<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, 1997
                                       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  $208,062,000  as of March 2, 1998,  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 2, 1998, the  registrant had 14,397,841  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 27, 1998, 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
neuropharmaceutical  company  engaged in the discovery and  development of a new
generation  of  drugs  to  treat  psychiatric  and  neurological   disorders  by
regulating  nerve  cell  (neuron)  communication  in the brain.  The  Company is
developing  "receptor subtype specific" drugs based on its expertise in neuronal
communication.  The Company  believes that receptor subtype specific drugs offer
the  potential for  equivalent or improved  efficacy and fewer side effects than
currently marketed psychotherapeutic drugs, most of which interact with multiple
receptor subtypes. The Company leverages its resources,  where it believes it to
be advantageous,  through collaborations with large pharmaceutical companies for
advanced clinical development and commercialization of its products. The Company
has  three   existing   collaborations   with  Pfizer  Inc  ("Pfizer")  and  one
collaboration  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
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, enable it to identify and
develop  compounds more quickly and efficiently than it could using  traditional
drug   discovery   techniques.   Neurogen   has   developed   a   portfolio   of
neuropharmaceutical drug candidates designed to treat anxiety, obesity and other
metabolic   disorders,   epilepsy,   sleep  disorders,   cognitive   impairment,
schizophrenia,  depression and stress disorders.  Industry analysts estimate the
worldwide market for currently marketed  neuropharmaceuticals for such disorders
to be in excess of $19.7 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

     The human  central  nervous  system  (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 epilepsy. Such disruption can result from abnormal release
of  neurotransmitters,  aberrant  signaling  between  nerve cells or  heightened
sensitivity of receptors to normal levels of neurotransmitters.

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

     For  many  years,  it was  commonly  believed  that  each  neurotransmitter
interacted  with one or at most  two  types of  receptors.  In the last  decade,
however,  scientists,  including current members of Neurogen's scientific staff,
have discovered that each neurotransmitter 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.  Receptor
subtypes  differ  slightly  from  other  members  of  their  family,  are  often
distributed   differently   throughout  the  brain  and  may  control  different
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.

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

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

     Almost every  psychotherapeutic  drug currently on the market interacts not
with one specific receptor subtype,  but with many or all members of one or more
receptor families.  Neurogen believes that this  nonselectivity is the principal
cause of the side effects,  including  sedation and addiction,  associated  with
such drugs.  The  discovery  of receptor  subtypes  provides  opportunities  for
Neurogen to design  drugs which  target  specific  receptor  subtypes.  Neurogen
believes that such  compounds  offer the  potential  for  equivalent or improved
efficacy with fewer side effects than drugs currently on the market.

 BUSINESS STRATEGY

     Neurogen's  mission  is to be a  leader  in  the  design,  development  and
commercialization  of  psychotherapeutic  drugs.  The  Company  focuses its drug
discovery  programs on small molecule  compounds that target  specific  receptor
subtypes implicated in a variety of neuropsychiatric  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 CNS area to develop a diverse  portfolio of drug candidates
to treat  common  disorders,  including  anxiety,  obesity  and other  metabolic
disorders,  epilepsy,  sleep  disorders,  cognitive  impairment,  schizophrenia,
depression and stress disorders. 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,  pharmacokinectic  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 new  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  is  employing  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 drug leads in a number of Neurogen's
programs,   including  NPY  for  obesity,  galanin  for  obesity  and  cognition
enhancement, CRF for obesity and GLP1 for Type II diabetes. In addition, as part
of its collaboration with  Schering-Plough,  Neurogen has granted limited access
to a portion of its combinatorial  libraries in return for $3.0 million per year
for two years. Neurogen also has leveraged the AIDD program in an agreement with
Tularik, Inc., a private biotechnology  company.  Under the agreement,  Neurogen
gains access to selected  Tularik  screening  methodology,  while  Tularik gains
access  to  a  portion  of  Neurogen's  combinatorial  chemistry  library.  Both
companies are eligible to receive milestone  payments and royalties based on the
clinical development and ultimate commercialization of products discovered under
the collaboration.

     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  gradually  develop 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
molecular  biology,   medicinal   chemistry  and  neurobiology  to  develop  new
psychotherapeutic compounds. The Company believes that its scientists possess an
advanced  understanding  of the  biochemistry  of the  brain  and  its  possible
connection to human behavior and that this understanding has enabled the Company
to develop a portfolio of compounds  which include  product  candidates  for the
treatment of anxiety,  obesity and other metabolic  disorders,  epilepsy,  sleep
disorders, cognitive impairment, schizophrenia, depression and stress 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.  To  date,  Neurogen  has  utilized  its AIDD  technologies  to
discover  and/or optimize  chemical leads in its NPY, CRF,  Galanin and Glucagon
Like Peptide-1 (GLP1) research efforts.  Through these discoveries  Neurogen has
established  its programs to develop drugs working  through these  mechanisms to
treat disorders such as obesity,  stress,  depression,  cognition impairment and
Type II diabetes.  The Company has also applied its AIDD  technologies to extend
its portfolios of drug candidates in its GABA and Dopamine programs.

     Neurogen's   drug   discovery   technologies   include   both   traditional
pharmaceutical   discovery   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 libraries of more than 1,000,000 compounds
in 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  a  fraction  of the 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 disorders  being targeted by the Company and
the  current  status  of  Neurogen's  programs  with  respect  to each of  these
disorders.

 DISORDER                   RECEPTOR TARGET            PROGRAM STATUS                COMMERCIAL RIGHTS
<S>                              <C>                          <C>                           <C>
Anxiety                     GABA receptor subtypes     NGD 91-2 Phase I              Pfizer (Neurogen royalty)
                                                       following NGD 91-1
                                                       preliminary test of
                                                       novel receptor binding
                                                       through Phase I clinical
                                                       trials (1)

Obesity and other           NPY/Receptor subtypes      Evaluation of new             Pfizer (Neurogen royalty,
eating disorders                                       preclinical candidates        manufacturing and profit
                                                       while exploring potential     sharing options)
                                                       side effect of NGD 95-1
                                                       in Phase I (1) clinical
                                                       trials

Seizure disorders           NMDA receptors and         Phase I clinical trials       Wyeth-Ayerst (Neurogen
                            sodium channels            of ADCI (1)                   and NIH royalty)

Insomnia                    GABA receptor subtypes     Preclinical development (2)   Pfizer (Neurogen royalty)

Dementia, cognition         GABA receptor subtypes     Preclinical development (2)   Pfizer (Neurogen royalty)
deficits

Schizophrenia               Dopamine D4 receptor       Evaluation of new             Schering-Plough (Neurogen
                            and D4 + D2 receptors      preclinical candidates        royalty and manufacturing
                                                       following Phase I (1)         option)
                                                       trials of NGD 94-4 and
                                                       NGD 94-1

Depression and stress-      CRF1 receptor              Preclinical development (2)   Neurogen
related disorders

Obesity, cognition          Galanin receptor           Leads identified (3)          Neurogen
deficits and pain

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

Obesity                     CRF receptor               Leads identified (3)          Neurogen

Depression                  NPY2 receptor              Leads identified (3)          Neurogen
------------
(1) See  "--Government  Regulation"  for a  description  of the  phases  of
    clinical trials.
(2) "Preclinical  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 preclinical development.
</TABLE>
<PAGE>

     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  $700 mllion worldwide and $400 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 and insomnia,  associated with currently  available  medications,
Neurogen  believes that an eating  disorder  therapy  without these side effects
would have the ability to penetrate and potentially  expand the market for these
drugs.  In  recognition  of  health  risks  associated  with  obesity,  the  FDA
transferred  the review of  anti-obesity  drugs to its  Endocrine  and Metabolic
Division  in 1994.  This move,  together  with its  proposed  FDA  Guidance  for
Weight-Control Drugs, suggests that the FDA is increasingly viewing obesity as a
disorder  which may require  chronic  treatment.  These  events  have  increased
interest  in  the  development  of  improved   treatments  for  obesity  in  the
pharmaceutical industry.

