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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the fiscal year ended June 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number: 0-23280



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NEUROBIOLOGICAL TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 94-3049219                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



3260 Blume Drive
Suite 500, Richmond, California 94806

(Address of Principal Executive Offices)



(510) 262-1730

(Registrants telephone number, including area code)



Securities registered under Section 12(b) of the Act:

None



Securities
registered under Section 12(g) of the Act:

Common stock, $.001 Par Value

(Title of Class)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  x  No ̈



Indicate 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.  x



Indicate by
check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  x  No ̈



As of August 31, 2004, the issuer had outstanding 26,420,607 shares of common stock.



The aggregate market value of the shares of common stock held by non-affiliates as of December 31, 2003, the registrants most recently completed second fiscal quarter, was approximately $102,979,000 based upon
the last sale price of the issuers common stock reported on The NASDAQ SmallCap Market on that date.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants Proxy Statement for the 2004 Annual Meeting of Stockholders, which will be held November 18, 2004, are incorporated by
reference into Part III of this report.



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TABLE OF CONTENTS



|        |  |                                                                                                |  |   
|------- |  | ---------------------------------------------------------------------------------------------- |  | --
|        |  | Part I                                                                                         |  |   
|        |  |                                                                                               
|Item 1  |  | Business                                                                                       |  | 3 
|Item 2  |  | Properties                                                                                     |  | 14
|Item 3  |  | Legal Proceedings                                                                              |  | 14
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                            |  | 14
|        |  |                                                                                               
|        |  | Part II                                                                                        |  |   
|        |  |                                                                                               
|Item 5  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 15
|Item 6  |  | Selected Financial Data                                                                        |  | 16
|Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 18
|Item 7a |  | Quantitative and Qualitative Disclosure about Market Risk                                      |  | 26
|Item 8  |  | Financial Statements and Supplementary Data                                                    |  | 27
|Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 42
|Item 9a |  | Controls and Procedures                                                                        |  | 42
|        |  |                                                                                               
|        |  | Part III                                                                                       |  |   
|        |  |                                                                                               
|Item 10 |  | Directors and Executive Officers of the Registrant                                             |  | 43
|Item 11 |  | Executive Compensation                                                                         |  | 45
|Item 12 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 45
|Item 13 |  | Certain Relationships and Related Transactions                                                 |  | 45
|Item 14 |  | Principal Accountant Fees and Services                                                         |  | 45
|        |  |                                                                                               
|        |  | Part IV                                                                                        |  |   
|        |  |                                                                                               
|Item 15 |  | Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K          |  | 46
|        |  | Signatures                                                                                     |  | 48



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PART I



ITEM 1.    BUSINESS



This report contains forward-looking statements. These forward-looking statements are based on our current expectations about our business and industry. In some cases, these statements may be identified by terminology such as
may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue, or the
negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed
or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in this report under the caption Other Factors that May Affect Future Results. Except as may be
required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.



OVERVIEW



Neurobiological Technologies, Inc., alternatively referred to in this report as NTI, we, us, our, or the
Company, is a drug development company focused on the clinical evaluation and regulatory approval of neuroscience drugs. We develop neuroprotective and neuromodulatory agents to treat progressive neurological impairments characteristic
of various nervous system disorders, including diabetic neuropathy and brain cancer.



Our strategy is to in-license and develop later stage drug candidates that target major medical needs and that can be rapidly commercialized. Our experienced management team oversees the human clinical trials
necessary to establish preliminary evidence of efficacy and then seeks partnerships with pharmaceutical and biotechnology companies for late-stage development and marketing of our product candidates. Currently, we receive revenues on the sales of
one approved product and have two product candidates in clinical development. The approved product, Memantine, is an orally dosed compound that is approved for the treatment of moderate to severe Alzheimers disease and is marketed in the
United States and Europe by our marketing partners. Memantine is also being developed for the treatment of neuropathic pain. Our product candidates are XERECPT, a compound for the treatment of peritumoral brain edema, or swelling around brain tumors, and Viprinex, a compound for the treatment of acute ischemic
stroke.



MEMANTINE



In April 1998, we entered into a strategic research and marketing
cooperation agreement with Merz Pharmaceuticals GmbH, or Merz, and Childrens Medical Center Corporation to further the clinical development and commercialization of Memantine. Pursuant to this agreement, we share in revenues from sales of
Memantine for all indications.



In June 2000, Merz entered into
an agreement with Forest Laboratories, Inc., or Forest, for the development and marketing of Memantine in the United States for the treatment of Alzheimers disease, neuropathic pain and AIDS-related dementia. In August 2000, Merz entered into
a strategic license and cooperation agreement with H. Lundbeck A/S of Copenhagen, Denmark, or Lundbeck, for the further development and marketing of Memantine for the treatment of Alzheimers disease, neuropathic pain and AIDS-related dementia.
Lundbeck acquired exclusive rights to Memantine in certain European markets, Canada, Australia and South Africa, as well as semi-exclusive rights to co-market Memantine with Merz in other markets worldwide, excluding the United States and Japan,
where Merz has granted development rights to Forest and Daiichi Suntory Pharma Co., Ltd., respectively.



In May 2002, Merz announced that Memantine (Ebixa®) was approved by the regulatory authorities in the European Union for the treatment of Alzheimers disease. In October 2003, Forest announced that
Memantine (Namenda) was approved by the FDA for
the treatment of moderate to severe Alzheimers disease. Memantine became commercially available in the United States in January 2004.



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During the period from August 2002 to June 30, 2004, we have received total license fee and royalty
payments of $4,766,000 from Merz. Subsequent to our year end in June 30, 2004, we received an additional $517,000 in royalty payments on sales of Memantine.



Forest is presently conducting three additional placebo-controlled studies in either mild-to-moderate or moderate-to-severe Alzheimers disease. In
June 2003, Forest announced that one of these trials did not demonstrate statistically significant effects on cognitive or global outcomes compared to control. This trial combined Memantine with Acetyl cholinesterase inhibitors for mild-to-moderate
Alzheimers disease. In an additional trial, patients with moderate-to-severe Alzheimers disease who received the combined therapy of Memantine with the Acetyl cholinesterase inhibitor donepezil showed greater cognitive, functional,
global and behavioral benefits over those with donepezil alone. These results were published in the Journal of the American Medical Association, or JAMA, a peer review journal, in January 2004. In January 2004, Forest announced positive
results of a Phase III study using Memantine as a monotherapy in mild-to-moderate Alzheimers disease. Forest has announced that it plans to seek approval for Memantine for a mild-to-moderate indication.



In July 2001, Forest initiated the second of two trials necessary for
registration of a new drug application, or NDA, for Memantine for the treatment of diabetic neuropathy. In May 2003, Forest announced that Memantine had failed to demonstrate a statistically significant difference versus placebo with regards to the
primary endpoint of this trial. In October 2003, Forest announced the resumption of its clinical development of Memantine for the neuropathic pain indication with an expanded clinical program to examine various neuropathic pain conditions at
different dosages. Forest anticipates that the earliest submission of an NDA would be 2006. NTI conducted the first pivotal trial of Memantine for the treatment of neuropathic pain with an enrollment of 400 patients and reported positive results in
January 2000.



XERECEPT 



We are developing XERECEPT, a synthetic preparation of the natural human peptide, Corticotropin-Releasing Factor, as a
treatment for brain swelling due to brain tumors (peritumoral brain edema). In April 1998, XERECEPT received orphan drug designation for this indication from the FDA. Orphan drug designation provides NTI with seven years market exclusivity and makes
NTI eligible to receive Orphan Drug Grants to fund clinical research. In fiscal 2004, animal toxicology studies were completed and the FDA undertook extensive review of the clinical trial designs for two pivotal trials for the treatment of
peritumoral brain edema. In April 2004, enrollment began in one trial, which has a target enrollment of 200 patients. The second pivotal trial is scheduled to begin in November 2004 and is expected to enroll 120 patients.



VIPRINEX 



With our acquisition of Empire Pharmaceuticals, Inc. (Empire) in July 2004, we acquired the exclusive worldwide
rights to Viprinex, which is a late-stage reperfusion therapy for use in the treatment of acute ischemic stroke.



Empire acquired the exclusive worldwide rights to Viprinex in a royalty-bearing license from Abbott Laboratories (Abbott) in March 2002.
Viprinex was being developed by Knoll AG, prior to its acquisition by Abbott in 2001.



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PRODUCT DEVELOPMENT STATUS



The following table summarizes the development status of product candidates for each indication in which regulatory approval
is being sought.



|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                    
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|Product/Indication                                  |  | Development Status                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Primary Benefit Sought                                                                             
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|MEMANTINE                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                    
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Neuropathic Pain                                    |  | Phase IIB trial completed by NTI. Results showed statistically
significant improvement of 40mg of Memantine over placebo in reducing chronic pain. The FDA accepted trial as one of two pivotal trials. In May 2003, Forest announced that primary endpoint results in the second pivotal trial did not demonstrate a
statistically significant difference versus placebo. In October 2003, Forest announced its plans to resume development of neuropathic pain indication. |  | Treatment of chronic pain associated with diabetic
neuropathy or other neuropathic pain conditions.
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Mild-to-Moderate Vascular Dementia                  |  | Phase III trials completed by Merz in the United Kingdom and France.
Results showed significantly improved cognitive abilities compared to patients who received placebo, as demonstrated by the Activities of Daily Living and cognitive performance evaluations.                                                                                                                                                                                                           |  | Functional and cognitive improvement.                                                              
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Mild-to-Moderate Dementia and Alzheimers Disease   |  | Combination of Memantine with Acetyl cholinesterase inhibitors showed no
significant improvement of Acetyl cholinesterase inhibitors alone. Monotherapy trial with Memantine versus placebo demonstrated a statistically significant difference with respect to primary efficacy measures. In January 2004, Forest announced its
plan to file an NDA.                                                                                                                        |  | Functional and cognitive improvement.                                                              
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Moderate-to-Severe Dementia and Alzheimers Disease |  | Merz and Lundbeck obtained drug approval in Europe in May 2002 for
Ebixa® (Memantine). Forest obtained drug approval
for Namenda in U.S. in October 2003. Combination of Memantine with donepezil (an acetyl cholinesterase inhibitor) showed greater cognitive, functional, global and behavioral benefit over donepezil alone. Results were published in JAMA in January
2004.                                                                                             |  | Functional and cognitive improvement.                                                              



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|                                           |  |                                                                                                                                                                                                                                                                                                                        |  |                                                                                                       
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------
|Product/Indication                         |  | Development Status                                                                                                                                                                                                                                                                                                     |  | Primary Benefit Sought                                                                                
|                                           | 
|XERECEPT (CORTICOTROPIN-RELEASING FACTOR) |  |                                                                                                                                                                                                                                                                                                                       
|                                           |  |                                                                                                                                                                                                                                                                                                                       
|Peritumoral Brain Edema                    |  | Enrollment begun in April 2004 in one of two pivotal Phase III
trials.                                                                                                                                                                                                                                                 |  | Stabilization or improvement of neurological function with substantial
dexamethasone sparing.         
|                                           | 
|VIPRINEX                                  |  |                                                                                                                                                                                                                                                                                                                       
|                                           |  |                                                                                                                                                                                                                                                                                                                       
|Acute Ischemic Stroke                      |  | Phase III study completed in U.S. by Knoll AG in 1998 with positive results. Phase III trial in Europe was halted in March 2000 by Knoll AG due to lack of efficacy and intracranial hemorrhaging.
New Phase III trial is being planned and is expected to be presented to FDA for review by the end of calendar 2004. |  | Reperfusion to restore blood flow and oxygen to affected portions of the brain during ischemic stroke.



