

     INCOME  TAXES--The  liability  method is used to account for income  taxes.
Deferred tax assets and liabilities are determined based on differences  between
financial  reporting and income tax bases of assets and  liabilities  as well as
net operating  loss  carryforwards  and are measured using the enacted tax rates
and laws  that are  expected  to be in  effect  when  the  differences  reverse.
Deferred  tax  assets may be reduced by a  valuation  allowance  to reflect  the
uncertainty associated with their ultimate realization.

     EARNINGS  (LOSS) PER  SHARE--In  1997,  the Company  adopted  Statement  of
Accounting Standards No. 128, "Earnings Per Share" (EPS) under which primary EPS
computed  in  accordance  with APB Opinion 15 has been  replaced  with a simpler
calculation  called  basic  EPS.  Basic EPS is  calculated  by  dividing  income
available  to  common   stockholders  by  the  weighted  average  common  shares
outstanding.  Fully  dilutive  EPS did not  change  significantly  but has  been
renamed  diluted EPS.  All earnings per share  amounts for all periods have been
presented,  and where  appropriate,  restated  to conform to the  Statement  128
requirements.

     FAIR VALUE OF FINANCIAL  INSTRUMENTS--The carrying amounts of the Company's
invested  cash and  marketable  securities  approximate  fair value as estimated
based on quoted market prices. The carrying value of long-term debt approximates
its fair value based upon currently  available debt  instruments  having similar
interest  rates and  maturities.  The carrying  amounts of the  Company's  other
financial instruments approximate their fair value.

2.   CORPORATE PARTNER AGREEMENTS

     In 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 has received an aggregate of  approximately  $31,900,000
for research and development  funding of the Company's  anxiolytic and cognition
enhancement projects.  Neurogen could also receive additional milestone payments
totaling  $12,250,000  ($250,000  had been  received as of December 31, 1998) if
certain  development  and  regulatory  objectives  are  achieved  regarding  its
products subject to the 1992 Pfizer  Agreement.  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
1998, 1997 and 1996, Neurogen received approximately $4,685,000,  $3,960,000 and
$4,600,000  respectively,  in research funding,  which approximates the research
costs it incurred in such years under the 1992 Pfizer Agreement.

     The Company  entered  into its second  collaborative  agreement  (the "1994
Pfizer  Agreement")  with Pfizer in June 1994  pursuant to which  Pfizer made an
additional equity investment in the Company of $9,864,000.  Pursuant to the 1994
Pfizer  Agreement,  the  Company  has  received an  aggregate  of  approximately
$10,300,000  during the  three-year  period which  commenced  July 1, 1994,  for
research  and  development  funding of the  Company's  sleep  disorder  project.
Neurogen could also receive additional milestone payments totaling $3,250,000 if
certain  development  and  regulatory  objectives  are  achieved  regarding  its
products subject to the 1994 Pfizer  Agreement.  In return,  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 net sales levels,  if any. In 1998,  1997 and 1996,  the Company
received   research   funding  of  approximately   $1,600,000,   $2,500,000  and
$2,379,000, respectively, which approximates the research costs incurred in such
years under the 1994 Pfizer Agreement.

     In  1996  and  1997,  Neurogen  and  Pfizer  extended  the  1992  and  1994
Agreements.  Pursuant to the extension agreements,  Neurogen received $6,080,000
and  $6,470,000 in 1998 and 1997,  respectively.  In the fourth quarter of 1998,
Neurogen announced that it had agreed with Pfizer to further extend the 1992 and
1994 Pfizer  Agreements to provide  research  funding of $6,240,000  per year in
both 1999 and  2000.  Additionally,  the  companies  agreed  to expand  the 1992
Agreement to include  depression  or a new target.  Pursuant to this  agreement,
Neurogen  will be  eligible  to  receive  certain  milestone  payments  upon the
achievement of development and regulatory  objectives and royalties based on net
sales levels,  if any.  Pfizer  received the exclusive  right to manufacture and
market GABA based drugs for depression from the collaboration.