     NPY. 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.   Research   (both  at  Neurogen  and  at  other
institutions)  has  demonstrated  that  the   neurotransmitter  NPY  is  closely
connected  with animal  feeding  behavior and appetite  control.  In preclinical
studies,  injection  of NPY  into  the  hypothalamic  region  of the  brain  has
stimulated  animals  that have just eaten to eat again.  Studies  indicate  that
animals develop no tolerance for NPY and that those  chronically  exposed to NPY
(over a period of days to weeks) become  obese.  Independent  of these  studies,
there has  developed a greater  understanding  of the  existence and role of NPY
receptor  subtypes  which has  stimulated  interest in pursuing an  NPY-mediated
treatment of 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 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.  The first of these  compounds,
NGD 95-1,  entered Phase I clinical  trials in March 1996. In Phase I studies in
which  successive  groups of men and women received  single doses of NGD 95-1 at
escalating  levels,  and in a Phase I  study  where  groups  of  overweight  but
otherwise  healthy  men and  women  received  multiple  doses of NGD 95-1 over a
two-week  period,  the compound was shown to be safe and well tolerated across a
broad dose range. Under Pfizer auspices, Neurogen began a maximum tolerated dose
study in the fall of 1997 to evaluate the safety and  pharmacokinetics of a high
dose of NGD 95-1 over a four week period. Following approximately three weeks of
dosing,  a minority  of  subjects  receiving  NGD 95-1  experienced  significant
elevation of certain liver enzymes.  Although the affected subjects exhibited no
symptoms, the study was stopped. No such changes were seen in subjects receiving
placebo, nor were clinically significant changes in liver function seen when the
same and lower doses were given in earlier  Phase I tests.  These  findings were
unexpected based on long-term drug safety testing in animal studies. Neurogen is
currently  investigating  the mechanism  which  triggered the elevation in liver
enzymes,  as well as  concurrently  evaluating  additional  NPY  antagonists  as
follow-on candidates for clinical testing.

     In November 1995 Neurogen entered into the Collaborative Research Agreement
and the Commercialization and Development  Agreement,  each dated as of November
1,  1995  between  the  Company  and  Pfizer  (collectively,  the  "1995  Pfizer
Agreement") to develop and commercialize with Pfizer drugs to treat NPY-mediated
disorders,  including obesity and eating  disorders.  All drug candidates in the
Company's NPY program  (with the exception of compounds  which work through NPY2
for the  treatment  of  depression),  are subject to the 1995 Pfizer  Agreement.
Pursuant to this  agreement,  Neurogen is  responsible  for  conducting  Phase I
trials under Pfizer auspices and Pfizer will be responsible for conducting Phase
II and later  trials.  While  Neurogen  and Pfizer  share  clinical  development
responsibilities,   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 obesity drug candidates in collaboration with
Pfizer. See "Collaborative Research and Licensing Agreements."

     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,  particularly  the  eating  of fats,  in  laboratory  animals.  Neurogen
believes  that a drug  which  blocks the  activity  of  galanin  could  decrease
appetite.  Through  its AIDD  program,  Neurogen  has  discovered  a  number  of
compounds  that block a galanin  receptor  and is in process of testing the most
attractive  compounds  in animal  models.  Neurogen  has, to date,  retained all
commercial rights to its galanin program.

     CRF. As another  approach to treating  obesity,  Neurogen has established a
program to explore the utility of and  develop  drugs which  modulate a receptor
subtype of the neurotransmitter  Corticotrophin  Releasing Factor (CRF). Studies
conducted at Neurogen have found that this CRF receptor  subtype is found in the
hypothalamus,  an area of the brain  associated  with  feeding.  Also,  academic
research has studied naturally  occuring  peptides which bind  preferentially to
this CRF receptor subtype and which suppress appetite.  Neurogen believes that a
drug which  potentiates  the effects of the naturally  occuring  peptides at the
receptor subtype could decrease appetite. Through its AIDD program, Neurogen has
discovered a number of small  molecule  compounds  that  partially  agonize,  or
mimic, the effects of the CRF  neurotransmitter at this CRF receptor subtype and
is currently  evaluating  these compounds in animal models and optimizing  their
pharmacology.  Neurogen has, to date,  retained all commercial rights to its CRF
program.

     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  $2.9
billion  worldwide  and  $1.4  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 cells in the pancreas 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 early in vitro testing suggest partially agonize,  or mimic, the
effects of GLP1 at the GLP1 receptor. The Company is currently in the process of
further testing and optimizing  these compounds to select  compounds for testing
in animal models.  Neurogen has, to date,  retained all of its commercial rights
in its GLP1 program.

     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 $2.3 billion worldwide and $800 million 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."

     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.  Two of these  candidates,  NGD
91-2 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,  which appears to
have pharmacokinetic  properties which are superior to NGD 91-1, is currently in
a Phase I-B clinical study.

     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 any  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  which
appears to have  pharmacokinectic  properties  that are superior to NGD 91-1 and
which  demonstrates  the novel GABA binding  activity which the Company believes
will relieve anxiety while reducing the potential for adverse side effects. This
determination  was made  following the completion of later stage Phase I studies
to establish the minimum blood levels at which NGD 91-1 is effective,  the blood
levels  achieved by NGD 91-1 and the testing of an alternate  formulation of NGD
91-1. While NGD 91-1 will remain subject to the collaboration, NGD 91-2 appears,
based on animal and early human  studies,  to be longer acting than NGD 91-1 and
to have other pharmacokinetic properties which are superior to NGD 91-1. In July
1997,  Pfizer commenced human testing of NGD 91-2 in a Phase I clinical trial in
which groups of subjects received a single dose of NGD 91-2. Each group received
a higher dose than the preceding  group.  Results of this study  indicate it was
safe and  well-tolerated  across the broad dose range  tested.  In October 1997,
Pfizer  commenced  a Phase I trial  of NGD 91-2 in which  successive  groups  of
subjects have received  multiple  doses of the drug  candidate  over a period of
days. Pfizer is currently collecting and analyzing data from this study.

     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 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 NGD 91-2 and
NGD 91-1 but which  belong to  different  chemical  series  than either of these
compounds.   Neurogen  has  filed  patent   applications  with  respect  to  the
composition  of NGD  91-2 and NGD 91-1 and  other  compounds  in its  anxiolytic
program. See "Collaborative Research and Licensing Agreements."