SCIENTIFIC BACKGROUND



Our therapeutic focus is neuroprotection and
neuromodulation, which is the prevention and treatment of neurological impairment by preserving or restoring neurological function of damaged neurons. We are developing neuroprotective and neuromodulatory agents that may slow or reverse the
progressive neurological impairment associated with multiple nervous system disorders, including diabetic neuropathy and brain cancer.



Because neuronal impairment contributes significantly to functional impairment in many nervous system disorders, scientists believe that neuroprotective
compounds are potentially powerful and flexible therapeutic agents. There has been much interest in the business and academic communities to develop such agents.



Mechanisms common to progressive neuronal impairment in various medical conditions are thought to result in multiple
neurologic symptoms such as chronic pain, motor difficulties, memory loss and other cognitive deficits. By modulating such mechanisms, neuroprotective agents may prevent or restore loss of neurological function. Our current scientific focus is on
two mechanisms contributing to progressive neuronal impairment, excitotoxicity and edema. There is evidence that Memantine prevents or reduces excitotoxicity, a cascade of neuronal cell injury and death associated with the release of abnormal levels
of excitatory neurotransmitters. XERECEPT has the potential to prevent the progressive neuronal impairment resulting directly from cerebral edema (swelling of the brain), damage that more frequently results in clinical impairment than the damage
resulting from the presence of a tumor.



PRODUCTS IN DEVELOPMENT



Memantine



Memantine is one of a class of agents referred to as NMDA receptor
antagonists. Scientific research has indicated that modulating the NMDA receptor may protect against the neuronal impairment and death associated with a number of medical conditions. Accumulating evidence from various studies indicates that over
stimulation of NMDA receptors contributes to the impairment and death of neurons. This occurs in a variety of chronic neurodegenerative diseases, including neuropathic pain, dementia, Alzheimers disease, and Huntingtons disease. There
are currently no approved neuroprotective treatments for any of the pathologies associated with NMDA receptor overstimulation.



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Estimates are that approximately 1,000,000 patients in the United States suffer from intractable
neuropathic pain. Nerve cells in the brain communicate by sending signals to excite or inhibit each other. Compounds known as neurotransmitters initiate these signals. The principal excitatory neurotransmitter, glutamate, binds to the NMDA receptor
embedded in the cell membrane of the neuron. When glutamate binds to the receptor, a channel in the neuron opens which enables charged calcium molecules to flow freely into the neuron. Normally, the influx of calcium triggers chemical reactions that
cause the neuron to change its electrical charge and fire a message to neighboring neurons. This basic function of the NMDA receptor is essential for normal movement, sensation, memory, and cognition. In certain medical conditions, glutamate levels
surrounding neurons are elevated, which results in over stimulation of the NMDA receptor. In these situations, excessive amounts of calcium enter the neuron, releasing internally stored glutamate into the surrounding area. This glutamate further
stimulates NMDA receptors on neighboring neurons, causing a cascade of neuronal cell impairment and/or death throughout the area, referred to as excitotoxicity.



Neuroscientists have been developing ways to prevent the damaging influx of excess calcium into neurons. One approach is to prevent glutamate from
binding to the receptor. This can be accomplished by using either a competitive NMDA receptor antagonist, which prevents glutamate from binding to the receptor, or a closed NMDA receptor channel blocker, which binds to the entrance of the closed
channel. However, if such compounds prevent the channel from opening for too long, they may impede the normal functioning of the NMDA receptor, causing side effects including hallucinations, paranoia, delirium, and amnesia.



Scientists affiliated with Childrens Hospital of Boston, Massachusetts
working on understanding the function of the NMDA receptor found Memantine to modulate the NMDA receptors calcium ion channel. Memantine binds uncompetitively to the NMDA receptor and appears to interfere relatively little with normal
functioning, while reducing abnormal signals associated with excessive calcium influx. Rather than blocking the NMDA receptor for long periods of time, Memantine appears to restore regulation of the channel to near normal activity, while permitting
routine neurotransmission.



Product Development Status



The Neuropathic Pain of Diabetes



Diabetes mellitus is a chronic disorder that affects an estimated 16
million Americans. One of its most common complications is nerve damage, particularly damage to peripheral nerves that send sensory signals from the extremities to the central nervous system, or CNS. This condition, referred to as peripheral
diabetic neuropathy, or PDN, is a large, unmet medical need. This condition most frequently damages nerves in the feet, making walking or standing painful and difficult. We estimate that approximately 800,000 patients in the United States currently
receive treatment for the symptoms of PDN, including severe, chronic pain known as neuropathic pain (persistent pain in the absence of an obvious stimulus). As the neuropathy progresses, the sensation of pain may become more intense, encompass more
areas, and become increasingly difficult to treat with available therapeutic agents.



Peripheral nerve damage disrupts pain pathways in the nervous system, causing nerves to send abnormal signals that the brain interprets as pain. In effect, neurons in the CNS are bombarded with abnormal signals until
their ability to process pain signals is compromised. This leads to hyper-sensitization of neurons to pain impulses and results in progressive neuronal impairment in the CNS. Although the precise mechanisms of these events are not completely
understood, there is evidence that over activation of NMDA receptors in the CNS plays an important role.



Memantine has been shown to inhibit abnormal pain signals by modulating the NMDA receptor in several animal models of neuropathic pain. Based on the
results of these studies, we sponsored and completed in 1998, a 122-patient placebo-controlled Phase IIA human clinical trial of Memantine in patients with neuropathic pain due to diabetes or post-herpetic neuralgia (a complication of shingles). No
treatment benefit was observed in patients with post-herpetic neuralgia. However, trends indicating efficacy of Memantine were observed in patients with PDN. The strongest efficacy trend was the reduction of nocturnal pain associated with PDN.
Nocturnal pain is a



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major problem for these patients, frequently leading to insomnia and other associated health and psychological problems. After eight weeks of treatment in
our clinical trial, the Memantine-treated subjects had 42% less nocturnal pain than those treated with placebo. The results for the other primary variables of daytime pain and pain relief, although not statistically significant, exhibited consistent
trends representative of analgesic benefit with Memantine compared to placebo.



Based on the results from our Phase IIA trial of Memantine in patients with neuropathic pain, we initiated a Phase IIB trial of Memantine in the second quarter of fiscal 1999, exclusively in patients with PDN. In May
2000, we presented results of our placebo-controlled Phase IIB dose ranging human clinical trial of Memantine. Results of this 421 patient Phase IIB clinical trial of Memantine as a treatment for painful diabetic neuropathy showed that 44% of the
patients receiving 40 mg dosages experienced a 50% or greater pain reduction, compared to 29% in the placebo group at the end of eight weeks. Although positive trends were seen in the groups treated with 20 mg of Memantine compared to placebo, no
statistical significance were observed.



In July 2001, Forest
initiated an additional year-long, large-scale, multi-center, double-blind placebo controlled trial to assess the safety and efficacy of Memantine in the treatment of diabetic neuropathy. In May 2003, Forest announced that Memantine had failed to
demonstrate a statistically significant difference versus placebo with regards to the primary endpoint of this trial. In October 2003 Forest announced that based on a recently completed analysis of a clinical trial evaluating Memantine for
neuropathic pain, Forest has decided to proceed with an expanded clinical program with the objective of obtaining approval for this indication. Although the results did not achieve statistical significance at week 16 (the protocol-defined endpoint),
the recently completed analysis found that weekly assessments did show a statistically significant effect for Memantine compared to placebo on nocturnal pain, on every time point from week 1 through week 14. In addition, patients with more severe
pain at baseline demonstrated a statistically superior effect of Memantine on pain scores compared to placebo from week 3 through week 16.



XERECEPT (Human Corticotropin-Releasing Factor)



XERECEPT is our synthetic preparation of the human peptide Corticotropin-Releasing Factor, or hCRF that we are developing as a treatment for brain
swelling due to brain tumors (peritumoral brain edema). There is clinical evidence that XERECEPT may be a safer treatment than synthetic corticosteroids, which are associated with serious adverse side effects including muscle wasting, weight gain,
immunosuppression, osteoporosis, hyperglycemia, glaucoma and psychosis. Results from our pre-clinical studies and pilot human clinical trials have demonstrated the compounds potential to reduce swelling in brain tissue and to be
well-tolerated. Thus, XERECEPT has the potential to significantly improve the quality of life for brain cancer patients with dysfunction due to brain swelling. In the United States, approximately 30,000 patients are diagnosed every year with primary
brain tumors, and 120,000 with metastatic brain tumors. Patients with this condition are in need of a safe alternative to corticosteroids, which have serious adverse effects at the high, chronic doses required for efficacy.



The FDA has approved our application for orphan drug designation for XERECEPT
to treat this unmet medical need. Orphan drug designation provides us with seven years market exclusivity and makes us eligible to receive federal funds for clinical research under the Orphan Drug Grant Program, althought to date we have not applied
for nor received such federal funds.



hCRF is a natural
neuroendocrine peptide hormone found in humans both centrally (within the brain) and peripherally (outside the brain). Researchers discovered anti-edema effects of hCRF through systemic administration. Additionally XERECEPT has been shown to have
anti-neoplastic properties. Research by our scientific collaborators has revealed that XERECEPT significantly reduces edema, or swelling of damaged tissue, in animal models. Edema is a condition characterized by swelling after tissue injury when
fluid, plasma proteins, and white blood cells flow from small blood vessels into the surrounding tissues, further contributing to the destruction of these tissues. Our pre-clinical studies have shown that XERECEPT reduces the flow of fluid



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through blood vessels at sites of traumatic tissue injury. Specifically, these studies have shown that XERECEPT injected systemically into animals can reduce
brain edema after injury, brain edema associated with cancer tumors, and swelling in muscle tissue following surgical trauma.



Product Development Status



Peritumoral Brain Edema



We have been evaluating XERECEPT for the treatment of cerebral edema caused by brain tumors. In these patients, the tumor promotes increased permeability
of the small blood vessels in the brain, which results in the excess flow of fluids into the brain, swelling of brain tissue, and a consequent impairment of neurological function. Current treatment of peritumoral brain edema, primarily
corticosteroids, results in serious adverse side effects at the high chronic doses required for efficacy. Reactions can include muscle wasting, weight gain, immunosuppression, osteoporosis, hyperglycemia, glaucoma, psychosis and other potentially
dose-limiting side effects.



Additional benefits of hCRF in
patients with brain tumors have been demonstrated in laboratory testing. To date six pre-clinical studies with Corticotropin-Releasing Factor, or CRF have demonstrated an anti-cancer effect by inhibiting new cell growth. One publication has shown
that CRF induces programmed cell death, which may represent one of the underlying mechanisms for the anti-neoplastic effects observed with CRF. It is of interest to note that dexamethasone, the drug of choice for peritumoral brain edema, has been
shown to interfere with this programmed cell death in malignant glioma (brain) cells making them less resistant to chemotherapy and radiation. However, these data are laboratory findings and may have no similar effects in the clinic. We are not
developing the drug as an anti-cancer agent.



Although
endogenous hCRF is involved in stimulating the release of natural corticosteroids, studies sponsored by us have shown that XERECEPT exerts its anti-edema action independent of cortisol release when administered systemically.