     Neurogen and Pfizer entered into their third  collaborative  agreement (the
"1995  Pfizer  Agreement")  in  November  1995,  pursuant  to which  Pfizer paid
$3,500,000 in one-time license fees and made an additional  equity investment in
the Company of $16,500,000,  bringing Pfizer's ownership of the Company's common
stock up to 21%.  The Company has  received  approximately  $7,500,000  per year
during  the  three  year  period  which  commenced  November  1,  1995,  to fund
Neurogen's  neuropeptide  Y (NPY)  eating  disorders  program.  Pfizer  has also
elected  to extend  the  research  program  through  October  1999 and  increase
Neurogen's  staffing  on the  program and pay  Neurogen  $3,120,000  to fund the
fourth year of research.  Neurogen may also receive  funding for a fifth year at
staffing  levels to be determined by Neurogen and Pfizer should Pfizer  exercise
its option to further extend the research  program.  Neurogen could also receive
milestone payments of up to approximately $28,000,000 if certain development and
regulatory  objectives  are  achieved  regarding  its  products  subject  to the
collaboration. Pfizer received the exclusive worldwide rights to manufacture and
market NPY-based collaboration compounds,  subject to certain rights retained by
Neurogen.  Pursuant to the 1995 Pfizer Agreement,  Neurogen will fund a minority
share of early stage development costs and has retained the right to manufacture
any  collaboration  products  in NAFTA  (North  American  Free Trade  Agreement)
countries and has retained a profit sharing option with respect to product sales
in NAFTA  countries.  If Neurogen  exercises the profit sharing option,  it will
fund a portion of the cost of late stage clinical trials and marketing costs and
in return  receive a share of any  profit  generated  by sales of  collaboration
products  in NAFTA  countries.  If Neurogen  chooses not to exercise  its profit
sharing option,  Pfizer would pay Neurogen  royalties on drugs marketed in NAFTA
countries and will fund a majority of early stage and all late stage development
and marketing  expenses.  In either case Neurogen would be entitled to royalties
on drugs marketed in non-NAFTA  countries.  As of December 31, 1998,  Pfizer had
provided   $8,280,000  in  research  funding  (including  $260,000  in  unearned
revenues) pursuant to the 1995 Pfizer Agreement.

     In June 1995, Neurogen and Schering  Corporation and  Schering-Plough  Ltd.
(together,  "Schering-Plough")  entered into an Agreement (the  "Schering-Plough
Agreement")  to  collaborate  in the discovery and  development of drugs for the
treatment of  schizophrenia  and other  disorders which act through the dopamine
family of  receptors.  Pursuant to the  Schering-Plough  Agreement,  the Company
received in 1995  one-time  license fees of  $14,000,000  in exchange for rights
relating to Neurogen's dopamine program and $3,000,000 in each 1995 and 1996 for
the right to test certain of  Neurogen's  combinatorial  chemistry  libraries in
selected  non-CNS assays of which $3,000,000 was included in unearned revenue at
December 31, 1996 and recognized as revenue in 1997. Neurogen received scheduled
funding aggregating  approximately  $10,800,000 during the period from June 1995
through June 1998 for research and development funding of the Company's dopamine
program.  In July 1998 Neurogen  announced that the Company and  Schering-Plough
had concluded the research phase of the collaboration  and that  Schering-Plough
planned to continue the  development of drug candidates  identified  during such
research.  Neurogen could also receive milestone payments of up to approximately
$32,000,000  if certain  development  and  regulatory  objectives  are  achieved
regarding  its products  subject to the  Schering-Plough  Agreement.  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,  and an  option  to  manufacture
products for the United  States  market.  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.

     In the fourth quarter of 1996,  Neurogen entered into an agreement pursuant
to  which  it  out-licensed  to  American  Home  Products  (acting  through  its
Wyeth-Ayerst  Laboratories  division)  Neurogen's  commercial  rights to ADCI, a
small  molecule  drug  candidate  for the  treatment  of  epilepsy  and  related
disorders.  Neurogen  had  previously  in-licensed  its  rights to ADCI from the
National Institutes of Health ("NIH").  Under the terms of Neurogen's  agreement
with American Home Products,  Neurogen received a $0.8 million for 37,442 shares
of common stock. In January 1999,  Wyeth-Ayerst  informed Neurogen that it would
not pursue further clinical testing on ADCI due to toxocological  results from a
clinical study.

3.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts  payable and accrued  expenses  at December 31 are  summarized  as
follows (in thousands):
                        1998   1997
                       ------ ------
Accounts payable...... $1,798 $3,374
Accrued compensation..  1,064  1,044
                       ------ ------
                       $2,862 $4,418
                       ====== ======

4.   LONG-TERM DEBT AND LEASE OBLIGATIONS

     At December 31, 1998,  the Company had a $74,000  mortgage  payable on, and
secured by, its Branford,  Connecticut office and research facility,  payable in
monthly installments.  The interest rate is adjusted quarterly to the prime rate
plus 1%. At December 31, 1998, the prime rate was 7.75%.

     The  Company  anticipates  paying  off the  mortgage  in full by the second
quarter of 1999.

     In the third quarter of 1995, the Company entered into a ten year operating
lease  agreement to lease 24,000 square feet of space in a building  adjacent to
the Company's  existing research  facility.  The Company has a renewal option to
extend  the  lease for an  additional  ten year  period.  The  Company  may also
exercise an option to purchase the  building  after the sixth year of the lease.
The  improvements  made to the leased  facility for  laboratory and office space
were  completed in the fourth  quarter of 1996 and are to be amortized  over the
life of the lease,  or ten years.  Rent expense  approximated  $130,000 in 1998,
1997 and 1996.