     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  $3.1 billion
worldwide and $1.7 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.   In
collaboration with  Schering-Plough,  the Company is pursuing the development of
compounds which selectively  block the D4 receptor  subtype,  as described below
and the  development  of  broader  acting  compounds,  such as  compounds  which
selectively  block the D2 as well as D4 receptor  subtypes.  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") pursuant to which
the Company and  Schering-Plough aim to develop and commercialize drugs to treat
a  variety  of  dopamine  mediated  disorders,   including  schizophrenia.   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 is similar 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  specific  D4  antagonist  might  be  an  effective
antipsychotic  agent and, because of its specificity,  might have a reduced side
effect profile compared to currently  marketed drugs.  Neurogen  scientists have
identified  several  chemical  series  which  contain  small  molecule,   orally
administered compounds,  which preclinical research has indicated are potent and
highly  selective  antagonists  for  the  D4  receptor  subtype.  One  of  these
compounds, NGD 94-4, was the subject of a Phase I-A clinical study in the spring
of 1997,  performed  by  Schering-Plough.  In this study,  successive  groups of
subjects were administered  single doses of escalating levels of NGD 94-4. While
the drug was safe and  well-tolerated  across  a broad  dose  range,  the  study
indicated  that NGD 94-4 is more  quickly  metabolized  in humans  than had been
expected,   based  on  the   preclinical   studies   conducted  in  primates  by
Schering-Plough.  The rapid  metabolism of NGD 94-4  indicates that NGD 94-4 may
not  have  the  desirable   pharmacokinetic   profile  for  continued   clinical
development.   Together,  Neurogen  and  Schering-Plough  have  been  evaluating
additional D4 antagonist candidates.

     Because  schizophrenia  may not be a  single  disease,  but a  syndrome  or
spectrum  of  diseases, the Company  believes  that a single  receptor  subtype
specific antipsychotic drug may not provide adequate therapy for all patients. A
complementary  alternative  to a D4  selective  agent,  would  be  a  drug  that
possessed  activity at a greater  number of, but not all,  receptor  subtypes to
provide broad  therapy for a greater  number of patients with fewer side effects
than currently marketed drugs to treat schizophrenia.  Neurogen has identified a
series of compounds with a balance of dopamine receptor blocking  activities (at
D2, D3 and D4 receptors) and other related receptor blocking activities. In this
regard, the Company,  together with Schering-Plough,  is investigating  selected
compounds with selectively broader receptor blocking  properties.  These include
compounds which selectively block 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
preclinical development or earlier stage research,  could potentially be used to
treat a spectrum of disorders associated with schizophrenia.

     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  is  developing  alternative  antipsychotic
candidates in collaboration with Schering-Plough.

     EPILEPSY AND SEIZURE  DISORDERS.  Approximately  two million  people in the
United  States have  epilepsy.  Industry  analysts  estimate the current  annual
market for  anticonvulsants  (drugs that  prevent or arrest  convulsions)  to be
approximately $2.8 billion worldwide and over $1.7 billion in the United States.

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

     In 1992,  Neurogen  entered into a licensing and  cooperative  research and
development  agreement  ("CRADA")  with  the  NIH  which  provided  the  Company
exclusive  access  to  a  library  of  compounds  for  evaluation  as  potential
anticonvulsants.  In preclinical  trials conducted by the Company,  one of these
compounds,  ADCI,  exhibited effective  anticonvulsant  activity in animal model
systems used to predict  efficacy and  potential  therapeutic  value in treating
epilepsy. The Company believes ADCI might be an effective anticonvulsant because
it possesses  two  important  modes of action:  blocking  the NMDA  receptor and
antagonism  of  voltage-dependent  sodium  channels,  which is  important in the
treatment of seizures.  Each of these  defined  biological  activities  has been
associated  with the activity of ADCI in different  animal  seizure  models.  In
preclinical animal models, and in contrast to many anticonvulsants  currently on
the market,  ADCI shows a therapeutic effect at doses  substantially below doses
which cause side effects.

     In November 1996,  Neurogen  entered into an Agreement dated as of November
25, 1996,  between the Company and American  Home Products  Corporation,  acting
through its  Wyeth-Ayerst  Laboratories  division (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 related
compounds.  In July 1997, American Home Products commenced human testing of ADCI
in a Phase I clinical  trial in which groups of subjects  received a single dose
of NGD 91-2. Each group received a higher dose than the preceding group. Results
of this study  indicate that ADCI was safe and well  tolerated  across the broad
dose range tested.  Under the American Home  Products  Agreement,  American Home
Products will conduct all future research and development  activities  under the
program and has the right to determine when to advance compounds in the clinical
process,  if at all.  Should  American Home Products  elect to continue  further
Phase I testing of ADCI,  the Company  believes it would next  conduct  multiple
dosing studies in which ADCI would be administered over a period of several days
to further access the safety and pharmokinetic  properties of the compound.  See
"Collaborative  Research and Licensing Agreements." As with all drugs that enter
clinical  testing,  no  assurances  can be given  that  ADCI  will  successfully
complete  the  clinical  trials or  advance  through  the  regulatory  approvals
process.

     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 $480 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 and tested  numerous of these  compounds in animals.  The most
advanced of these compounds,  NGD 96-1 is currently in preclinical  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 $1.2 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  Company
believes that the  benzodiazepines,  which  produce  their desired  anti-anxiety
effect by  enhancing  the  activity  of certain  GABA  receptors,  cause  memory
impairment  and other side  effects  due to their  nonselective  binding to GABA
receptor subtypes.  Accordingly, the Company believes that inhibition of certain
GABA receptor  subtypes in the cortex and  hippocampal  regions of the brain may
enhance the storage and retrieval of memory. Neurogen has discovered a number of
compounds  that  inhibit  activity at these GABA  receptor  subtypes  and tested
numerous of these  compounds  in  animals.  Currently,  Neurogen  and Pfizer are
evaluating  the most  advanced  of  these  compounds,  NGD  97-1 in  preclinical
testing. 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 has
discovered  a number of  compounds  that block a galanin  receptor and is in the
process of testing the most attractive compounds in animal models. 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 $7.8 billion worldwide and over $4.9 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.  Through
its AIDD  program,  Neurogen  has  discovered  compounds  which  block  the CRF1
receptor  subtype.  This  receptor  subtype  has been  linked to stress  through
industry  research and studies  conducted at Neurogen  which found that the CRF1
receptor subtype is found in areas of the brain involved in the stress response.
Moreover, industry studies have also demonstrated that antagonists, or blockers,
of the CRF1 receptor subtype can reduce  indications of stress in animal models.
Through  preclinical  animal  models,  Neurogen  believes  to be  predictive  of
anti-depressant potential. Neurogen has identified several compounds which it is
currently evaluating for clinical testing.

     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.


 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.  In November 1996,  Neurogen  licensed its
commercial  rights to ADCI to  American  Home  Products.  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.