Based on the pharmacologic profile of XERECEPT, there is evidence that the
compound may be efficacious without many of the adverse side effects associated with current corticosteroid therapies. Recently completed three month animal toxicity studies with XERECEPT support the concept of reduced side effects with XERECEPT
over standard corticosteroid therapy. There is also evidence that XERECEPT may enhance radiation therapy, whereas cortisols appear to interfere with this conventional brain tumor therapy. XERECEPT has been safely administered to several hundred
healthy volunteers and patients according to numerous studies published by third parties. In human clinical trials sponsored by us, XERECEPT was well tolerated and appeared to be safe in more than 230 courses of treatment.



Viprinex



Viprinex has been studied in more than 2,000 patients in various clinical studies in the U.S. and Europe and has the
potential to at least double the available treatment window following the onset of stroke symptoms. Currently, the only available therapy for stroke must be administered within the initial three hours, significantly limiting the number of patients
that may be treated.



One of the primary goals for the
treatment of acute ischemic stroke is improving blood flow through a blocked vessel so that the flow of oxygen and nutrient supply to brain tissue is not interrupted or compromised. Brain tissue starved of oxygen can cause loss of neurological
function such, as speech and mobility. Fibrinogen, a protein involved in blood clotting, has been known to contribute to high blood viscosity, which in turn may impede blood flow to critical regions of the brain. Thus, an agent that reduces
fibrinogen levels may significantly impact stroke treatment.



Derived from the venom of the Malayan pit viper, Viprinex is a thrombin-like enzyme that is highly specific to fibrinogen. When administered systemically, Viprinex has been shown to rapidly deplete plasma fibrinogen



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(it is a defibrinogenating agent). The effects are anticoagulation, improved blood viscosity and a secondary fibrinolytic or clot lysing action.
Combined, these effects constitute a reperfusion strategy that appears to restore and enhance oxygen flow to the affected area of the brain. Studies have shown that in patients receiving Viprinex within six hours of stroke onset, blood viscosity is
progressively reduced by 20-30% from pretreatment levels, resulting in an improvement in blood flow and microcirculation. After stopping treatment with Viprinex, viscosity levels have been shown to return to pretreatment levels very slowly, within
about 10 days.



Product Development Status



Ischemic Stroke



According to the American Stroke Association, every 45 seconds someone in
the U.S. suffers a stroke and every three minutes someone dies of one. It is the nations third leading cause of death after diseases of the heart and all forms of cancer and is the leading cause of serious, long-term disability.



A stroke occurs when a blood vessel that carries oxygen and nutrients to the
brain is either blocked (ischemic) by a clot or ruptures (hemorrhagic). When the tissues are deprived of needed blood they begin to die, affecting various parts of the body and causing paralysis, speech, vision and other problems. It is estimated
that less than ten percent of stroke patients are suitable for current therapies and less than five percent actually receive treatment.



Knoll AG completed a randomized, double-blind, placebo-controlled Phase III clinical study in the United States in 1998 to evaluate the safety and
efficacy of Viprinex given within three hours after the onset of acute, ischemic stroke in 500 patients. In that study, Viprinex was shown to be effective in preserving neurological function in this patient population. A separate randomized,
double-blind, placebo-controlled Phase III study enrolling patients within six hours of onset of acute ischemic stroke was stopped by Knoll AG after a planned interim analysis indicated lack of efficacy and increased incidence of intracranial
hemorrhage. We believe that the higher dosing levels in the European trial and the use of protocol criteria that permitted entry of patients at higher risk of hemorrhage contributed to the trials failure. We are designing a further Phase III
study with a revised dosage strategy, which we believe will confirm the results of the U.S. trial.



COMPETITION



Competition in the biopharmaceutical industry is intense and is expected to increase. There are other therapies under development for each of our therapeutic targets and the development and sale of drugs for the treatment of the therapeutic
targets that we and our collaborative partners are pursuing is highly competitive. Specifically, we face known competition from the following companies for each of the indications listed below.



|                                   |  |                                                        
|---------------------------------- |  | -------------------------------------------------------
|Indication                         |  | Principal known competing products and competitors     
|Alzheimers disease (Memantine)    |  |    ARICEPT® (donepezil HCI)Eisai Inc. and Pfizer Inc.
|                                   | 
|                                   |  |    Exelon® (rivastigmine tartrate)Novartis           
|                                   | 
|                                   |  |    Reminyl® (galantamine HBr)Janssen Pharmaceutica   
|                                   | 
|Neuropathic pain (Memantine)       |  |    Neurontin® (gabapentin)Parke-Davis                
|                                   | 
|Peritumoral brain edema (XERECEPT) |  |    Decadron® (dexamenthasone)Merck & Co. Inc.        
|                                   | 
|Acute ischemic stroke (Virpinex)   |  |    Activase® (alteplase, recombinat)Genentech, Inc.  



We may not be able to
develop products that will be as efficacious or as cost-effective as currently-marketed products or those products being developed by our competitors. In addition, because our license to certain XERECEPT patent rights is non-exclusive, others may
develop competing products using the same compound. Consequently, others may develop, manufacture and market products that could compete with those that we are developing.



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##### Table of Contents

We and our collaborative partners will face intense competition from pharmaceutical, chemical and
biotechnology companies both in the United States and abroad. Companies that complete clinical trials, obtain required regulatory approvals and first commence commercial sales of their products before their competitors may achieve a significant
competitive advantage. In addition, significant levels of research in biotechnology and medicine occur in universities and other nonprofit research institutions. These entities have become increasingly active in seeking patent protection and
licensing revenues for their research results.



SUPPLIERS



Merz and Forest have the responsibility of supplying Memantine for their
clinical trials and for commercial sale.



XERECEPT has been
manufactured by established methods using chemical synthesis to our specifications. We performed audits on our contractors who supplied XERECEPT to assess compliance with the current Good Manufacturing Practice, or cGMP, regulations. Alternative
cGMP suppliers of the bulk drugs and of finished dosage form products are available to us. We currently have no plans to build or develop an in-house manufacturing capability.



We are currently negotiating a manufacturing and supply arrangement with a manufacturer that will supply the Viprinex needed
for our planned clinical trials. Viprinex is derived from snake venom and the purification and manufacturing process is lengthy, complex and costly. Any delays in this process could negatively affect our ability to conduct our planned clinical
trials. Additionally, although we believe that we have an adequate supply of raw snake venom from which our clinical supply of Viprinex will be prepared, we may face difficulties in the future obtaining additional snake venom in the necessary
quantities and potency. Any such difficulties could adversely affect our ability to conduct clinical trials as planned.



We face certain risks by outsourcing manufacturing, including:



| |  | the delay of our pre-clinical and human clinical testing if our contractors are unable to supply sufficient quantities of product candidates manufactured in accordance with cGMP on
acceptable terms;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the delay of market introduction and subsequent sales if we encounter difficulties establishing relationships with manufacturers to produce, package and distribute products; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | adverse effects on FDA pre-market approvals of potential products and contract manufacturers if they do not adhere to cGMP regulations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



Because of these risks, our dependence on third parties for the manufacture
of products may adversely affect our results of operations and our ability to develop and deliver products on a timely and competitive basis.



PATENTS AND PROPRIETARY INFORMATION



In April 1998, in connection with our agreement with Merz, our exclusive license from Childrens Medical Center Corporation to a series of patents
and patent applications relating to certain non-ophthalmic uses of Memantine was terminated. Merz holds rights to those uses under licenses from Childrens Medical Center Corporation.



We hold non-exclusive worldwide licenses to four issued U.S. patents covering
the composition of matter of XERECEPT and various analogues, together with certain foreign patents and patent applications. Because of the non-exclusivity of the four issued U.S. patents, others may develop, manufacture and market products that
could compete with those we develop. We also have exclusive rights to four issued patents and one patent application covering certain uses of XERECEPT and analogues. We are responsible for the costs of prosecuting the patent applications related to
XERECEPT for which we have exclusive rights. In addition to the patents and pending applications we have licensed from others, we hold U.S. Patent No. 5,870,430, which covers certain liquid formulations of hCRF and hCRF-related peptides.



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We hold the exclusive worldwide marketing rights to Viprinex through a license from Abbott Laboratories
acquired with our purchase of Empire Pharmaceuticals, Inc. in July 2004. Viprinex is protected by three patents covering the composition of matter and synthesis of the compound.



The patent position of biotechnology firms generally is highly uncertain because:



| |  | patents involve complex legal and factual issues that have been the subject of much litigation;
| | - | -----------------------------------------------------------------------------------------------



| |  | no consistent policy has emerged from the United States Patent and Trademark Office regarding the breadth of claims allowed or the degree of protection afforded under biotechnology
patents; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | others may independently develop similar products, duplicate any of our potential products, or design around the claims of any of our potential patented products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, because of the time delay in patent
approval and the secrecy afforded United States patent applications, we do not know if other applications, which might have priority over our applications, have been filed.



As a result of all of these factors, there can be no assurance that patent applications relating to our potential products
or processes will result in patents being issued, or that patents, if issued, will provide protection against competitors who successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or
be able to circumvent our patent position.



A number of
pharmaceutical and biotechnology companies and research institutions have developed competing technologies and may have patent rights that conflict with our patent rights. If such a conflict were to develop, the scope of our patent rights could be
limited and we may be unable to obtain additional patent rights needed to permit the continuing use of the subject technologies.



In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information. It is our policy that each
employee enter into a confidentiality agreement which contains provisions generally prohibiting the disclosure of confidential information to anyone outside NTI and requiring disclosure to us of ideas, developments, discoveries or inventions
conceived during employment and assignment to us of proprietary rights to such matters related to our business and technology. However, it is possible that these agreements could be breached. In addition, others may independently develop
substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology.



GOVERNMENT REGULATION



In order to clinically test, produce, and market products for therapeutic use, a company must comply with mandatory procedures and safety standards
established by the FDA and comparable agencies in foreign countries.



A company generally must conduct pre-clinical testing on laboratory animals of new pharmaceutical products prior to commencement of clinical studies involving humans. These studies evaluate the potential efficacy and safety of the product.
The company then submits the results of these studies to the FDA as part of an investigational new drug application, or IND, which must become effective before clinical testing in humans can begin.



Typically, human clinical evaluation involves a time-consuming and costly
three-phase process:



| |  | In Phase I, a company conducts clinical trials with a small number of subjects to determine a drugs early safety profile and its pharmacokinetic pattern.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Phase II, a company conducts clinical trials with groups of patients afflicted with a specific disease in order to determine preliminary effectiveness, optimal dosages and
further evidence of safety.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In Phase III, a company conducts large-scale, multi-center, comparative trials with patients afflicted with a target disease in order to provide enough data to demonstrate the
effectiveness and safety required by the FDA prior to commercialization.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion,
re-evaluate, alter, suspend, or terminate testing based upon the data accumulated to that point and the FDAs assessment of the risk/benefit ratio to patients.



The results of the pre-clinical and clinical testing are submitted to the FDA in the form of an NDA for approval prior to
commercialization. In responding to an NDA, the FDA may grant marketing approval, request additional information, or deny the application. Failure to receive approval for any of our potential products would have a material adverse effect on us.
Among the requirements for product approval is the requirement that each domestic manufacturer of the product conform to the FDAs cGMP regulations, which must be followed at all times. Compliance with the cGMP regulations requires that
manufacturers continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance.



Once the sale of a product is approved, FDA regulations continue to govern the manufacturing process and marketing activities. A post-marketing testing
and surveillance program may be required to continuously monitor a products usage and effects in patients. Product approvals may be suspended or withdrawn if compliance with regulatory standards is not maintained.