     Future minimum rental lease payments subsequent to December 31, 1998
(in thousands) are:

1999.......................... $  126
2000..........................    130
2001..........................    151
2002..........................    151
2003..........................    151
Thereafter....................    278
                               ------
Total minimum lease payments.. $  987
                               ======

5.   STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK

     The Neurogen  Corporation Stock Option Plan (the "Plan") originally adopted
in 1988  and  amended  in 1992,  provided  for the  issuance  of  incentive  and
non-qualified  stock options for up to 1,200,000  shares of common stock. In May
1994, the Company's  shareholders approved its 1993 Omnibus Incentive Plan which
made 3,000,000  shares available for grant and its 1993  Non-Employee  Directors
Stock Option Program which made 500,000 shares  available for grant. In November
1998 the  shareholders  approved  a  1,500,000  increase  in  shares to the 1993
Omnibus  Incentive  Plan.  The  Plan  allows  for  stock  appreciation   rights,
restricted  shares, and performance units. All options expire not later than ten
years after the date of grant.  Employees  vest annually over five years,  while
directors vest monthly over three years.

Options
-------

     The  following  table  presents the  combined  activity of its stock option
plans for the years ended December 31, as follows:
<TABLE>
     <CAPTION>

                                             1998                1997                1996
                                     ------------------- ------------------- -------------------
                                                Weighted            Weighted            Weighted
                                                 Average             Average             Average
                                                Exercise            Exercise            Exercise
                                      Options     Price   Options     Price   Options     Price
<S>                                     <C>       <C>       <C>         <C>      <C>       <C>
                                     ---------- -------- ---------- -------- ---------- --------
Outstanding at January 1............ 3,389,576    $14.11 2,874,994    $13.70 2,478,149    $11.10
Granted.............................   524,788     16.91   777,349     16.27   669,830     20.54
Exercised...........................  ( 97,645)     5.80  (138,382)     6.60  (260,118)     6.43
Canceled............................  (124,259)    18.95  (124,385)    20.53   (12,867)    16.74
                                     ---------- -------- ---------- -------- ---------- --------
Outstanding at December 31.......... 3,692,460    $14.56 3,389,576    $14.11 2,874,994    $13.70
                                     ========== ======== ========== ======== ========== ========
Options exercisable at December 31.. 2,006,784    $12.21 1,504,716    $10.78 1,121,296     $8.54
</TABLE>

     With respect to options for 66,250 shares  granted at year-end 1997, if the
recipient remains employed with the Company for a period of seven years from the
date of grant,  the exercise  price for any of such options  which have not been
exercised at the end of the ten year term of such option, shall become zero. The
exercise  price  for  any of such  options  exercised  prior  to the end of such
ten-year term shall be $13.50 per share, the market price of the common stock on
the date of grant. In connection with this grant, the Company recorded  deferred
compensation  totaling $894,000.  Such deferred  compensation is to be amortized
over the seven year service period required for this provision to vest.

     The Company has adopted the  disclosure  provisions  only of  Statement  of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation"  ("FAS 123").  The Company will  continue to account for its stock
option plans in accordance with the provisions of APB 25,  "Accounting for Stock
Issued to Employees."

     The following table presents  weighted  average price and life  information
about significant option groups outstanding at December 31, 1998:

                               Weighted
                                Average   Weighted             Weighted
                               Remaining   Average              Average
     Range of        Number   Contractual Exercise    Number   Exercise
 Exercise Prices  Outstanding Life (Yrs.)   Price  Exercisable   Price
----------------- ----------- ----------- -------- ----------- --------
Less than $6.50..      83,465         3.8   $5.35      83,265    $5.35
$6.50-$10.00.....   1,247,763         5.3    6.57   1,156,563     6.56
$10.00-$20.00....   1,619,186         8.9   16.35     360,171    16.89
$20.00-34.88.....     742,046         7.3   25.10     406,785    25.55
                  -----------                      -----------
                    3,692,460                       2,006,784
                  ===========                      ===========


Restricted Stock
----------------

     In  December  1998,  145,125  shares of  restricted  stock were  granted to
certain employees. If the stock price reaches $45.00 within four years from date
of grant the  restriction  will be removed  and the  individual  will be able to
trade the stock with no cost to the employee.  If the stock price does not reach
$45.00 the shares will be forfeited.  In connection with this grant, the Company
has recorded $2,540,000 of deferred compensation within stockholders' equity.

Warrants
--------

     As of  December  31,  1998  the  Company  had a total  of  36,266  warrants
outstanding  issuable  for  shares of  common  stock at $2.55  per  share.  Such
warrants were issued to a prior lessor in connection  with a sale and lease back
of certain of the Company's  furniture and equipment and will expire in the year
2001.

     In February 1995, the Board of Directors approved the conversion of 112,000
warrants granted to the Company's  scientific  advisory board at $6.50 per share
to  options  under  the  1993  Omnibus  Incentive  Plan.  The new  options  have
substantially  the same  terms  as the  warrants  which  they  replaced  and are
included in the table above as options granted.