     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 is  entitled,  subject to certain  conditions,  to receive
approximately $2.4 million during the three-year period which commenced November
1, 1995, 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 per year for two additional  one-year periods  depending on whether
and the extent to which  Pfizer  exercises  its  rights to extend  the  research
program  under the  collaboration  beyond  November  1998.  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 has 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  and  may  receive  additional  research  and
development  funding of up to $3.6 million per year depending on whether and the
extent to which  Schering-Plough  exercises  its rights to extend  the  research
program beyond June 1998. Under the Schering-Plough  Agreement,  Schering-Plough
has the option to extend the research program for up to two additional  one-year
periods through June 2000.  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 will 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,  will be entitled to make all  determinations  regarding  any such
efforts. Neurogen received a $750,000 license fee and an equity investment of an
additional  $750,000 for 37,442 shares of Neurogen common stock.  Neurogen could
also receive  additional  equity  investments  and  milestone  payments of up to
approximately $11 million if certain  development and regulatory  objectives are
achieved  regarding  compounds  subject  to the  license  agreement.  In return,
American Home Products  received the exclusive  worldwide license to develop and
market  products  subject to the  license  and  Neurogen  retained  the right to
receive  royalties  based on net sales  levels,  if any.  A portion  of any such
royalties would be payable to 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 fifty-eight issued United States
patents and several foreign patents.  Thirty-four of the Company's issued United
States patents and several pending patent applications  concern the compounds in
its anxiolytic program. Twenty-one of the Company's issued United States patents
and  several   pending  patent   applications   concern  the  compounds  in  its
antipsychotic  program.  The  Company  believes  that it does not  infringe  any
third-party patents and, 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.

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

     In connection with the Pfizer Agreements, 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  preclinical  and clinical
trials.  The Company,  which  manufactures  certain of its  compounds to conduct
preclinical studies, may expand its facilities to produce sufficient  quantities
of compounds for the clinical  stage of  development  in certain  circumstances.
Neurogen  has  focused  its  research  on  developing  compounds  that are small
molecules.   The  Company   believes  these  compounds  are  more  efficient  to
manufacture  and do not require  purification  associated  with certain  protein
compounds.

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

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

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

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

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

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

     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  several  times per year.  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 of the members has served on the Scientific Advisory Board pursuant to
consulting  agreements (the "SAB Agreements")  since 1988, with the exception of
Dr. Nestler, who has served on the Scientific Advisory Board since January 1993.
The SAB Agreements contain  confidentiality  provisions and restrict the members
of the Scientific Advisory Board from competing with the Company for the term of
the agreement and for one year  thereafter.  The SAB Agreements  expire in 1998.
Each member of the Scientific  Advisory Board who is not also an employee of the
Company receives a fee of $15,000 per year for providing  consulting services to
Neurogen at least  fifteen days per year and is eligible to  participate  in the
Neurogen  Corporation 1993 Omnibus  Incentive Plan. All non-employee  members of
the  Scientific  Advisory  Board  are  employed  on a  full-time  basis  by  the
University  and,  accordingly,  devote  only a small  portion  of their  time to
Neurogen. The University has regulations and policies which limit the ability of
such  personnel to act as part-time  consultants  or in other  capacities  for a
commercial enterprise. A change in these regulations or policies could adversely
affect the Company.  Furthermore,  it is possible  that  inventions or processes
discovered  by the outside  members of the  Scientific  Advisory  Board will not
become the property of Neurogen,  but will remain the property of such  persons,
the University or other entities to which the Scientific  Advisory Board members
have obligations.

 HUMAN RESOURCES

     As of December 31, 1997, the Company had 130 full-time employees,  of which
111 persons were scientists and 45 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.

 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

     During the fourth quarter of fiscal year 1997, no matter was submitted to a
vote of stockholders.
<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, preclinical 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.

     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 2, 1998, 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 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
FISCAL 1996:
First Quarter.................................................. 35 1/4  25 1/4
Second Quarter................................................. 34      17 3/4
Third Quarter.................................................. 26 1/2  16 3/4
Fourth Quarter................................................. 28      16 3/4


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

For the Year Ended December 31

                                                     (in thousands, except per share data)
                                                -----------------------------------------------
                                                  1997     1996     1995      1994      1993
<S>                                                <C>      <C>      <C>       <C>       <C>
                                                -------- -------- --------- --------- ---------
Total operating revenues.......................$ 17,979  $ 18,286 $ 26,929  $ 5,789   $ 4,604
Total operating expenses.......................$ 23,276   $17,229 $ 15,585  $12,924   $ 9,036
Net income (loss)..............................$   (257)   $5,894 $ 13,353  $(6,651)  $(3,816)
Net income (loss) per share-basic (1)..........$   (.02)    $ .42   $ 1.19   $ (.70)   $ (.43)
Net income (loss) per share-diluted (1)........$   (.02)    $ .38   $ 1.07   $ (.70)   $ (.43)
Total assets...................................$111,869  $113,869 $104,856  $25,889   $22,704
Long-term debt.................................    $ 74     $ 279    $ 460    $ 620     $ 792
Stockholders' equity...........................$106,918   106,245 $ 98,076  $24,080   $20,771
Weighted average number of shares outstanding-
basic..........................................  14,348    14,145   11,267    9,528     8,962

(1) All per share data has been restated in order to conform 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 one-time  license fees received in
1996 from  Schering-Plough  and American Home Products and from  Schering-Plough
and Pfizer in 1995,  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, 1997, 1996 AND 1995

     The Company's fiscal 1997 operating revenues decreased 1.6 percent to $18.0
million from 1996  operating  revenues of $18.3 million,  a 32 percent  decrease
from fiscal 1995 operating  revenues of $26.9 million.  These  decreases are due
primarily to a decrease in license fees  recognized in each of these years which
was partially offset by an increase in research and development revenues in each
year.

     Neurogen's  license fees of $3.0 million in 1997,  $3.8 million in 1996 and
$17.5   million   in  1995   represent   non-recurring   fees   which,   in  the
above-referenced  years,  have  related to the  granting  of certain  commercial
licenses,  rights and access to  collaborative  partners,  as  described  below.
License fees in 1997  represented  a previously  unearned  $3.0 million fee from
Schering-Plough  for access to a portion of Neurogen's  combinatorial  chemistry
libraries. License fees in 1996 were comprised 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.  License fees in 1995 consisted of a $14.0 million fee from
Schering-Plough  received in connection  with entering into the  Schering-Plough
Agreement  and a $3.5  million  fee from  Pfizer  received  in  connection  with
entering into the 1995 Pfizer Agreement.

     Research  and  development  revenues  of  $15.0  million  for  fiscal  1997
represented a $0.5 million,  or 3.4 percent,  increase over fiscal 1996 research
and development revenues of $14.5 million. This increase was due primarily to an
increase in reimbursements  from Pfizer of certain  development costs in the NPY
obesity  project,  as described  below.  Research and  development  revenues for
fiscal 1996 of $14.5 million represented a $5.1 million, or 54 percent, increase
over  fiscal 1995  research  and  development  revenues  of $9.4  million.  This
increase  was  due  to  the   commencement   of  research   funding   under  the
Schering-Plough Agreement in the third quarter of 1995 and under the 1995 Pfizer
Agreement in the fourth quarter of 1995.  Research and  development  revenues in
each of 1997,  1996, and 1995 include  scheduled  research funding payments from
Pfizer and Schering-Plough,  under separate  collaborations,  to fund Neurogen's
collaborative  research  programs  and,  in the case of  Neurogen's  NPY obesity
collaboration   with  Pfizer,  to  reimburse   Neurogen  under  a  cost  sharing
arrangement for certain expenses associated with human clinical trials conducted
by Neurogen.  The amount of such  reimbursements  have  increased in each of the
respective  years,  but 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  extent  to  which  Pfizer  or
Schering-Plough  elect to extend the research  programs  under their  respective
collaborations.