Foreign regulatory approval of a product must also be obtained prior to
marketing the product internationally. Foreign approval procedures vary from country to country. The time required for approval may delay or prevent marketing in certain countries. In certain instances, the Company or its collaborative partners may
seek approval to market and sell certain products outside of the United States before submitting an application for United States approval to the FDA. The clinical testing requirements and the time required to obtain foreign regulatory approvals may
differ from those required for FDA approval.



Fulfillment of
regulatory requirements for marketing human therapeutics typically takes many years and varies substantially based on the type, complexity, and novelty of the drug for which approval is sought. Government regulation may:



| |  | delay for a considerable period of time or prevent marketing of any product that we may develop; and/or
| | - | -------------------------------------------------------------------------------------------------------



| |  | impose costly procedures upon our activities.
| | - | ---------------------------------------------



Either of these effects of government regulation may provide an advantage to our competitors.



For products we develop, we may not receive FDA or other regulatory approval on a timely basis or at all. Any delay in
obtaining, or failure to obtain, required approvals would adversely affect the marketing of our proposed products and our ability to earn product revenues or royalties.



In addition, success in pre-clinical or early stage clinical trials does not assure success in later-stage clinical trials.
For example, although our Phase II clinical trials for Memantine for the treatment of diabetic neuropathy produced positive results, subsequent clinical trials conducted by Forest did not replicate these results. Similarly, the results of Knoll
AGs Phase III clinical trials for Viprinex in the United States were not replicated in subsequent European clinical trials. As with any regulated product, additional government regulations may be instituted which could delay regulatory
approval of our potential products. Additional government regulations that might result from future legislation or administrative action cannot be predicted.



EMPLOYEES



Currently, we employ fourteen people, eight of whom are full-time employees. Additionally, we use consultants to complement our staffing as needed. Our
employees are not subject to any collective bargaining agreements, and we regard our relations with employees to be good.



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WEBSITE ADDRESS



Our website address is www.ntii.com. We make available free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing, by providing a hyperlink to the SECs website directly to our reports.



ITEM 2.    PROPERTIES



Our executive offices occupy approximately 4,333 square feet in Richmond, California, pursuant to a lease that expires in July 2005. Effective August 1, 2004, we amended our lease to increase our executive offices by approximately 600
square feet of space, which is not contiguous with our existing space, and this amendment also expires in July 2005. We are currently evaluating alternatives available to enable us to obtain adequate contiguous space for our existing and anticipated
needs.



We have also leased approximately 3,000 square feet of
office space in Mahwah, New Jersey, pursuant to a one-year lease that expires in September 2005. This facility will be occupied by new employees hired in connection with our acquisition of Empire Pharmaceuticals in July 2004.



ITEM 3.    LEGAL PROCEEDINGS



We are not currently involved in any legal proceedings.



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



No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended June 30, 2004.



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##### Table of Contents

PART II.



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------------------



NTIs common stock is traded on The NASDAQ SmallCap Market under the symbol NTII.



As of June 30, 2004, there were approximately 239 holders of record of our
common stock and 23,993,938 shares of common stock outstanding. No dividends have been paid on our common stock to date, and we do not anticipate paying any dividends in the foreseeable future.



The following table sets forth the high and low closing prices of our common
stock during the past two fiscal years.



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|Fiscal 2003    |  | High |      | Low
|First Quarter  |  | $    | 3.54 |     | $ | 1.90
|Second Quarter |  | $    | 6.80 |     | $ | 2.40
|Third Quarter  |  | $    | 7.79 |     | $ | 5.46
|Fourth Quarter |  | $    | 8.35 |     | $ | 3.49



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|Fiscal 2004    |  | High |      | Low
|First Quarter  |  | $    | 6.57 |     | $ | 3.18
|Second Quarter |  | $    | 6.68 |     | $ | 4.20
|Third Quarter  |  | $    | 7.00 |     | $ | 4.33
|Fourth Quarter |  | $    | 5.02 |     | $ | 3.35



In August 2002,
NTIs board of directors authorized a stock repurchase program of up to 500,000 shares of its common stock. As of June 30, 2004, NTI had repurchased 32,000 shares of common stock for a total cost of $86,950, or at an average per share cost of
$2.72. No repurchases were made in the fiscal year ended June 30, 2004. Depending on market conditions and other factors, repurchases may be made in future periods from time to time in the open market and in negotiated transactions, including block
transactions and may be discontinued at any time.



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##### Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA



The following table sets forth certain financial data with respect to our business. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the financial statements and related notes thereto in Item 8.



|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                            |  | Year Ended June 30,                   |       
|                                                            |  | 2004                                  |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                            |  | (in thousands, except per share data) |       
|Statement of Operations Data:                               |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total revenue                                               |  | $                                     | 2,786  |   |      | $ | 1,980  |      |  | $ |       |   |  | $    | 4,781  |   |  | $ |       |  
|Expenses:                                                   |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Research and development                                    |  |                                       | 2,098  |   |      |   | 2,317  |      |  |   | 2,013  |   |  |      | 1,194  |   |  |   | 1,896  |  
|General and administrative                                  |  |                                       | 3,101  |   |      |   | 2,493  |      |  |   | 2,637  |   |  |      | 2,556  |   |  |   | 1,380  |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total expenses                                              |  |                                       | 5,199  |   |      |   | 4,810  |      |  |   | 4,650  |   |  |      | 3,750  |   |  |   | 3,276  |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Operating income (loss)                                     |  |                                       | (2,413 | ) |      |   | (2,830 | )    |  |   | (4,650 | ) |  |      | 1,031  |   |  |   | (3,276 | )
|Interest income, net                                        |  |                                       | 128    |   |      |   | 144    |      |  |   | 342    |   |  |      | 599    |   |  |   | 161    |  
|Other non-cash income                                       |  |                                       | 477    |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) before income tax                             |  |                                       | (1,808 | ) |      |   | (2,686 | )    |  |   | (4,308 | ) |  |      | 1,630  |   |  |   | (3,115 | )
|Income tax benefit (provision)                              |  |                                       |       |   |      |   |       |      |  |   | 42     |   |  |      | (42    | ) |  |   |       |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss)                                           |  | $                                     | (1,808 | ) |      | $ | (2,686 | )    |  | $ | (4,266 | ) |  | $    | 1,588  |   |  | $ | (3,115 | )
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Basic net income (loss) per share                           |  | $                                     | (0.09  | ) |      | $ | (0.15  | )    |  | $ | (0.24  | ) |  | $    | 0.10   |   |  | $ | (0.27  | )
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted net income (loss) per share                         |  | $                                     | (0.09  | ) |      | $ | (0.15  | )    |  | $ | (0.24  | ) |  | $    | 0.08   |   |  | $ | (0.27  | )
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average shares of common stock outstandingbasic   |  |                                       | 20,679 |   |      |   | 18,016 |      |  |   | 17,570 |   |  |      | 16,532 |   |  |   | 11,461 |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average shares of common stock outstandingdiluted |  |                                       | 20,679 |   |      |   | 18,016 |      |  |   | 17,570 |   |  |      | 21,071 |   |  |   | 11,461 |  
|                                                            |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



|                                             |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                             |  | June 30,       |        
|                                             |  | 2004           |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                             |  | (in thousands) |        
|Balance Sheet Data:                          |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and total investments |  | $              | 20,733  |   |      | $ | 4,402   |      |  | $ | 7,259   |   |  | $    | 11,044  |   |  | $ | 8,554   |  
|Working capital                              |  |                | 13,582  |   |      |   | 4,238   |      |  |   | 5,043   |   |  |      | 9,806   |   |  |   | 7,886   |  
|Total assets                                 |  |                | 21,384  |   |      |   | 4,813   |      |  |   | 7,665   |   |  |      | 11,458  |   |  |   | 8,683   |  
|Total current liabilities                    |  |                | 661     |   |      |   | 566     |      |  |   | 1,052   |   |  |      | 762     |   |  |   | 769     |  
|Accumulated deficit                          |  |                | (42,325 | ) |      |   | (40,517 | )    |  |   | (37,830 | ) |  |      | (33,564 | ) |  |   | (35,152 | )
|Stockholders equity                         |  |                | 20,723  |   |      |   | 4,248   |      |  |   | 6,613   |   |  |      | 10,696  |   |  |   | 7,913   |  



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Selected quarterly financial information is summarized below:



|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | ------------------------------------------------- | ------ | - | ----------- | - | ------ | -------- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                                              |  | Fiscal 2004                                       |       
|                                                                              |  | September 30                                      |        |   | December 31 |   |        | March 31 |  |   | June 30 |   |  | Total |       
|                                                                              |  | (in thousands, except per share data) (Unaudited) |       
|Quarterly Results of Operations                                               |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Total revenue                                                                 |  | $                                                 | 10     |   |             | $ | 300    |          |  | $ | 2,302   |   |  | $     | 174    |   |  | $ | 2,786  |  
|Research and development expense                                              |  |                                                   | (328   | ) |             |   | (513   | )        |  |   | (725    | ) |  |       | (532   | ) |  |   | (2,098 | )
|General and administrative expense                                            |  |                                                   | (576   | ) |             |   | (855   | )        |  |   | (890    | ) |  |       | (780   | ) |  |   | (3,101 | )
|Interest income                                                               |  |                                                   | 21     |   |             |   | 9      |          |  |   | 21      |   |  |       | 77     |   |  |   | 128    |  
|Other non-cash income                                                         |  |                                                   |       |   |             |   |       |          |  |   | 431     |   |  |       | 46     |   |  |   | 477    |  
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Net loss                                                                      |  | $                                                 | (873   | ) |             | $ | (1,059 | )        |  | $ | 1,139   |   |  | $     | (1,015 | ) |  | $ | (1,808 | )
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Basic and diluted net loss per share                                          |  | $                                                 | (0.05  | ) |             | $ | (0.06  | )        |  | $ | 0.05    |   |  | $     | (0.04  | ) |  | $ | (0.09  | )
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Shares used in basic and diluted net loss per share calculation               |  |                                                   | 18,833 |   |             |   | 19,206 |          |  |   | 20,795  |   |  |       | 23,918 |   |  |   | 20,679 |  
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|                                                                              | 
|                                                                              |  | Fiscal 2003                                       |       
|                                                                              |  | September 30                                      |        |   | December 31 |   |        | March 31 |  |   | June 30 |   |  | Total |       
|                                                                              |  | (in thousands, except per share data) (Unaudited) |       
|Quarterly Results of Operations                                               |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Total revenue                                                                 |  | $                                                 | 1,407  |   |             | $ |       |          |  | $ | 281     |   |  | $     | 292    |   |  | $ | 1,980  |  
|Research and development expense                                              |  |                                                   | (907   | ) |             |   | (679   | )        |  |   | (435    | ) |  |       | (296   | ) |  |   | (2,317 | )
|General and administrative expense                                            |  |                                                   | (489   | ) |             |   | (687   | )        |  |   | (623    | ) |  |       | (694   | ) |  |   | (2,493 | )
|Interest income                                                               |  |                                                   | 45     |   |             |   | 41     |          |  |   | 30      |   |  |       | 28     |   |  |   | 144    |  
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Net income (loss)                                                             |  | $                                                 | 56     |   |             | $ | (1,325 | )        |  | $ | (747    | ) |  | $     | (670   | ) |  | $ | (2,686 | )
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Basic net income (loss) per share                                             |  | $                                                 | 0.00   |   |             | $ | (0.07  | )        |  | $ | (0.04   | ) |  | $     | (0.04  | ) |  | $ | (0.15  | )
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Weighted average shares used in basic net income (loss) per share calculation |  |                                                   | 17,782 |   |             |   | 17,773 |          |  |   | 17,985  |   |  |       | 18,524 |   |  |   | 18,016 |  
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Diluted net income (loss) per share                                           |  | $                                                 | 0.00   |   |             | $ | (0.07  | )        |  | $ | (0.04   | ) |  | $     | (0.04  | ) |  | $ | (0.15  | )
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  
|Shares used in diluted net income (loss) per share calculation                |  |                                                   | 19,848 |   |             |   | 17,773 |          |  |   | 17,985  |   |  |       | 18,524 |   |  |   | 18,016 |  
|                                                                              |  |                                                   |        |   |             |   |        |          |  |   |         |   |  |       |        |   |  |   |        |  



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



Except for the historical information contained herein, the matters discussed in this Managements Discussion and
Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties, including those discussed below under the caption Other Factors that May Affect Future Results and elsewhere
in this Annual Report on Form 10-K. Actual results may differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.