     Compensation  cost has not been  recognized  for the  stock  option  plans,
except  as noted  above  for  66,250  options  granted  at  year-end  1997.  Had
compensation  cost for the Company's stock option plans been determined based on
the fair value at the grant date for  awards in 1998,  1997 and 1996  consistent
with the  provisions  of SFAS No. 123, the  Company's  net  earnings  (loss) and
earnings  (loss) per share  would have been  adjusted  to the pro forma  amounts
indicated below (in thousands):
<TABLE>
<CAPTION>
                                                  1998          1997         1996
<S>                                                <C>           <C>          <C>
                                              -------------   --------     --------
Net earnings (loss) as reported.. ...........  $ (9,458)      $  (257)      $ 5,894
Net earnings (loss) pro forma................  $(15,971)      $(6,613)      $   892
Diluted earnings (loss) per share as reported  $   (.66)      $  (.02)      $   .38
Diluted earnings (loss) per share-pro forma..  $  (1.11)      $  (.46)      $   .06
</TABLE>
<PAGE>

     The estimated fair value at the date of grant for options  granted in 1998,
1997  and  1996  was  $10.15  $  9.07  and  $13.01,   respectively,   using  the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
                                1998     1997    1996
<S>                             <C>       <C>     <C>
                              -------  ------  -------
Expected life...............       5       5        5
Interest rate...............     4.6%   5.75%     6.4%
Volatility..................      66%     65%      70%

</TABLE>
     The effects on 1998,  1997 and 1996 pro forma net  earnings  (loss) and net
earnings (loss) per share of expensing the estimated fair value of stock options
are not  necessarily  representative  of the effects on reporting the results of
operations for future years as the period  presented  includes only one, two and
three years, respectively, of option grants under the Company's plans.

     The Company has reserved  5,378,196 shares of common stock for the exercise
of options, restricted stock and warrants.

6.   INCOME TAXES

     The difference between the Company's "expected" tax provision (benefit), as
computed by applying the U.S. federal corporate tax rate of 34% to income (loss)
before  provision  for income  taxes,  and actual  tax is  reconciled  below (in
thousands):
<TABLE>
<CAPTION>

                                                                 1998      1997      1996
<S>                                                               <C>       <C>       <C>
                                                               --------- --------- ---------
Expected tax provision (benefit) at 34%.......................   $(3,216)  $ (87)    $2,038
State tax provision (benefit) net of federal benefit..........      (593)    (20)       456
Change in valuation allowance ................................     3,993     100     (2,252)
R & D credit..................................................        -        -       (150)
Disqualifying stock dispositions..............................      (342)      -         -
Nondeductible expense, Other..................................        10       7          8
Expiring loss carry forward...................................       148       -         -
                                                               --------- --------- ---------
                                                                  $   -    $   -      $ 100
                                                               ========= ========= =========
</TABLE>
<PAGE>

     The tax  effect of  temporary  differences  that  give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below (in thousands):

                                               1998      1997
                                             ---------  ---------
DEFERRED TAX ASSETS:
Federal tax operating loss carryforwards..     $8,256    $4,619
State tax operating loss carryforwards....      1,239       867
Research & development credit.............      2,084     1,595
Alternative minimum tax credit carryover..        362       366
Other miscellaneous.......................        283       296
                                             ---------  ---------
Gross deferred asset......................     12,224     7,743
Valuation allowance.......................    (11,325)   (7,333)
                                             ---------  ---------
Net deferred asset........................        899       410
DEFERRED TAX LIABILITY:
Depreciation..............................       (899)     (410)
                                             ---------  ---------
Net asset/liability.......................     $   -     $   -
                                             =========  =========

     The valuation  allowance changed by $3,993,000 during 1998 due primarily to
the increase in net operating loss and research and development tax credit carry
forwards.  This  allowance has been  established  due to the  uncertainty in the
ability of the  Company to benefit  in the  future  from the  federal  and state
operating loss carry forwards.

     Any  subsequently   recognized  tax  benefits  relating  to  the  valuation
allowance  for deferred tax assets as of December 31, 1998 would be allocated as
follows (in thousands):

Income tax provision........ $6,763
Additional paid-in-capital..  4,562
                             ------
                            $11,325
                             ======

     As of December 31, 1998, the Company had  approximately  $24,281,000 of net
operating  loss  carryforwards  available for federal  income tax purposes which
expire in the years  2004  through  2013.  The  Company  also had  approximately
$19,760,000 of Connecticut state tax operating loss carryforwards as of December
31,  1998 which  expire in the years 1999  through  2003.  Because of "change in
ownership"  provisions of the Tax Reform Act of 1986, the Company's  utilization
of its net operating loss and research and development credit  carryforwards may
be subject to an annual limitation in future periods.