     Research and  development  costs  increased 41 percent to $19.7 million for
the year  ended  December  31,  1997 as  compared  to the same  period  in 1996.
Research and  development  costs  increased 10 percent to $13.9  million in 1996
compared to $12.6  million in 1995.  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.  Research and  development  costs  represented 85 percent,  81
percent and 81 percent of total operating  expenses for the years ended December
31, 1997, 1996 and 1995, respectively.

     General and administrative  expenses increased 8 percent to $3.6 million in
1997 from $3.3  million in 1996 and 12 percent  from $2.9  million in 1995.  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 $5.0 million in 1997, $4.9 million in 1996 and
$2.3  million  in 1995,  respectively.  The  increase  in 1997 over 1996 was due
primarily  to a higher rate of return on invested  funds while the  increase in
1996 over 1995 was due to a higher level of invested funds.

     The  Company  recognized  a net loss of $0.3  million  for the  year  ended
December  31, 1997,  net income of $5.9 million for the year ended  December 31,
1996 and a net  income of $13.4  million  in 1995.  The net loss in 1997 was due
primarily to an increase in research and development  expenses.  The decrease in
net income in 1996  compared to 1995 is due  primarily  to a decrease in license
fees partially offset by an increase in research and development revenues and an
increase in research and development expenses, all as described above.

LIQUIDITY AND CAPITAL RESOURCES

     At December  31,  1997 and 1996,  cash,  cash  equivalents  and  marketable
securities were in the aggregate $84.2 million and $95.1 million,  respectively.
The decrease in 1997 was due to an increase in capital  spending  and  operating
expenses from an expansion of the company's facility and increased staffing. The
Company's  aggregate level of cash, cash  equivalents and marketable  securities
have  fluctuated  significantly  in the  past and are  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 in each year
from  1992  through  1996 and is  receiving  additional  funding  pursuant  to a
December  1996  extension,  as  described  below.  Neurogen  could also  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, and for which it will pay Neurogen  royalties based upon net sales levels,
if any, for such  products.  As of December 31, 1997,  Pfizer had provided $27.0
million of research funding to the Company pursuant to the 1992 Pfizer Agreement
and $.3 million due to the completion of a clinical  development  milestone,  in
addition to its $13.8 million equity investment in 1992.

     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  and is  receiving
additional  funding  pursuant to a December 1996 extension,  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.  As part of this  second  collaboration,  Pfizer
received  the  exclusive  rights to  manufacture  and  market  GABA-based  sleep
disorder  products for which it will pay Neurogen  royalties  depending upon net
sales levels,  if any. As of December 31, 1997, Pfizer had provided $8.7 million
of research  funding to the Company  pursuant to the 1994 Pfizer  Agreement,  in
addition to its $9.9 million equity investment in 1994.

     In December 1996,  Neurogen and Pfizer extended the research programs under
the 1992 Pfizer  Agreement and 1994 Pfizer Agreement  through 1998.  Pursuant to
the  extension  agreement,  Neurogen  earned $5.4 million in 1997 and expects to
receive  $6.1  million  in 1998 for  research  and  development  funding  of the
Company's  GABA  based  anxiolytic,   cognitive  enhancer  and  sleep  disorders
projects.

     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 21% and  paid a $3.5  million
license  fee. The Company is  scheduled  to receive  approximately  $7.2 million
during  the  three-year  period  which  commenced  November  1,  1995,  to  fund
Neurogen's  neuropeptide Y (NPY) eating disorders  program and may receive up to
an  additional  $2.4 million per year for a fourth and fifth year should  Pfizer
exercise  its option to extend the  research  program  under the  collaboration.
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.  As part of this third 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 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 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  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.  As of December 31, 1997, Pfizer had provided $5.4 million
in research funding (including $.2 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 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 has received an aggregate of approximately $7.2 million during
the two-year  period which commenced June 28, 1995, for research and development
funding  of the  Company's  dopamine  program.  In March  1997,  Schering-Plough
elected to extend the research program under the  Schering-Plough  Agreement for
an  additional  one-year  period,  through June 1998,  and to pay Neurogen  $3.6
million to fund such research.  The Company may receive additional  research and
development  funding of up to $3.6 million per year for two additional  one-year
periods depending on whether and the extent to which  Schering-Plough  exercises
its right to  further  extend  the  research  program  under the  collaboration.
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
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.  As
of December 31,  1997,  Schering-Plough  had  provided  $9.0 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.

     In the fourth  quarter of 1996  Neurogen  entered  into an  agreement  with
American Home Products Corporation, acting through its Wyeth-Ayerst Laboratories
division.  Under the terms of the  agreement  Neurogen  received $0.8 million in
license fees for ADCI, a small  molecule  pharmaceutical  that Neurogen has been
developing for the treatment of epilepsy and related disorders, and $0.8 million
for 37,442  shares of common  stock.  Neurogen  may receive up to an  additional
$11.0  million in the form of license  fees,  equity  investment  and  milestone
payments on world-wide sales of ADCI.

     The Company plans to use its cash balance 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 and the Schering-Plough  Agreement,  will be sufficient to
fund its  current and  planned  operations  through  2000.  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, 1997, the Company had approximately $13.6 million of net
operating  loss  carryforwards  available for federal  income tax purposes which
expire from the years 2004 through  2012.  The Company had  approximately  $11.4
million of Connecticut state tax net operating loss carryforwards as of December
31,  1997 which  expire in the years 1998  through  2002.  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.

     The Company has conducted a review of its computer  systems to identify the
systems  that could be affected by the "Year  2000" issue and is  developing  an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer  programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could  result in system  failures or  miscalculations  to existing  software and
converting  to new software.  While the Company  cannot  accurately  predict any
impact the "Year 2000"  problem may have on third  parties with whom the Company
conducts business,  the Company believes that the cost of making its information
systems "2000 ready" will not be material.