OVERVIEW



We are a drug development company focused on the clinical evaluation and
regulatory approval of neuroscience drugs. We are developing neuroprotective and neuromodulatory agents to treat progressive neurological impairments characteristic of various nervous system disorders, including diabetic neuropathy and brain cancer.
Our strategy is to in-license and develop later-stage drug candidates that target major medical needs and that may be rapidly commercialized.



Except for 2001, we have incurred significant losses each year since our inception. As of June 30, 2004, our accumulated deficit was $42.3 million and
total stockholders equity was $20.7 million. We expect to incur additional operating losses over at least the next year as we continue our research and development efforts.



CRITICAL ACCOUNTING POLICIES



Our managements discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities, if any, at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates on historical experience and
on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. We consider our accounting policies related to revenue recognition and research and development expenses to be critical.



Revenue recognition



Revenue related to license fees with non-cancelable, non-refundable terms
and no future performance obligations are recognized when collection is assured. Revenues are deferred and recognized over the performance period in the event that future performance obligations exist. Non-refundable up-front payments received in
connection with research and development activities are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenues associated with milestones are recognized as earned,
based on completion of development milestones, either upon receipt, or when collection is assured. Revenues associated with royalty agreements on sales of products by our marketing partners are recognized when the proceeds are received due to the
limited sales history of the product and our inability to estimate such sales.



Research and development expenses



Our research and development expenses include certain expenses that are incurred over multiple reporting periods, such as fees for contractors and consultants, fees to collaborators for pre-clinical research studies,
patient treatment costs related to clinical trials and related clinical manufacturing costs, and license fees for use of third-party intellectual property rights. Management assesses how much of these multi-period costs should be charged



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to research and development expense in each reporting period. In determining whether clinical trial activities and preclinical animal studies performed by
third parties should be recognized in a specific reporting period, management considers:



| |  | estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with the third-party service providers; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | estimates of the percentage of work completed over the life of the individual study in accordance with discussions with internal clinical and preclinical personnel and independent
service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The assessment of the percentage of work completed that determines the amount of research and development expense that should be recognized in a given
period requires significant judgment, and could have a material impact on our balance sheet and results of operations. These estimates may or may not match the actual services performed by the service providers as determined by patient enrollment
levels, pre-clinical animal study schedules, and related activities. We monitor service provider activities to the extent possible; however, if we underestimated activity levels associated with various studies at a given point in time, we could
record significant research and development expenses in future periods.



RESULTS OF OPERATIONS



REVENUES



| |  |                     |           |                                     |   |           |  |           |   |           |   |         |  |   |          
| |  | ------------------- | --------- | ----------------------------------- | - | --------- |  | --------- | - | --------- | - | ------- |  | - | ---------
| |  | Year Ended June 30, |           | Increase (Decrease) From Prior Year
| |  | 2004                |           | 2003                                |   | 2002      |  | 2004/2003 |   | 2003/2002
| |  | $                   | 2,786,000 |                                     | $ | 1,980,000 |  | $         |  |           | $ | 806,000 |  | $ | 1,980,000



Revenues were
$2,786,000 in 2004 compared to $1,980,000 in 2003. Our 2004 revenues included $2,531,000 in license fees and $255,000 in royalty fees. During 2004, we received license fee revenue of $2,250,000 and $281,000 related to the approval of Memantine in
the U.S. and in certain European countries, respectively.



In
October 2003, Forest announced that it had received approval of Namenda (Memantine) in the Unites States for the treatment of Alzheimers disease. Merz received a payment from Forest relating to this approval, which triggered a $2.25 million payment from Merz in January 2004 under our
1998 strategic research and marketing cooperation agreement. We also received payments from Merz of $281,000 in October 2003, which represent a portion of the payments that Merz received pursuant to its agreement with Lundbeck for the approval of
Memantine for the treatment of Alzheimers disease.



Our
2003 revenue included $1,969,000 in license fees and $11,000 in royalty fees, which were earned for the approval and sales, respectively, of Memantine in the European Union. We earned no revenue in 2002.



NTI expects to continue to receive royalty payments from Merz on sales of
Memantine in certain European countries and in the United States. We expect total revenues to fluctuate depending upon the ability of Merz and its marketing partners to market Memantine and the timing and amounts of payments related to these
activities.



RESEARCH AND DEVELOPMENT EXPENSES



| |  |                     |           |                                     |   |           |  |           |           |  |           |          |   |  |   |        
| |  | ------------------- | --------- | ----------------------------------- | - | --------- |  | --------- | --------- |  | --------- | -------- | - |  | - | -------
| |  | Year Ended June 30, |           | Increase (Decrease) From Prior Year
| |  | 2004                |           | 2003                                |   | 2002      |  | 2004/2003 |           |  | 2003/2002
| |  | $                   | 2,098,000 |                                     | $ | 2,317,000 |  | $         | 2,013,000 |  | $         | (219,000 | ) |  | $ | 304,000



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Research and development expenses were $2,098,000 in fiscal 2004 compared to $2,317,000 in fiscal 2003.
The decrease from 2003 to 2004 was primarily due to the completion of toxicology studies and manufacturing of clinical supplies of XERECPT, partially offset by an increase in expenses relating to the initiation in April 2004 of a Phase III clinical
trial for XERECEPT. The increase from 2002 to 2003 was due primarily to expenses incurred in 2003 associated with the toxicology studies and manufacturing of XERECEPT.



The table captioned Product Development Status in Item 1 of this report sets forth the status of regulatory
approval and clinical trial for Memantine, XERECEPT and Viprinex. The expenses related to the clinical trials of XERECEPT were approximately $2,098,000, $2,292,000, and $1,981,000 for the years ended June 30, 2004, 2003, and 2002, respectively. To
date, we have incurred expenses of approximately $8,947,000 in the development of Memantine and $18,234,000 in the development of XERECEPT. We expect to start incurring expenses in the clinical development of Viprinex in fiscal 2005. All future
expenses for the development and commercialization of Memantine will be borne by Merz and its marketing partners, Forest and Lundbeck. We are currently unable to estimate the expenses of completing clinical trials for XERECEPT due to the
uncertainties inherent in conducting clinical trials and seeking regulatory approval for a drug candidate. Similarly, because we are still designing our planned Phase III clinical trials for Viprinex and have not yet received FDA approval for these
trials, we are currently unable to estimate the expenses required to obtain regulatory approval for Viprinex. We expect that we will bear the expenses of the Viprinex clinical trials. We expect that research and development expenses will increase in
2005 as we commence our second Phase III clinical trial for XERECEPT, begin manufacturing a clinical supply of Viprinex and incur costs for our planned Phase III clinical trial for Viprinex.



Research and development expenditures are charged to operations, as incurred.
Research and development expenses, including direct and allocated expenses, consist of independent research and development costs and costs associated with sponsored research and development.



GENERAL AND ADMINISTRATIVE EXPENSES



| |  |                     |           |                                     |   |           |  |           |           |           |   |         |  |   |          |  
| |  | ------------------- | --------- | ----------------------------------- | - | --------- |  | --------- | --------- | --------- | - | ------- |  | - | -------- | -
| |  | Year Ended June 30, |           | Increase (Decrease) From Prior Year |  
| |  | 2004                |           | 2003                                |   | 2002      |  | 2004/2003 |           | 2003/2002 |  
| |  | $                   | 3,101,000 |                                     | $ | 2,493,000 |  | $         | 2,637,000 |           | $ | 608,000 |  | $ | (144,000 | )



General and
administrative expenses were $3,101,000 in 2004 compared to $2,493,000 in fiscal 2003. The 2004 increase resulted primarily from increases of $230,000 for performance-based bonus compensation and $378,000 for additional marketing advisory and
investor relation services, directors and officers insurance, increased directors fees, and professional accounting fees related to compliance with the Sarbanes-Oxley Act.



The decrease in general and administrative expenses from 2002 to 2003 resulted primarily from a decrease in expenditures for
activities related to seeking financing and strategic partnerships.



We expect that our general and administrative expenses will increase in fiscal 2005 as we increase professional staff and add facilities in the New York area related to the development of Viprinex.



INTEREST INCOME



| |  |                     |         |                                     |   |         |  |           |         |  |           |         |   |  |   |          |  
| |  | ------------------- | ------- | ----------------------------------- | - | ------- |  | --------- | ------- |  | --------- | ------- | - |  | - | -------- | -
| |  | Year Ended June 30, |         | Increase (Decrease) From Prior Year |  
| |  | 2004                |         | 2003                                |   | 2002    |  | 2004/2003 |         |  | 2003/2002 |        
| |  | $                   | 128,000 |                                     | $ | 144,000 |  | $         | 342,000 |  | $         | (16,000 | ) |  | $ | (198,000 | )



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Interest income was $128,000 in 2004, compared to $144,000 in 2003 and $342,000 in 2002. The decreases
were primarily due to lower average interest rates and lower average invested cash balances. In March 2004, we issued 3,880,000 shares of common stock for net proceeds of $18,311,000, which funds were available for investment in the final four
months of the 2004 fiscal year.



OTHER NON-CASH INCOME



| |  |                     |         |                                     |   |      |   |           |   |           |  |  
| |  | ------------------- | ------- | ----------------------------------- | - | ---- | - | --------- | - | --------- |  | -
| |  | Year Ended June 30, |         | Increase (Decrease) From Prior Year
| |  | 2004                |         | 2003                                |   | 2002 |   | 2004/2003 |   | 2003/2002
| |  | $                   | 477,000 |                                     |  |      |  |           | $ | 477,000   |  | 



Non-cash income of
$477,000 in 2004 resulted from the revaluation of warrants issued with our sale of 3,880,000 shares of common stock in March 2004. The common stock and warrants were issued in a private placement and were initially unregistered. We filed a
registration statement on Form S-3 with the Securities and Exchange Commission in April 2004 to register the shares issued in the private placement, as well as the shares to be issued upon the exercise of the warrants. In accordance with EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, A Companys Own Stock, the warrants were reported as a liability and valued at fair value on the date of issuance. The warrants were revalued
each period until the effective date of the registration statement, and the change in the fair value from the date of issuance through the date that the registration statement was effective, in the amount of $477,000, was recorded as non-cash
income.



We had no other non-cash income during 2003 and 2002.