7.   COMMITMENTS AND CONTINGENCIES

     The Company has granted Pfizer certain  registration rights with respect to
2,846,000 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 to American  Home Products with respect to 37,442 shares of
common stock purchased in connection with entering into a licensing agreement in
1996.
<PAGE>

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. Effective
January 1, 1998, the Company  increased the match on employee  contributions  to
100%,  up to 6% of an employee's  salary.  One third of the match is in cash and
two thirds of the match is in company  stock.  Contributions  to the 401(k) plan
totaled approximately $432,000 in 1998, $111,000 in 1997 and $92,000 in 1996.

     The  Company  has  made  loans  to  certain  officers  subject  to  various
compensation   agreements.   The  loans  will  be  forgiven  and  recognized  as
compensation  expense ratably over service  periods of five to seven years.  The
amount of loans outstanding at December 31, 1998 was $459,000, of which $140,000
was short-term.

9.   SUPPLEMENTAL CASH FLOW INFORMATION

     The  Company  made  interest  payments  of  approximately  $17,000 in 1998,
$36,000 in 1997 and $51,000 in 1996.  The Company made no income tax payments in
1998 and 1997 and $37,000 in 1996.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and
Stockholders of Neurogen Corporation

     In our opinion,  the accompanying balance sheet as of December 31, 1998 and
the related statements of operations,  of stockholders' equity and of cash flows
present fairly,  in all material  respects,  the financial  position of Neurogen
Corporation  (the  "Company")  at  December  31,  1998,  and the  results of its
operations  and its cash  flows  for the year then  ended,  in  conformity  with
generally accepted  accounting  principles.  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 audit. We conducted our audit
of these  statements in accordance with generally  accepted  auditing  standards
which 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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for the opinion  expressed  above. The financial  statements of
the Company as of December  31, 1997 and for each of the two years in the period
then ended were  audited by other  independent  accountants  whose  report dated
February 13, 1998 expressed an unqualified opinion on those statements.

                                                   PRICEWATERHOUSECOOPERS LLP


Hartford, Connecticut
February 16, 1999

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Neurogen Corporation

     We have audited the accompanying  balance sheets of Neurogen Corporation as
of  December  31,  1997 and  1996  and the  related  statements  of  operations,
stockholders'  equity  and cash  flows for each of the two  years in the  period
ended December 31, 1997. 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, 1997 and 1996 and the results of its  operations and its cash flows
for each of the two years in the period ended  December  31, 1997 in  conformity
with generally accepted accounting principles.


                                                           ERNST & YOUNG LLP

Boston, Massachusetts
February 13, 1998



<PAGE>



ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     As previously  reported on the Company's  Current  Report on Form 8-K dated
December 17, 1998, the Company,  upon the approval of the Audit Committee of its
Board of  Directors,  elected not to retain  Ernst & Young LLP as its  principal
independent accountants.  On December 11, 1998, the Audit Committee of the Board
of Directors appointed  PriceWaterhouseCoopers  LLP to succeed Ernst & Young LLP
as the principal independent accountants of the Company.

     Neither of the  accountant's  reports for the last two years  contained any
adverse  opinion,  disclaimer  or  qualification.  There  has  also not been any
disagreements  with  the  Company's  accountants  on any  matter  of  accounting
principles  or  practices,  financial  statement  disclosure  or audit  scope or
procedure in the last two fiscal years.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     For  information  relating  to  directors  and  executive  officers  of the
Company,  reference  is  made to  pages  2  through  5 and 8  through  12 of the
Company's  Proxy  Statement  delivered to  stockholders  in connection  with the
Annual Meeting of Stockholders to be held on May 26, 1999, which  information is
incorporated herein by reference.

ITEM 11.   EXECUTIVE COMPENSATION

     For information  relating to executive  compensation,  reference is made to
pages 8 through 12 of the Company's Proxy Statement delivered to stockholders in
connection  with the Annual Meeting of  Stockholders to be held on May 26, 1999,
which information is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     For information  relating to the security  ownership of certain  beneficial
owners and management, reference is made to pages 6 and 7 of the Company's Proxy
Statement  delivered to  stockholders  in connection  with the Annual Meeting of
Stockholders  to be held on May 26,  1999,  which  information  is  incorporated
herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For information relating to certain relationships and related transactions,
reference  is made  to page 5 and  pages 8  through  12 of the  Company's  Proxy
Statement  delivered to  stockholders  in connection  with the Annual Meeting of
Stockholders  to be held on May 26,  1999,  which  information  is  incorporated
herein by reference.


<PAGE>


                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)(1)   Financial Statements

     Reference is made to the Index to Financial  Statements under Item 8 in
     Part II hereof,  where these documents are listed.

   (2)   Financial Statement Schedule

     Note:  Schedules  are  omitted  as not  applicable,  not  required,  or
     the information is included in the financial statements or notes thereto.

   (3)   Executive Compensation Plans and Arrangements

     The following executive  compensation plans or arrangements are required to
be filed, and are filed, as exhibits to this Form 10-K:

EXHIBIT
NUMBER                               DESCRIPTION
-------   ----------------------------------------------------------------------
10.1    - Neurogen Corporation Stock Option Plan, as amended (incorporated by
          reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal
          year ended December 31, 1991).