<PAGE>



ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS
                                                                            Page
                                                                            ----
Balance Sheets at December 31, 1997 and 1996...............................36-37

Statements of Operations for the years ended
December 31, 1997,1996 and 1995............................................   38

Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...........................................   39

Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...........................................   40

Notes to Financial Statements..............................................   41

Independent Auditors' Reports..............................................   50



<PAGE>
<TABLE>
<CAPTION>
                                               NEUROGEN CORPORATION

                                                  BALANCE SHEETS


                                                                           December 31
                                                                       -------------------
                                                                         1997      1996
                                                                       --------- ---------
                                                                      (In thousands, except
                                                                         per share data)
<S>                                                                       <C>       <C>
                                Assets
Current Assets:
Cash and cash equivalents............................................. $ 66,924  $ 62,823
Marketable securities.................................................   17,227    32,314
Receivable from corporate partners....................................    1,192       460
Other current assets..................................................    1,122     1,132
                                                                       --------- ---------
Total current assets..................................................   86,465    96,729
Property, plant & equipment:
Land and land improvements............................................      542       523
Building and building improvements....................................   16,377     8,679
Leasehold improvements................................................    4,026     4,005
Equipment.............................................................    8,422     5,903
Furniture.............................................................      484       311
Construction in progress..............................................       -        440
                                                                       --------- ---------
                                                                         29,851    19,861
Less accumulated depreciation and amortization........................    4,950     3,136
                                                                       --------- ---------
Net property, plant and equipment.....................................   24,901    16,725
Other assets, net.....................................................      503       415
                                                                       --------- ---------
                                                                       $111,869  $113,869
                                                                       ========= =========
<PAGE>
                                               NEUROGEN CORPORATION

                                            BALANCE SHEETS--(Continued)
                                                                           December 31
                                                                       -------------------
                                                                         1997      1996
                                                                       --------- ---------
                                                                      (In thousands, except
                                                                         per share data)


              Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses.................................  $ 4,418   $ 3,010
Unearned revenue from corporate partners..............................      200     4,100
Current portion of mortgage payable...................................      205       181
                                                                       --------- ---------
Total current liabilities.............................................    4,823     7,291
Mortgage payable, excluding current portion...........................       74       279
Other compensation....................................................       54        54
                                                                       --------- ---------
Total liabilities.....................................................    4,951     7,624
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 14,390 shares in 1997
and 14,252 in 1996....................................................      360       356
Additional paid-in capital............................................  110,231   108,491
Accumulated deficit...................................................   (2,776)   (2,519)
Deferred compensation.................................................     (894)       -
Unrealized (loss) on marketable securities............................       (3)      (83)
                                                                       --------- ---------
Total stockholders' equity............................................  106,918   106,245
                                                                       --------- ---------
                                                                       $111,869  $113,869
                                                                       ========= =========


                                  See accompanying notes to financial statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                             STATEMENTS OF OPERATIONS

                                                          For the Years Ended December 31
                                                         ---------------------------------
                                                            1997        1996       1995
                                                         ----------- ---------- ----------
<S>                                                          <C>        <C>         <C>
                                                       (In thousands, except per share data)
Operating revenues:
License fees............................................     $3,000     $3,750    $17,500
Research and development................................     14,979     14,536      9,429
                                                         ----------- ---------- ----------
Total operating revenues................................     17,979     18,286     26,929
Operating expenses:
Research and development................................     19,710     13,934     12,646
General and administrative..............................      3,566      3,295      2,939
                                                         ----------- ---------- ----------
Total operating expenses................................     23,276     17,229     15,585
                                                         ----------- ---------- ----------
Operating income (loss).................................     (5,297)     1,057     11,344
Other income (expense):
Investment income.......................................      5,075      4,988      2,353
Interest expense........................................        (35)       (51)       (69)
                                                         ----------- ---------- ----------
Total other income, net.................................      5,040      4,937      2,284
                                                         ----------- ---------- ----------
Income (loss) before provision for income taxes.........       (257)     5,994     13,628
Provision for income taxes..............................        -          100        275
                                                         ----------- ---------- ----------
Net income (loss).......................................      $(257)    $5,894    $13,353
                                                         =========== ========== ==========
Earnings (loss) per share:
Basic...................................................      $(.02)      $.42      $1.19
                                                         ----------- ---------- ----------
Diluted.................................................      $(.02)      $.38      $1.07
                                                         ----------- ---------- ----------
Shares used in calculation of earnings (loss) per share:
Basic...................................................     14,348     14,145     11,267
                                                         ----------- ---------- ----------
Diluted.................................................     14,348     15,449     12,479
                                                         ----------- ---------- ----------





                                  See accompanying notes to financial statements
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                        STATEMENTS OF STOCKHOLDERS' EQUITY

                                                     For the Years Ended December 31, 1997, 1996 and 1995
                                                 ------------------------------------------------------------

                                                                                                     Unrealized
                                                  Common Stock  Additional                           gain (loss)
                                                  -------------   Paid-in  Accumulated   Deferred    on marketable
                                                  Shares Amount   Capital    Deficit   Compensation  securities    Total
                                                  ------ ------ ---------- ----------- ------------  ------------- --------
<S>                                                <C>    <C>       <C>          <C>        <C>          <C>       <C>

                                                                         (In thousands)
Balance at December 31, 1994....................  10,083   $252   $45,608  $(21,766)        -            $(13)     $24,081
Issuance of shares for cash to Pfizer, Inc......     750    19     16,481        -          -             -         16,500
Issuance of shares for cash in public offering..   2,875    72     42,783        -          -             -         42,855
Exercise of stock options.......................     241     6      1,110        -          -             -          1,116
Net income......................................     -      -          -     13,353         -             -         13,353
Tax benefit relating to stock option exercises..     -      -          58        -          -             -             58
Unrealized gain on marketable securities........     -      -          -         -          -             113          113
                                                 ------  ------ ---------- ----------- ------------  ------------- ---------
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
Net income......................................     -       -          -     5,894         -             -          5,894
Tax benefit relating to stock option exercises..     -       -         71        -          -             -             71
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
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
                                                 ====== ====== ========== =========== ============  ============= =========





                                  See accompanying notes to financial statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                               NEUROGEN CORPORATION

                                             STATEMENTS OF CASH FLOWS

                                                                For the Years ended December 31
                                                                --------------------------------
                                                                   1997       1996       1995
                                                                ---------- ---------- ----------
<S>                                                                 <C>        <C>        <C>
                                                                         (In thousands)
Cash flows from operating activities:
Net income (loss)..............................................     $(257)    $5,894    $13,353
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization expense..........................     1,849      1,020        780
(Gain) loss on sale of assets..................................         4        (15)         3
Changes in operating assets and liabilities:
Increase in accounts payable and accrued expenses..............     1,408        999      1,106
Increase in unearned revenue from corporate partners...........    (3,900)       -        4,100
(Increase) decrease in other current assets....................        10         62       (795)
Increase in receivable from corporate partners.................      (732)      (136)      (324)
(Increase) decrease in other assets, net.......................      (110)        67       (325)
                                                                ---------- ---------- ----------
Net cash provided by (used in) operating activities............    (1,728)     7,891     17,898
                                                                ---------- ---------- ----------
Cash flows from investing activities:
Purchase of plant and equipment................................   (10,033)    (6,600)    (2,172)
Purchases of marketable securities.............................   (35,060)   (42,584)   (79,514)
Maturities and sales of marketable securities..................    50,227     75,784     20,054
Proceeds from sale of assets...................................        26        109        -
                                                                ---------- ---------- ----------
Net cash provided by (used in) investing activities............     5,160     26,709    (61,632)
                                                                ---------- ---------- ----------
Cash flows from financing activities:
Exercise of stock options......................................       850      1,629      1,116
Principal payments under mortgage payable......................      (181)      (160)      (141)
Proceeds from sales of common stock, net.......................        -         750     59,355
Principal payments under capital lease obligations.............        -         -          (31)
                                                                ---------- ---------- ----------
Net cash provided by financing activities......................       669      2,219     60,299
                                                                ---------- ---------- ----------
Net increase in cash and cash equivalents......................     4,101     36,819     16,565
Cash and cash equivalents at beginning of year.................    62,823     26,004      9,439
                                                                ---------- ---------- ----------
Cash and cash equivalents at end of year.......................   $66,924    $62,823   $ 26,004
                                                                ========== ========== ==========



                                  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 an emerging
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, 1997 and 1996 were
approximately $66,789,000 and $62,716,000, 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, 1997 and 1996 consist of debt
securities with maturities of three months to five years.  The aggregate cost of
marketable   securities  at  December  31,  1997  and  1996  was   approximately
$17,230,000 and $32,397,000,  respectively.  Realized gains and losses have been
determined by the specific  identification  method. The Company recognized gross
realized  gains of $116,000  and $15,000 in 1997 and 1996,  respectively.  Gross
realized losses were $65,000 and $105,000 in 1997 and 1996, 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.  Leasehold  improvements are amortized over the life
of the lease.