LIQUIDITY AND CAPITAL RESOURCES



|                                           |  |          |            |      |   |           |  |   |          
|------------------------------------------ |  | -------- | ---------- | ---- | - | --------- |  | - | ---------
|                                           |  | June 30,
|                                           |  | 2004     |            | 2003 |   | 2002     
|Cash and cash equivalents, and investments |  | $        | 20,733,000 |      | $ | 4,402,000 |  | $ | 7,259,000
|Working capital                            |  | $        | 13,582,000 |      | $ | 4,238,000 |  | $ | 5,043,000



|                            |  |                     |             |   |      |   |            |      |  |   |            |  
|--------------------------- |  | ------------------- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                            |  | Year Ended June 30, |            
|                            |  | 2004                |             |   | 2003 |   |            | 2002 | 
|Cash provided by (used in): |  |                     |             |   |      |   |            |      |  |   |            |  
|Operating activities        |  | $                   | (2,078,000  | ) |      | $ | (3,110,000 | )    |  | $ | (3,913,000 | )
|Investing activities        |  | $                   | (14,736,000 | ) |      | $ | 2,625,000  |      |  | $ | 452,000    |  
|Financing activities        |  | $                   | 18,760,000  |   |      | $ | 274,000    |      |  | $ | 111,000    |  



Since our founding in
1987, we have applied a majority of our resources to research and development programs and have generated only limited operating revenue. Except for 2001, we have incurred losses in each year since our inception and we expect to continue to incur
losses in the future due to ongoing research and development efforts.



As of June 30, 2004, we had cash and cash equivalents of $2,012,000, and total investments of $18,721,000 which represents an increase of $16,331,000 over our balance of cash and cash equivalents of $66,000, and investments of $4,336,000 as
of June 30, 2003.



Cash Flows from Operating Activities



The cash used for operating activities of $2,078,000 in
2004 consisted primarily of the net loss of $1,808,000 and the non-cash income of $477,000 related to the derivative revaluation of the warrants issued in March 2004 in connection with our private placement. Cash used for operating activities of
$3,110,000 and $3,913,000 in 2003 and 2002, respectively, resulted primarily from the net loss in each year.



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Cash Flows from Investing Activities



The cash used for investing activities of $14,736,000 in 2004 resulted
primarily from purchases of investments of $54,000,000, less maturities of investments of $39,533,000, and $264,000 in deferred acquisition related costs for the purchase of Empire Pharmaceuticals, Inc. Cash of $2,625,000 was provided from investing
activities in 2003 primarily from the maturity of investments in the amount of $9,359,000, less purchase of investments of $6,720,000 during the year. Cash of $452,000 was provided by investing activities in 2002 primarily from the maturity of
investments in the amount of $1,700,000, less the purchase of investments of $1,248,000 during the year.



Cash Flows from Financing Activities



Financing activities provided cash of $18,760,000 in 2004 and consisted of the net proceeds we received in the amount of $18,311,000 from the sale of
common stock and warrants in our March 2004 private financing, $424,000 from issuances of common stock upon exercise of stock options and warrants during the year and $25,000 from the sale of common stock pursuant to the Companys employee
stock purchase plan during the year. Financing activities provided cash of $274,000 and $111,000 in 2003 and 2002, respectively, resulting from the issuance of common stock upon the exercise of stock options and warrants and from the sale of common
stock pursuant to the Companys employee stock purchase plan.



Our contractual commitments as of June 30, 2004 are summarized below by category in the following table. As we move forward with the clinical development of XERECEPT and Viprinex, the Company will enter into
contractual commitments for additional expenditures relating to these clinical trials; these additional expenditures are not reflected in the following table.



|                              |  |                        |           |                 |   |           |  |           |           |                  |   |  |  
|----------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | --------- | ---------------- | - |  | -
|                              |  | Payments due by period
|                              |  | Total                  |           | Less than1 year |   | 1-3 years |  | 3-5 years |           | More than5 years
|Operating lease obligations   |  | $                      | 114,115   |                 | $ | 105,237   |  | $         | 8,878     |                  |  |  | 
|Other long-term liabilities * |  |                        | 2,000,000 |                 |   |          |  |           | 2,000,000 |                  |  |  | 
|                              |  |                        |           |                 |   |           |  |           |           |                  |   |  |  
|Total                         |  | $                      | 2,114,115 |                 | $ | 105,237   |  | $         | 2,008,878 |                  |  |  | 
|                              |  |                        |           |                 |   |           |  |           |           |                  |   |  |  

---

|* | Represents additional contingent merger cash consideration payable to the selling stockholders of Empire Pharmaceuticals if and when Phase III clinical trials for Viprinex commence.
We will also issue up to 2,375,176 additional shares to those selling stockholders if and when Phase III clinical trials for Viprinex commence.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our available cash and cash equivalents of $2,012,000, together with investments of $18,721,000 totaled $20,733,000 as of June 30, 2004. In July 2004, we
paid $2,000,000 in cash, issued 2,399,176 of common stock valued at $9,453,000, and incurred approximately $1,065,000 in acquisition-related expenses to acquire Empire Pharmaceuticals as described in Note 9 to the accompanying financial statements.
As described above, we expect to incur increased costs in 2005 primarily for Phase III clinical trials of XERECEPT and for the preparation of Phase III clinical trials for Viprinex, along with related administrative support costs. If and when
Viprinex commences Phase III clinical trials, we will pay the former Empire stockholders up to an additional $2,000,000 and issue up to an additional 2,375,176 shares of common stock. All future development costs for Memantine will be paid by Merz,
together with its marketing partners. We believe that our available cash, cash equivalents and investment balances will be adequate to fund our operations through at least the next twelve months, although we expect that we may need to raise
additional capital in the future to complete the clinical development of both XERECEPT and Viprinex. Accordingly, we may seek to raise additional funds when market conditions permit. However, there can be no assurance that funding will be available
or that, if available, will be on acceptable terms.



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Our future capital requirements will depend on a number of factors, including:



| |  | the amount of payments received from marketing agreements for Memantine;
| | - | ------------------------------------------------------------------------



| |  | the amount of royalties received from Merz for future sales of Memantine;
| | - | -------------------------------------------------------------------------



| |  | the progress of our clinical development programs;
| | - | --------------------------------------------------



| |  | the time and cost involved in obtaining regulatory approvals;
| | - | -------------------------------------------------------------



| |  | the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | the acquisition or licensing of new drug candidates;
| | - | ----------------------------------------------------



| |  | competing technological and market developments;
| | - | ------------------------------------------------



| |  | our ability to establish collaborative relationships; and
| | - | ---------------------------------------------------------



| |  | the development of commercialization activities and arrangements.
| | - | -----------------------------------------------------------------



We do not have any off-balance sheet arrangements as defined by rules recently enacted by the Securities and Exchange Commission and Financial Accounting
Standards Board, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS



Our product candidates are based on new technologies and therefore are subject to
numerous inherent risks of failure.



Our product
candidates are based on new and relatively unproven technologies. Viprinex has previously failed in one Phase III clinical trial and a recent Phase III clinical trial for Memantine for neuropathic pain failed to produce the desired results. As
evidenced by these trials, our product candidates face numerous risks of failure, including the possibility that these candidates may:



| |  | be found to be unsafe, ineffective or toxic;
| | - | --------------------------------------------



| |  | fail to receive necessary regulatory clearances;
| | - | ------------------------------------------------



| |  | if approved, be difficult to manufacture on a large scale or be uneconomical to market;
| | - | ---------------------------------------------------------------------------------------



| |  | be precluded from marketing by us or our marketing partners due to the proprietary rights of third parties; and
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | not be successful because third parties market or may market superior or equivalent products.
| | - | ---------------------------------------------------------------------------------------------



If any of these risks of failure should materialize, we may be forced to make additional significant expenditures for
further clinical trials or cease further development of the drug candidate. In either case, our prospects would be harmed and our stock price could decline.



We are dependent on Merz and its marketing partners Forest and Lundbeck for the successful commercialization of Memantine.



All of our revenues in fiscal 2004 and 2003 were license fee and royalty
payments from Merz related to our portion of payments received by Merz pursuant to its agreements with Forest and Lundbeck, its marketing partners. The only revenues that we expect to receive in the foreseeable future are our share of payments
received by Merz from Forest and Lundbeck and royalties on Memantine sales made by Merz or its marketing partners, which depends, among other things, on the continuation of our research and marketing cooperation agreement with Merz and
Childrens Medical Center. Although Merz has received approval to market Memantine for



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Alzheimers disease in Europe, we are not entitled to receive royalty payments for Memantine sales for Alzheimers disease in certain European
countries and any commercialization efforts in these markets would not directly benefit us. If Merz is unable to successfully commercialize Memantine, or if Memantine is not commercialized for indications or in markets where we are entitled to
royalty payments, our revenues would be adversely affected.



Under certain circumstances, Merz or Childrens Medical Center can terminate our research and marketing cooperation agreement upon six months notice. The termination of our agreement with Merz or any failure by Merz or its
partners to successfully commercialize Memantine, could reduce or terminate our future royalties under the research and marketing cooperation agreement and would have a material adverse effect on our business, financial conditions and results of
operations.



We have a history of losses and we may never achieve or
maintain profitability.



Except for fiscal 2001, we
have experienced operating losses every year since inception in funding the research, development and clinical testing of our drug candidates. As of June 30, 2004, our accumulated deficit was approximately $42.3 million and we expect to continue to
incur operating losses in the future as we continue our clinical trials for XERECEPT and commence our planned clinical trials for Viprinex. To achieve profitability, we would need to generate significant additional revenue with positive gross
margins. Although we expect that our royalty revenues from the sales of Memantine will increase in future periods, these increases may not occur and, even if they do increase in line with our projections, we do not expect that these increases will
be sufficient to allow us to operate profitably at any time in the foreseeable future.



Even if our other product candidates are approved for commercialization, these candidates may not be successfully commercialized.



If either XERECEPT or Viprinex is approved for commercialization, we will be required either to market the drug directly, which would require the
recruitment and training of a direct sales force, or license the drug to a larger biotechnology or pharmaceutical company with an existing sales force. The building of a direct sales force is costly and we may not succeed in directly marketing any
approved drug. If we elected to license the approved drug to a larger company with an existing sales force, we would be required to share the revenues from commercialization and would lose a significant degree of control over the commercialization
of the drug.



It is difficult to integrate acquired companies, products,
technologies and personnel into our operations and our inability to do so could greatly lessen the value of any such acquisitions.



In July 2004, we acquired Empire Pharmaceuticals in a merger transaction and we may make additional strategic acquisitions of companies, products or
technologies in the future in order to complement our product pipeline or to implement our business strategy. In connection with the Empire acquisition, we added two new members to our senior management team and we established offices in New Jersey.
This is the first time that we will be managing two facilities and the distance between the facilities may make integration more difficult. If we are unable to successfully integrate acquired businesses, products, technologies or personnel with our
existing operations, we may not receive the intended benefits of such acquisitions.



Additionally, disputes may arise following the consummation of an acquisition regarding representations and warranties, indemnity, earn-out and other provisions in the acquisition agreement. For these reasons,
acquisitions may subject us to unanticipated liabilities or risks, disrupt our operations or divert managements attention from day-to-day operations.



Because we do not have our own manufacturing facilities, we face risks from outsourcing.