10.2    - Form of Stock Option  Agreement  currently used in connection with the
          grant  of  options  under  Neurogen   Corporation  Stock  Option  Plan
          (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K
          for the fiscal year ended December 31, 1992).

10.3    - Neurogen  Corporation   1993  Omnibus   Incentive  Plan,  as  amended
         (incorporated by  reference to Exhibit 10.3 to the Company's Form 10-K
         for the fiscal year ended December 31, 1993).

10.4    - Form of Stock Option  Agreement  currently used in connection with the
          grant of options under  Neurogen  Corporation  1993 Omnibus  Incentive
          Plan (incorporated by reference to Exhibit 10.4 to the Company's Form
          10-K for the fiscal year ended December 31, 1993).

10.5    - Neurogen  Corporation  1993  Non-Employee  Directors  Stock  Option
          Program  (incorporated  by reference to Exhibit 10.5 to the Company's
          Form 10-K for the fiscal year ended December 31, 1993).

10.6    - Form of Stock Option  Agreement  currently used in connection with the
          grant  of  options  under  Neurogen   Corporation  1993   Non-Employee
          Directors Stock Option Program  (incorporated  by reference to Exhibit
          10.6 to the Company's Form 10-K for the fiscal year ended December 31,
          1993).

10.7    - Employment  Contract  between the Company  and Harry H.  Penner,  Jr.,
          dated as of October 12, 1993  (incorporated  by  reference  to Exhibit
          10.7 to the Company's Form 10-K for the fiscal year ended December 31,
          1993).

10.8    - Employment Contract between the Company and John F. Tallman, dated as
          of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the
          Company's Form 10-Q for the quarterly period ended September 30,
          1994).


 (4) Exhibits

EXHIBIT
NUMBER                               DESCRIPTION
-------   ----------------------------------------------------------------------
3.1    -  Restated Certificate of Incorporation, filed June 17, 1994.

3.2    -  By-Laws, as amended (incorporated by reference to Exhibit 3.6 to the
          Company's Form 10-K for the fiscal year ended December 31, 1993).

10.1   -  Neurogen Corporation Stock Option Plan, as amended (incorporated by
          reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal
          year ended December 31, 1991).

10.2    - Form of Stock Option  Agreement  currently used in connection with the
          grant  of  options  under  Neurogen   Corporation  Stock  Option  Plan
          (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K
          for the fiscal year ended December 31, 1992).

10.3    - Neurogen   Corporation   1993  Omnibus   Incentive  Plan,  as  amended
          (incorporated by reference to Exhibit 10.3 to the Company's Form 10-K
          for the fiscal year ended December 31, 1993).

10.4    - Form of Stock Option  Agreement  currently used in connection with the
          grant of options under  Neurogen  Corporation  1993 Omnibus  Incentive
          Plan (incorporated by reference to Exhibit 10.4 to the Company's Form
          10-K for the fiscal year ended December 31, 1993).

10.5    - Neurogen Corporation 1993 Non-Employee  Directors Stock Option Program
          (incorporated  by reference to Exhibit 10.5 to the Company's Form 10-K
          for the fiscal year ended December 31, 1993).

10.6    - Form of Stock Option  Agreement  currently used in connection with the
          grant  of  options  under  Neurogen   Corporation  1993   Non-Employee
          Directors Stock Option Program  (incorporated  by reference to Exhibit
          10.6 to the Company's Form 10-K for the fiscal year ended December 31,
          1993).

10.7    - Employment  Contract  between the Company  and Harry H.  Penner,  Jr.,
          dated as of October 12, 1993  (incorporated  by  reference  to Exhibit
          10.7 to the Company's Form 10-K for the fiscal year ended December 31,
          1993).

10.8    - Employment Contract between the Company and John F. Tallman,  dated as
          of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the
          Company's Form 10-Q for the quarterly period
          ended September 30, 1994).

10.9    - Open-End Mortgage Deed and Security  Agreement between the Company and
          Orion   Machinery   &   Engineering   Corp.,   dated  March  16,  1989
          (incorporated by reference to Exhibit 10.15 to Registration Statement
          No. 33-29709 on Form S-1).

10.10   - Form of Proprietary Information and Inventions Agreement(incorporated
          by reference to Exhibit 10.31 to Registration Statement No. 33-29709
          on Form S-1).

10.11   - Warrant to Purchase 47,058 Shares of Common Stock to MMC/GATX
          Partnership No. I, dated February 20, 1991 (incorporated by reference
          to Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended
          December 31, 1990).

10.12   - Collaborative  Research  Agreement  and License and Royalty  Agreement
          between  the  Company  and  Pfizer  Inc,  dated as of  January 1, 1992
          (confidential  treatment  requested)  (incorporated  by  reference  to
          Exhibit  10.35 to the  Company's  Form 10-K for the fiscal  year ended
          December 31, 1991).