     REVENUE   RECOGNITION--Payments  under  corporate  partner  agreements  are
recorded as earned  based on the  performance  requirements  of the  agreements,
while related costs are expensed as incurred.

     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) which is effective for
both interim and annual  financial  statements  for periods ended after December
15, 1997.  Under Statement 128,  primary EPS computed in accordance with Opinion
15 has been replaced with a simpler  calculation called the 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.  The difference  between the shares used for
the basic and dilutive  calculation was the inclusion of 1,304,000 and 1,211,000
common  equivalent  shares  in  the  dilutive  calculation  in  1996  and  1995,
respectively.

     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  $27,000,000
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, 1997) 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
1997, 1996 and 1995, Neurogen received approximately $3,960,000,  $4,600,000 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
$8,700,000  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.  As part of the  1994  Pfizer
Agreement,  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 1997,
1996  and  1995,  the  Company   received   research  funding  of  approximately
$2,500,000,  $2,379,000 and $2,629,000,  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. Neurogen earned $5,400,000 in 1997 and expects to receive $6,100,000
in 1998 for  research  and  development  funding  of the  Company's  anxiolytic,
cognitive enhancer and sleep programs.  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 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%.  Under such  agreement,  the Company is scheduled to receive an
aggregate  of  approximately  $7,200,000  during  the  three-year  period  which
commenced  November 1, 1995,  to fund  Neurogen's  neuropeptide  Y (NPY)  eating
disorders  program and may receive up to $2,400,000  per year for two additional
one-year  periods,  should  Pfizer  exercise  its option to extend the  research
program under the collaboration.  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 1995  Pfizer
Agreement.  As part of this third  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  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.  As of December 31, 1997, Pfizer had provided $5,400,000 in
research funding (including  $200,000 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  for the right to test
certain of  Neurogen's  combinatorial  chemistry  libraries in selected  non-CNS
assays.  Schering-Plough  also paid an  additional  $3,000,000 in 1996 which was
included  in  unearned  revenues  at  December  31,  1996 for the  right to test
additional libraries and was recognized as revenue in 1997. Neurogen received an
aggregate of approximately $7,200,000 during the two-year period which commenced
June 28, 1995, for research and  development  funding of the Company's  dopamine
program. In March 1997,  Schering-Plough  elected to extend the research program
under the Schering-Plough  Agreement for an additional one-year period,  through
June 1998. Neurogen received an additional  $1,800,000 from this extension as of
December 31, 1997. The Company may receive  additional  research and development
funding  of up to  $3,600,000  per  year  for two  additional  one-year  periods
depending on whether,  and the extent to which,  Schering-Plough  exercises  its
right to extend the research  program under the  collaboration.  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 November  1996,  Neurogen  entered into an agreement  with American Home
Products.  Under the arrangement Neurogen may receive up to $12.5 million in the
form of license fees, equity investments and milestone payments for licensing to
American Home Products its world-wide  commercial rights to a class of compounds
including  ADCI,  a  small  molecule   pharmaceutical  that  Neurogen  has  been
developing  for  the  treatment  of  epilepsy  and  related  disorders.  In  the
agreement,  Neurogen  retained the right to receive  royalties on net sales,  if
any, a portion of which  royalties  would be paid to the National  Institutes of
Health, from whom Neurogen licensed the rights to ADCI.

3.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts  payable and accrued  expenses  at December 31 are  summarized  as
follows (in thousands):
                        1997   1996
                       ------ ------
Accounts payable...... $3,374 $2,280
Accrued compensation..  1,044    730
                       ------ ------
                       $4,418 $3,010
                       ====== ======
4.   LONG-TERM DEBT AND LEASE OBLIGATIONS

     At December 31, 1997, the Company had a $279,000  mortgage  payable on, and
secured by, its Branford,  Connecticut office and research facility,  payable in
monthly  installments over ten years. The interest rate is adjusted quarterly to
the prime rate plus 1%. At December 31, 1997, the prime rate was 8.5%.

     Aggregate annual principal payments  applicable to the mortgage payable for
the years subsequent to December 31, 1997 (in thousands) are:

1998...........................  $205
1999...........................    74
                                 ----
                                 $279
                                 ====

     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 totaled $126,000 in 1997, 1996 and
1995.

     Future minimum rental lease payments subsequent to December 31, 1997
(in thousands) are:

1998..........................  $ 126
1999..........................    126
2000..........................    130
2001..........................    151
2002..........................    151
Thereafter....................    429
                               ------
Total minimum lease payments.. $1,113
                               ======

<PAGE>

5.   STOCK OPTIONS AND WARRANTS

     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
makes a total of 3,000,000 shares available for grant and its 1993  Non-Employee
Directors  Stock Option Program which makes a total of 500,000 shares  available
for grant. The new plans allow for stock appreciation rights, restricted shares,
and  performance  units.  All options  expire not later than ten years after the
date of grant.

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

                                             1997                1996                1995
                                     ------------------- ------------------- -------------------
                                                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............ 2,875,044    $13.70 2,478,149    $11.10 2,002,085    $ 6.30
Granted.............................   782,349     16.27   669,830     20.54   748,652     21.94
Exercised...........................  (138,382)     6.60  (260,118)     6.43  (241,301)     5.52
Canceled............................  (119,089)    20.53   (12,817)    16.74   (31,287)     6.35
                                     ---------- -------- ---------- -------- ---------- --------
Outstanding at December 31.......... 3,399,922    $14.11 2,875,044    $13.70 2,478,149    $11.10
                                     ========== ======== ========== ======== ========== ========
Options exercisable at December 31.. 1,504,716    $10.78 1,121,296    $ 8.54   882,981     $6.30
</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."
<PAGE>


     The following table presents  weighted  average price and life  information
about significant option groups outstanding at December 31, 1997.