Although Merz and Merzs marketing partners have the responsibility of supplying Memantine for their clinical trials,
we must procure our own supplies of XERECEPT and Viprinex for our clinical trials of the these



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compounds. Our clinical supply of XERECEPT has been manufactured by established methods using chemical synthesis to our specifications and we are currently
making arrangements for an initial clinical supply of Viprinex to be produced to our specifications. We perform audits on our contractors who supply our drug candidates to assess compliance with the current Good Manufacturing Practice, or cGMP,
regulations. Although alternative cGMP suppliers of the bulk drugs and of finished dosage form products are available to us, Viprinex is difficult and costly to produce and we believe that there is only a limited number of manufacturers who are
capable of producing the compound. We currently have no plans to build or develop an in-house manufacturing capability.



We face certain risks by outsourcing manufacturing, including:



| |  | the delay of our preclinical and human clinical testing if our contractors are unable to supply sufficient quantities of product candidates manufactured in accordance with cGMP on
acceptable terms;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the delay of market introduction and subsequent sales if we should encounter difficulties establishing relationships with manufacturers to produce, package and distribute products;
and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | adverse effects on FDA pre-market approval of potential products and contract manufacturers if they do not adhere to cGMP regulations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



Because of these risks, our dependence on third parties for the manufacture
of products may adversely affect our results of operations and our ability to develop and deliver products on a timely and competitive basis.



We have relied and will continue to rely on others for research, development and commercialization of our potential products.



We have entered into various contractual arrangements (which are generally
non-exclusive) with consultants, academic collaborators, licensors, licensees and others, and we are dependent upon the level of commitment and subsequent success of these outside parties in performing their responsibilities. Certain of these
agreements place significant responsibility for pre-clinical testing and human clinical trials and for preparing and submitting submissions for regulatory approval for potential products on the collaborator, licensor or contractor. If the
collaborator, licensor or contractor fails to perform, our business, financial conditions and results may be adversely affected.



We have also relied on scientific, mechanical, clinical, commercial and other data supplied and disclosed by others in entering into these agreements. We
have relied on this data in support of applications for human clinical trials for our potential products. Although we have no reason to believe that this information contains errors or omissions of fact, it is possible that there are errors or
omissions of fact that would change materially our view of the future likelihood of FDA approval or commercial viability of these potential products.



We have agreements and licenses with third parties that require us to meet certain due diligence obligations, provide regular reports and make royalty and
other payments to such parties. Our failure to satisfy these obligations could cause us to lose rights to technology or data under these agreements.



Reductions in our staff might delay the achievement of planned development objectives.



Each person currently employed by us serves an essential function. We currently employ eight persons full-time and six
persons part-time. Any reduction in our staff could impair our ability to manage ongoing clinical trials and may have a material adverse effect on our operations.



The market price of our common stock has been, and is likely to continue to be, highly volatile.



The average daily trading volume of our common stock has historically been
low, even when compared to that of other biopharmaceutical companies. Because of our relatively low trading volume, our stock price can be highly volatile.



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Additionally, we recently issued 2,399,168 shares of common stock in connection with our acquisition of
Empire Pharmaceuticals and if and when we commence Phase III clinical trials for Viprinex we will be required to issue an additional 2,375,176 shares. We are required to register these shares with the SEC for resale. The selling stockholders of
Empire will be able to begin selling their NTI common stock on the earlier of the commencement of Phase III clinical trials of Viprinex or July 14, 2005. The issuance of these additional shares and any large sales that may be made by the former
Empire stockholders could have a negative effect on the price and volatility of our stock price.



Additional factors that may affect the volatility of our stock price include:



| |  | announcements of the results of pre-clinical studies and clinical trials by us, Merz or its marketing partners or our competitors;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | other evidence of the safety or efficacy of our products, or those of Merz or its marketing partners or our competitors;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | announcements of technological innovations or new therapeutic products by us or our competitors;
| | - | ------------------------------------------------------------------------------------------------



| |  | developments in patent or other proprietary rights of us or our competitors, including litigation;
| | - | --------------------------------------------------------------------------------------------------



| |  | fluctuations in our operating results;
| | - | --------------------------------------



| |  | government regulation and health care legislation;
| | - | --------------------------------------------------



| |  | market conditions for life science companies stocks in general.
| | - | ----------------------------------------------------------------



Clinical trials or marketing of any of our potential products may expose us to liability claims from the use of such products, which our insurance may not cover.



We currently have a limited amount of product
liability insurance for our clinical trials, with coverage limits of $5 million per incident and $5 million in the aggregate. It is possible that our current insurance may not be adequate to cover liabilities arising from our clinical trials.



Our current product liability insurance does not cover the
commercial sales of products. We cannot be sure that we will be able to obtain product liability insurance covering commercial sales or, if such insurance is obtained, that sufficient coverage can be acquired at a reasonable cost. An inability to
obtain insurance at acceptable cost or otherwise protect against potential product liability claims could prevent or inhibit commercialization of any products we develop.



ITEM 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements.
We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.



The primary objective for our investment activities is to preserve principal
while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of June 30, 2004, the fair value of our
investments was $18.7 million and 63% of our total portfolio will mature in one year or less. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale
securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.



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##### Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Neurobiological Technologies, Inc.



We have audited the accompanying balance sheets of Neurobiological Technologies, Inc. as of June 30, 2004 and 2003, and the related statements of operations, stockholders equity, and cash flows for each of the three years in the
period ended June 30, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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 Neurobiological Technologies, Inc. as of June 30, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with U.S. generally accepted accounting principles.



/s/    ERNST & YOUNG LLP



Palo Alto, California

July 30, 2004



27



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NEUROBIOLOGICAL TECHNOLOGIES, INC.



BALANCE SHEETS



|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                                                                                          |  | June 30, |            
|                                                                                                                                                                                                                                                          |  | 2004     |             |   | 2003 |  
|ASSETS                                                                                                                                                                                                                                                    |  |          |             |   |      |   |             |  
|                                                                                                                                                                                                                                                          |  |         
|Current assets:                                                                                                                                                                                                                                           |  |          |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                 |  | $        | 2,012,452   |   |      | $ | 66,138      |  
|Short-term investments                                                                                                                                                                                                                                    |  |          | 11,849,763  |   |      |   | 4,336,127   |  
|Interest receivable                                                                                                                                                                                                                                       |  |          | 103,259     |   |      |   | 50,339      |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                 |  |          | 277,027     |   |      |   | 350,533     |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|Total current assets                                                                                                                                                                                                                                      |  |          | 14,242,501  |   |      |   | 4,803,137   |  
|Long-term investments                                                                                                                                                                                                                                     |  |          | 6,871,344   |   |      |   |            |  
|Property and equipment, net                                                                                                                                                                                                                               |  |          | 6,209       |   |      |   | 10,073      |  
|Deferred acquisition costs                                                                                                                                                                                                                                |  |          | 263,544     |   |      |   |            |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|                                                                                                                                                                                                                                                          |  | $        | 21,383,598  |   |      | $ | 4,813,210   |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                      |  |          |             |   |      |   |             |  
|                                                                                                                                                                                                                                                          |  |         
|Current liabilities:                                                                                                                                                                                                                                      |  |          |             |   |      |   |             |  
|Accounts payable                                                                                                                                                                                                                                          |  | $        | 258,855     |   |      | $ | 309,558     |  
|Accrued professional fees                                                                                                                                                                                                                                 |  |          | 210,025     |   |      |   | 167,118     |  
|Accrued clinical trial expenses                                                                                                                                                                                                                           |  |          | 42,550      |   |      |   |            |  
|Accrued toxicology and manufacturing expenses                                                                                                                                                                                                             |  |          | 42,284      |   |      |   | 27,913      |  
|Accrued liabilities                                                                                                                                                                                                                                       |  |          | 106,835     |   |      |   | 61,006      |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|Total current liabilities                                                                                                                                                                                                                                 |  |          | 660,549     |   |      |   | 565,595     |  
|                                                                                                                                                                                                                                                          |  |         
|Commitments                                                                                                                                                                                                                                               |  |          |             |   |      |   |             |  
|                                                                                                                                                                                                                                                          |  |         
|Stockholders equity:                                                                                                                                                                                                                                     |  |          |             |   |      |   |             |  
|Convertible Series A Preferred stock, $.001 par value, 5,000,000 shares authorized, 2,332,000 issued in series, 534,000 and 1,154,000
outstanding at June 30, 2004 and 2003, respectively (aggregate liquidation preference of $267,000 at June 30, 2004) |  |          | 267,000     |   |      |   | 577,000     |  
|Common stock, $.001 par value, 35,000,000 shares authorized, 23,993,938 and 18,755,553 outstanding at June 30, 2004 and 2003,
respectively                                                                                                                |  |          | 62,880,926  |   |      |   | 44,259,534  |  
|Deferred stock compensation                                                                                                                                                                                                                               |  |          | (27,376     | ) |      |   | (82,126     | )
|Accumulated deficit                                                                                                                                                                                                                                       |  |          | (42,324,627 | ) |      |   | (40,516,524 | )
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                             |  |          | (72,874     | ) |      |   | 9,731       |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                                                                                                                |  |          | 20,723,049  |   |      |   | 4,247,615   |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  
|                                                                                                                                                                                                                                                          |  | $        | 21,383,598  |   |      | $ | 4,813,210   |  
|                                                                                                                                                                                                                                                          |  |          |             |   |      |   |             |  



See accompanying notes.



28



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NEUROBIOLOGICAL TECHNOLOGIES, INC.



STATEMENTS OF OPERATIONS



|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------- |  | ------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                |  | Year ended June 30, |           
|                                                                |  | 2004                |            |   | 2003 |   |            | 2002 | 
|REVENUES:                                                       |  |                     |            |   |      |   |            |      |  |   |            |  
|License                                                         |  | $                   | 2,531,210  |   |      | $ | 1,968,690  |      |  | $ |           |  
|Royalty                                                         |  |                     | 255,369    |   |      |   | 10,949     |      |  |   |           |  
|Grant                                                           |  |                     |           |   |      |   |           |      |  |   |           |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Total revenues                                                  |  |                     | 2,786,579  |   |      |   | 1,979,639  |      |  |   |           |  
|EXPENSES:                                                       |  |                     |            |   |      |   |            |      |  |   |            |  
|Research and development                                        |  |                     | 2,098,404  |   |      |   | 2,316,978  |      |  |   | 2,013,403  |  
|General and administrative                                      |  |                     | 3,101,033  |   |      |   | 2,492,971  |      |  |   | 2,637,332  |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Total expenses                                                  |  |                     | 5,199,437  |   |      |   | 4,809,949  |      |  |   | 4,650,735  |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Operating loss                                                  |  |                     | (2,412,858 | ) |      |   | (2,830,310 | )    |  |   | (4,650,735 | )
|Interest income, net                                            |  |                     | 127,516    |   |      |   | 143,842    |      |  |   | 342,549    |  
|Other non-cash income                                           |  |                     | 477,239    |   |      |   |           |      |  |   |           |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Loss before income tax benefit                                  |  |                     | (1,808,103 | ) |      |   | (2,686,468 | )    |  |   | (4,308,186 | )
|Income tax benefit                                              |  |                     |           |   |      |   |           |      |  |   | 41,831     |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|NET LOSS                                                        |  | $                   | (1,808,103 | ) |      | $ | (2,686,468 | )    |  | $ | (4,266,355 | )
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss per share                            |  | $                   | (0.09      | ) |      | $ | (0.15      | )    |  | $ | (0.24      | )
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  
|Shares used in basic and diluted net loss per share calculation |  |                     | 20,678,914 |   |      |   | 18,015,644 |      |  |   | 17,569,923 |  
|                                                                |  |                     |            |   |      |   |            |      |  |   |            |  





See accompanying notes.