10.13   - License  Agreement  between  the Company  and the  National  Technical
          Information  Service,  dated as of  January 1, 1992  (incorporated  by
          reference to Exhibit 10.36 to the Company's Form 10-K for the fiscal
          year ended December 31, 1991).

10.14   - Cooperative Research and Development Agreement between the Company and
          the  National  Institutes  of  Health,  dated as of January  21,  1993
          (incorporated by reference to Exhibit 10.37 to the Company's Form 10-K
          for the fiscal year ended December 31, 1991).

10.15   - Letter Agreement between the Company and Barry M. Bloom, dated January
          12, 1994  (incorporated by reference to Exhibit 10.25 to the Company's
          Form 10-K for the fiscal year ended December 31, 1993).

10.16   - Letter  Agreement  between the Company and Robert H. Roth, dated April
          14, 1994  (incorporated by reference to Exhibit 10.26 to the Company's
          Form 10-K for the fiscal year ended December 31, 1994).

10.17   - Collaborative  Research  Agreement  and License and Royalty  Agreement
          between  the  Company  and  Pfizer  Inc,  dated  as of  July  1,  1994
          (confidential  treatment  requested)  (incorporated  by  reference  of
          Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended
          June 30, 1994).

10.18   - Stock  Purchase  Agreement  between the Company and Pfizer dated as of
          July  1,  1994  (incorporated  by  reference  to  Exhibit  10.2 to the
          Company's Form 10-Q for the quarterly period ended June 30, 1994).

10.19   - Registration Rights and Standstill Agreement among the Company and the
          Persons and  Entities  listed on Schedule I thereto,  dated as of July
          11, 1994 (incorporated by reference to Exhibit 10.29 to the Company's
          Form 10-Q for the quarterly period ended September 30, 1994).

10.20   - Collaboration  and License  Agreement and Screening  Agreement between
          the Company and Schering-Plough  Corporation  (confidential  treatment
          requested) (incorporated by reference to Exhibit 10.1 to the Company's
          Form 8-K dated July 28, 1995).

10.21   - Lease Agreement between the Company and Commercial Building Associates
          dated as of August 30,  1995  (incorporated  by  reference  to Exhibit
          10.27 to the Company's Form 10-Q for the quarterly period ended
          September 30, 1995).

10.22   - Collaborative  Research Agreement between the Company and Pfizer dated
          as  of   November   1,   1995   (confidential   treatment   requested)
          (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
          dated November 1, 1995).

10.23   - Development and  Commercialization  Agreement  between the Company and
          Pfizer dated as of November 1, 1995 (confidential treatment requested)
          (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K
          dated November 1, 1995).

10.24   - Stock  Purchase  Agreement  between the Company and Pfizer dated as of
          November  1, 1995  (incorporated  by  reference  to Exhibit  10.3 of
          the Company's Form 8-K dated November 1, 1995).

10.25   - Licensing  Agreement  dated as of November 25, 1996  between  American
          Home Products Corporation,acting through its Wyeth-Ayerst Laboratories
          Division, and Neurogen Corporation  (CONFIDENTIAL TREATMENT REQUESTED)
         (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
          dated March 31, 1997).

10.26   - Stock  Purchase  Agreement  dated  as of  November  25,  1996  between
          American Home Products  Corporation,  acting through its  Wyeth-Ayerst
          Laboratories   Division,   and  Neurogen   Corporation   (CONFIDENTIAL
          TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
          the Company's Form 8-K dated March 31, 1997).

16      - Letter re Change in Certifying Accountant (incorporated by reference
          to Exhibit 16 of the Company's Form 8-K dated December 17, 1998.

23.1    - Consent of Price Waterhouse Coopers LLP, Independent Auditors.

23.2    - Consent of Ernst & Young LLP, Independent Auditors.

24.1    - Powers of Attorney of Frank C. Carlucci, Robert H. Roth, John Simon,
          John F. Tallman, Robert M. Gardiner, Robert N. Butler, Jeffrey J.
          Collinson, Suzanne Woolsey, Mark Novitch and Barry M. Bloom.

27      - Financial Data Schedule.

99.1    - Proxy Statement for the Annual Meeting of Stockholders to be held on
          May 26, 1999 (to be filed with the Commission on or before April 30,
          1999).


   (b)   Reports on Form 8-K

     On  December  17,  1998 a Form 8-K was  filed  disclosing  a change  in the
Company's auditors.