                                Weighted
                                Average   Weighted
                               Remaining   Average
     Range of        Number   Contractual Exercise    Number   Exercise
 Exercise Prices  Outstanding Life (Yrs.)   Price  Exercisable   Price
----------------- ----------- ----------- -------- ----------- --------
Less than $6.50..     129,965         3.7   $5.20     119,565    $5.12
$6.50-$10.00.....   1,302,608         6.1    6.57   1,002,958     6.55
$10.00-$20.00....   1,181,999         9.5   16.80     119,358    18.63
$20.00-34.88.....     785,350         8.3   25.16     262,835    25.93
                  -----------                      -----------
                    3,399,922                       1,504,716
                  ===========                      ===========

         As of December  31,  1997 the  Company  had a total of 41,278  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 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.  Had
compensation  cost for the Company's stock option plans been determined based on
the fair value at the grant date for  awards in 1997,  1996 and 1995  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>
                                                  1997          1996         1995
<S>                                                <C>           <C>          <C>
                                              -------------   --------     --------
Net earnings (loss) as reported.. ...........  $      (257)   $ 5,894      $13,353
Net earnings (loss) pro forma................  $    (6,613)   $   892      $13,132
Diluted earnings (loss) per share as reported  $      (.02)   $   .38      $  1.07
Diluted earnings (loss) per share-pro forma..  $      (.46)   $   .06      $  1.05
</TABLE>
<PAGE>

     The estimated fair value at date of grant for options granted in 1997, 1996
and 1995 was $9.07,  $13.01 and $13.29,  respectively,  using the  Black-Scholes
model with the following weighted average assumptions:
                                          1997     1996     1995
                                         ------- -------- -------
Expected life...........................      5        5      5
Interest rate...........................   5.75%     6.4%   6.4%
Volatility..............................     65%      70%    70%

     The effects on 1997,  1996 and 1995 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  4,065,778 shares of common stock for the exercise
of options 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>

                                                                 1997      1996      1995
<S>                                                               <C>       <C>       <C>
                                                               --------- --------- ---------
Expected tax provision (benefit) at 34%.......................   $ (87)    $2,038   $ 4,634
State tax provision (benefit) net of federal benefit..........     (20)       456     1,036
Change in the allowance for deferred tax assets allocated to
income tax expense............................................     100     (2,252)   (5,940)
R & D credit..................................................       -       (150)     (136)
Adjustment for state tax rate.................................       -         -        677
Nondeductible expense.........................................       7          8         4
                                                               --------- --------- ---------
                                                                  $  -      $ 100     $ 275
                                                               ========= ========= =========
</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,
1997 and 1996 are presented below (in thousands):

                                               1997      1996
                                             --------- ---------
DEFERED TAX ASSETS:
Federal tax operating loss carryforwards..     $4,619    $3,907
State tax operating loss carryforwards....        867       873
Research & development credit.............      1,595       803
Alternative minimum tax credit carryover..        366       366
Other miscellaneous.......................        296       225
                                             --------- ---------
Gross deferred asset......................      7,743     6,174
Valuation allowance.......................     (7,333)   (5,683)
                                             --------- ---------
Net deferred asset........................        410       491
DEFERRED TAX LIABILITY:
Depreciation..............................       (410)     (491)
                                             --------- ---------
Net asset/liability.......................        $-       $-
                                             ========= =========

     The valuation  allowance changed by $1,650,000 during 1997 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, 1997 would be allocated as
follows (in thousands):

Income tax provision........ $3,177
Additional paid-in-capital..  4,156
                             ------
                             $7,333
                             ======

     As of December 31, 1997, the Company had  approximately  $13,585,000 of net
operating  loss  carryforwards  available for federal  income tax purposes which
expire in the years  2004  through  2012.  The  Company  also had  approximately
$11,405,000 of Connecticut state tax operating loss carryforwards as of December
31,  1997 which  expire in the years 1998  through  2002.  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.  On a
quarterly basis the Company matches  employee  contributions at a rate of 33% of
up to 6% of an  employee's  salary.  Contributions  to the 401(k)  plan  totaled
approximately $111,000 in 1997, $92,000 in 1996 and $49,000 in 1995.

     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, 1997 was $587,000.

9.   SUPPLEMENTAL CASH FLOW INFORMATION

     The Company made  interest  payments of  approximately  $36,000 in 1997,
$51,000 in 1996 and $69,000 in 1995. The Company made no income tax payments in
1997, $37,000 in 1996 and $256,000 in 1995.



<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>



                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Neurogen Corporation

     We have audited the statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1995.  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 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 audit provides 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,  the
results of its  operations  and its cash flows for the year ended  December  31,
1995, in conformity with generally accepted accounting principles.


                                                           KPMG PEAT MARWICK LLP

Hartford, Connecticut
February 12, 1996


<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
April 25,  1996,  the Company,  upon the approval of the Audit  Committee of its
Board of Directors, elected not to retain KPMG Peat Marwick LLP as its principal
independent accountants.  On April 26, 1996, the Audit Committee of the Board of
Directors  appointed  Ernst & Young LLP to succeed  KPMG Peat Marwick LLP as the
principal independent accountants of the Company.

     There has 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 fiscal year.

                                    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 27, 1998, 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 27, 1998,
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 27,  1998,  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 27,  1998,  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).

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

23.2    - Consent of KPMG Peat Marwick LLP, Independent Auditors.

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

99.1    - Proxy Statement for the Annual Meeting of Stockholders to be held on
          May 27, 1998 (to be filed with the Commission on or before April 29,
          1998).


   (b)   Reports on Form 8-K

     The Company did not file any  reports on Form 8-K with the  Securities  and
Exchange Commission during the fourth quarter of fiscal year 1997.


<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, 1998

     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, 1998
     Frank C. Carlucci         and Director





 /S/ HARRY H. PENNER, JR.
___________________________  President, Chief Executive           March 31, 1998
    Harry H. Penner, Jr.       Officer and Director
                               (Principal Executive
                               Officer)


             *
___________________________  Executive Vice President,            March 31, 1998
    John F. Tallman, Ph.D.     Secretary and Director



  /S/ STEPHEN R. DAVIS
___________________________  Vice President--Finance,             March 31, 1998
     Stephen R. Davis          Chief Financial Officer
                               and Treasurer (Principal
                               Financial and Accounting
                               Officer)


             *
_________________________   Director                              March 31, 1998
   Robert H. Roth, Ph.D.



             *
__________________________  Director                              March 31, 1998
   Jeffrey J. Collinson



             *
_________________________  Director                               March 31, 1998
        John Simon



             *
_________________________  Director                               March 31, 1998
     Robert M. Gardiner




             *
_________________________  Director                               March 31, 1998
  Robert N. Butler, M.D.




________________________  Director                                March 31, 1998
      Suzanne Woolsey



             *
________________________  Director                                March 31, 1998
     Barry M. Bloom



             *
________________________  Director                                March 31, 1998
      Mark Novitch



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



<PAGE>






                                                               EXHIBIT 23.1

                         Consent of Independent Auditors

     We 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 13, 1998, with respect
to the  financial  statements  of  Neurogen  Corporation  included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.


                                            ERNST & YOUNG LLP


  Boston,  Massachusetts
  March 25, 1998


<PAGE>





                                                              EXHIBIT 23.2

                          Independent Auditors' Consent

  The Board of Directors
  Neurogen Corporation:

     We consent to the use of our report  dated  February  12,  1996 of Neurogen
Corporation relating to statements of operations,  stockholders' equity and cash
flows for the year ended  December 31, l995 which report appears in the December
31, 1997 annual report on Form 10-K of Neurogen Corporation.


                                            KPMG PEAT MARWICK  LLP

  Hartford, Connecticut
  March 25, 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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

                                                    /s/ ROBERT N BUTTER, 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, 1997,  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 7th day of March, 1998.

                                                    /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, 1997,  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 7th day of March, 1998.

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