<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                   NEUROGEN CORPORATION

                                                   /S/ HARRY H. PENNER, JR.
                                               By:______________________________
                                                     Harry H. Penner, Jr.
                                           President and Chief Executive Officer


Date: March 31, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated and on the dates indicated:


       SIGNATURE                    TITLE                              DATE
      -----------                  -------                            ------


            *
___________________________  Chairman of the Board                March 31, 1999
     Frank C. Carlucci         and Director





 /S/ HARRY H. PENNER, JR.
___________________________  President, Chief Executive           March 31, 1999
    Harry H. Penner, Jr.       Officer and Director
                               (Principal Executive
                               Officer)


             *
___________________________  Executive Vice President,            March 31, 1999
    John F. Tallman, Ph.D.     Secretary and Director



  /S/ STEPHEN R. DAVIS
___________________________  Vice President--Finance,             March 31, 1999
     Stephen R. Davis          Chief Financial Officer
                               and Treasurer (Principal
                               Financial and Accounting
                               Officer)


             *
_________________________   Director                              March 31, 1999
   Robert H. Roth, Ph.D.



             *
__________________________  Director                              March 31, 1999
   Jeffrey J. Collinson



             *
_________________________  Director                               March 31, 1999
        John Simon



             *
_________________________  Director                               March 31, 1999
     Robert M. Gardiner




             *
_________________________  Director                               March 31, 1999
  Robert N. Butler, M.D.




________________________  Director                                March 31, 1999
      Suzanne Woolsey



             *
________________________  Director                                March 31, 1999
     Barry M. Bloom



             *
________________________  Director                                March 31, 1999
      Mark Novitch



     /S/ HARRY H. PENNER, JR.
*By:____________________
Harry H. Penner, Jr., Attorney-in-Fact



<PAGE>






                                                               EXHIBIT 23.1

                         Consent of Independent Auditors

     We hereby  consent to the  incorporation  by reference in the  Registration
Statements  (Forms S-8 No.  33-43441,  33-43541 and 33-81266)  pertaining to the
Neurogen  Stock  Option  Plan,  the  1993  Omnibus  Incentive  Plan and the 1993
Non-Employee Directors Plan of Neurogen Corporation of our report dated February
16, 1999, appearing on page 54 of this form 10-K.


                                            PRICEWATERHOUSECOOPERS LLP


  Hartford, Connecticut
  March 31, 1999


<PAGE>





                                                              EXHIBIT 23.2
                        Consent of Independent Auditors

  The Board of Directors
  Neurogen Corporation:

     We consent to the use of our report dated  February  13, 1998,  included in
the  Annual  Report  (Form  10-K) of  Neurogen  Corporation  for the year  ended
December 31, 1997, with respect to the balance sheet of Neurogen  Corporation as
of December  31,  1997 and the  related  statements  of  operations,  changes in
stockholders'  equity  and cash  flows for each of the two  years in the  period
ended  December 31, 1997 included in this Annual Report (Form 10-K) for the year
ended December 31, 1998.

                                                       ERNST & YOUNG LLP

  Boston, Massachusetts
  February 13, 1998




<PAGE>



                                POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ FRANK C. CARLUCCI
                                                    ----------------------------
                                                       Frank C. Carlucci
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ JOHN F. TALLMAN
                                                    ----------------------------
                                                       John F. Tallman
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ ROBERT H. ROTH, PH.D.
                                                    ----------------------------
                                                       Robert H. Roth, Ph.D.
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ JEFFREY J. COLLINSON
                                                    ----------------------------
                                                       Jeffrey J. Collinson
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ JOHN SIMON
                                                    ----------------------------
                                                       John Simon
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ ROBERT M. GARDINER
                                                    ----------------------------
                                                       Robert M. Gardiner
<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ ROBERT N BUTLER, M D
                                                    ----------------------------
                                                       Robert N. Butler, M.D.

<PAGE>


                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ BARRY M. BLOOM
                                                    ----------------------------
                                                        Barry M. Bloom
<PAGE>



                               POWER OF ATTORNEY

     KNOW ALL YE PERSONS BY THESE  PRESENTS,  that the  undersigned  does hereby
make,  constitute and appoint Harry H. Penner,  Jr., and Stephen R. Davis,  each
his   attorney-in-fact   and  agent   with  full  power  of   substitution   and
resubstitution  for  him  and in his  name,  place  and  stead,  in any  and all
capacities,  to execute for him and on his behalf an Annual  Report  pursuant to
Section 13 of the Securities and Exchange Act of 1934, as amended,  on form 10-K
relating to the fiscal year ended  December  31, 1998,  of Neurogen  Corporation
(the  "Company"),  and any and all amendments to the foregoing  Annual Report on
Form 10-K,  which  amendments may make such changes in the Annual Report on Form
10-K as such  attorney-in-fact  deems  appropriate,  and any other documents and
instruments  incidental thereto, and to file the same, with all exhibits thereto
and all  documents in connection  therewith,  with the  Securities  and Exchange
Commission and the National  Association of Securities  Dealers,  Inc., granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes,  may lawfully do or cause to be done by
virtue hereof.

     IN WITNESS  WHEREOF,  the  undersigned  has executed this Power of Attorney
this 8th day of March, 1999.

                                                    /s/ MARK NOVITCH
                                                    ----------------------------
                                                        Mark Novitch