29



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



STATEMENTS OF STOCKHOLDERS EQUITY



|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------ | -------- | - | -------------------------- | ---------- | - | ------------------ | - | ---------- | ----------------------------------- |  | - | ------------------------ | - |  | - | ----------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                              |  | ConvertiblePreferred Stock |   |  | Common Stock |          |   | Deferred StockCompensation |            |   | AccumulatedDeficit |   |            | AccumulatedOtherComprehensiveIncome |  |   | TotalStockholdersEquity |  
|                                                                                              |  | Shares                     |   |  | Amount       |          |   | Shares                     |            |   | Amount             |   |            |                                     |  |  
|Balances at June 30, 2001                                                                     |  | 1,582,000                  |   |  | $            | 791,000  |   |                            | 17,503,699 |   |                    | $ | 43,660,557 |                                     |  | $ | (191,626                 | ) |  | $ | (33,563,701 | ) |  | $ |        |   |  | $ | 10,696,230 |  
|Issuance of common stock upon exercise of warrants                                            |  |                           |   |  |              |         |   |                            | 58,000     |   |                    |   | 80,500     |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 80,500     |  
|Amortization of deferred stock compensation                                                   |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   | 54,750                   |   |  |   |            |   |  |   |        |   |  |   | 54,750     |  
|Conversion of preferred stock to common stock                                                 |  | (210,000                   | ) |  |              | (105,000 | ) |                            | 210,000    |   |                    |   | 105,000    |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   |           |  
|Issuance of common stock under employee stock purchase plan                                   |  |                           |   |  |              |         |   |                            | 11,872     |   |                    |   | 30,648     |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 30,648     |  
|Comprehensive loss:                                                                           |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Net loss                                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   | (4,266,355  | ) |  |   |        |   |  |   | (4,266,355 | )
|Unrealized gain on securities                                                                 |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   | 16,930  |   |  |   | 16,930     |  
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Total comprehensive loss                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | (4,249,425 | )
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Balances at June 30, 2002                                                                     |  | 1,372,000                  |   |  |              | 686,000  |   |                            | 17,783,571 |   |                    |   | 43,876,705 |                                     |  |   | (136,876                 | ) |  |   | (37,830,056 | ) |  |   | 16,930  |   |  |   | 6,612,703  |  
|Issuance of common stock upon exercise of options and warrants                                |  |                           |   |  |              |         |   |                            | 769,955    |   |                    |   | 320,422    |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 320,422    |  
|Repurchase of common stock                                                                    |  |                           |   |  |              |         |   |                            | (32,000    | ) |                    |   | (86,950    | )                                   |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | (86,950    | )
|Amortization of deferred stock compensation                                                   |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   | 54,750                   |   |  |   |            |   |  |   |        |   |  |   | 54,750     |  
|Conversion of preferred stock to common stock                                                 |  | (218,000                   | ) |  |              | (109,000 | ) |                            | 218,000    |   |                    |   | 109,000    |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   |           |  
|Issuance of common stock under employee stock purchase plan                                   |  |                           |   |  |              |         |   |                            | 16,027     |   |                    |   | 40,357     |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 40,357     |  
|Comprehensive loss:                                                                           |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Net loss                                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   | (2,686,468  | ) |  |   |        |   |  |   | (2,686,468 | )
|Unrealized loss on securities                                                                 |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   | (7,199  | ) |  |   | (7,199     | )
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Total comprehensive loss                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | (2,693,667 | )
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Balances at June 30, 2003                                                                     |  | 1,154,000                  |   |  |              | 577,000  |   |                            | 18,755,553 |   |                    |   | 44,259,534 |                                     |  |   | (82,126                  | ) |  |   | (40,516,524 | ) |  |   | 9,731   |   |  |   | 4,247,615  |  
|Issuance of common stock upon exercise of options and warrants                                |  |                           |   |  |              |         |   |                            | 729,005    |   |                    |   | 423,917    |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 423,917    |  
|Issuance of common stock at $5.00 per share in private equity financing net of issuance costs |  |                           |   |  |              |         |   |                            | 3,880,000  |   |                    |   | 18,310,831 |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 18,310,831 |  
|Derivative revaluation of warrants issued with common stock                                   |  |                           |   |  |              |         |   |                            |           |   |                    |   | (477,239   | )                                   |  |   |                         |   |  |   |             |   |  |   |        |   |  |   | (477,239   | )
|Issuance of warrants for services                                                             |  |                           |   |  |              |         |   |                            |           |   |                    |   | 28,200     |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 28,200     |  
|Amortization of deferred stock compensation                                                   |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   | 54,750                   |   |  |   |            |   |  |   |        |   |  |   | 54,750     |  
|Conversion of preferred stock to common stock                                                 |  | (620,000                   | ) |  |              | (310,000 | ) |                            | 620,000    |   |                    |   | 310,000    |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   |           |  
|Issuance of common stock under employee stock purchase plan                                   |  |                           |   |  |              |         |   |                            | 9,380      |   |                    |   | 25,683     |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | 25,683     |  
|Comprehensive loss:                                                                           |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Net loss                                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   | (1,808,103  | ) |  |   |        |   |  |   | (1,808,103 | )
|Unrealized loss on securities                                                                 |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   | (82,605 | ) |  |   | (82,605    | )
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Total comprehensive loss                                                                      |  |                           |   |  |              |         |   |                            |           |   |                    |   |           |                                     |  |   |                         |   |  |   |            |   |  |   |        |   |  |   | (1,890,708 | )
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  
|Balances at June 30, 2004                                                                     |  | 534,000                    |   |  | $            | 267,000  |   |                            | 23,993,938 |   |                    | $ | 62,880,926 |                                     |  | $ | (27,376                  | ) |  | $ | (42,324,627 | ) |  | $ | (72,874 | ) |  | $ | 20,723,049 |  
|                                                                                              |  |                            |   |  |              |          |   |                            |            |   |                    |   |            |                                     |  |   |                          |   |  |   |             |   |  |   |         |   |  |   |            |  



See accompanying notes.



30



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



STATEMENTS OF CASH FLOWS



|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------ |  | ------------------- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                               |  | Year ended June 30, |            
|                                                                               |  | 2004                |             |   | 2003 |   |            | 2002 | 
|Operating Activities                                                           |  |                     |             |   |      |   |            |      |  |   |            |  
|Net loss                                                                       |  | $                   | (1,808,103  | ) |      | $ | (2,686,468 | )    |  | $ | (4,266,355 | )
|Adjustments to reconcile net loss to net cash used in operating activities:    |  |                     |             |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                                  |  |                     | 5,967       |   |      |   | 8,715      |      |  |   | 23,364     |  
|Loss on sale of property and equipment                                         |  |                     | 2,850       |   |      |   |           |      |  |   |           |  
|Amortization of deferred stock Compensation                                    |  |                     | 54,750      |   |      |   | 54,750     |      |  |   | 54,750     |  
|Derivative revaluation                                                         |  |                     | (477,239    | ) |      |   |           |      |  |   |           |  
|Issuance of common stock, options and warrants for license rights and services |  |                     | 28,200      |   |      |   |           |      |  |   |           |  
|Changes in assets and liabilities:                                             |  |                     |             |   |      |   |            |      |  |   |            |  
|Interest receivable                                                            |  |                     | (52,920     | ) |      |   | 105,557    |      |  |   | (23,852    | )
|Prepaid expenses and other current assets                                      |  |                     | 73,506      |   |      |   | (105,999   | )    |  |   | 9,293      |  
|Accounts payable and accrued expenses                                          |  |                     | 94,954      |   |      |   | (486,682   | )    |  |   | 290,228    |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Net cash used in operating activities                                          |  |                     | (2,078,035  | ) |      |   | (3,110,127 | )    |  |   | (3,912,572 | )
|                                                                               |  |                     |            
|Investing Activities                                                           |  |                     |             |   |      |   |            |      |  |   |            |  
|Purchase of investments                                                        |  |                     | (54,000,312 | ) |      |   | (6,719,831 | )    |  |   | (1,248,214 | )
|Maturities of investments                                                      |  |                     | 39,532,727  |   |      |   | 9,358,537  |      |  |   | 1,700,000  |  
|Purchases of property and equipment                                            |  |                     | (4,953      | ) |      |   | (13,332    | )    |  |   |           |  
|Deferred acquisition costs                                                     |  |                     | (263,544    | ) |      |   |           |      |  |   |           |  
|Proceeds from sale of property and equipment                                   |  |                     |            |   |      |   |           |      |  |   |           |  
|Additions to patents and licenses                                              |  |                     |            |   |      |   |           |      |  |   |           |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided by investing activities                            |  |                     | (14,736,082 | ) |      |   | 2,625,374  |      |  |   | 451,786    |  
|                                                                               |  |                     |            
|Financing Activities                                                           |  |                     |             |   |      |   |            |      |  |   |            |  
|Payment of note payable                                                        |  |                     |            |   |      |   |           |      |  |   |           |  
|Proceeds of short-term borrowings                                              |  |                     |            |   |      |   |           |      |  |   |           |  
|Issuance of common stock, net of issuance costs                                |  |                     | 18,760,431  |   |      |   | 360,779    |      |  |   | 111,148    |  
|Repurchase of common stock                                                     |  |                     |            |   |      |   | (86,950    | )    |  |   |           |  
|Issuance of preferred stock, net of issuance costs                             |  |                     |            |   |      |   |           |      |  |   |           |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Net cash provided by financing activities                                      |  |                     | 18,760,431  |   |      |   | 273,829    |      |  |   | 111,148    |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents                               |  |                     | 1,946,314   |   |      |   | (210,924   | )    |  |   | (3,349,638 | )
|Cash and cash equivalents at beginning of period                               |  |                     | 66,138      |   |      |   | 277,062    |      |  |   | 3,626,700  |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of period                                     |  | $                   | 2,012,452   |   |      | $ | 66,138     |      |  | $ | 277,062    |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Supplemental Disclosures:                                                      |  |                     |             |   |      |   |            |      |  |   |            |  
|Conversion of short-term-borrowings to Series A preferred stock                |  | $                   |            |   |      | $ |           |      |  | $ |           |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Conversion of preferred stock to common stock                                  |  | $                   | 310,000     |   |      | $ | 109,000    |      |  | $ | 105,000    |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  
|Deferred stock compensation related to options granted                         |  | $                   |            |   |      | $ |           |      |  | $ |           |  
|                                                                               |  |                     |             |   |      |   |            |      |  |   |            |  



See accompanying notes.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS



Note 1.    Description of Business and Summary of Significant Accounting Policies



Description of Business



Neurobiological Technologies, Inc. (NTI®, we, or the Company) is a drug development
company focused on the clinical evaluation and regulatory approval of neuroscience drugs. The Companys strategy is to in-license and develop later-stage drug candidates that target major medical needs and which can be rapidly commercialized.
The Companys experienced management team oversees the human clinical trials necessary to establish preliminary evidence of efficacy and seeks partnerships with pharmaceutical and biotechnology companies to complete development and marketing of
our product candidates.



Through June 30, 2003, the Company was
a development stage company whose activities primarily involved research and development of drug delivery systems using proprietary technology, in-licensing of a product candidate, recruiting key personnel, establishing a manufacturing process and
raising capital to finance its development operations. Memantine has been approved for treatment of moderate to severe Alzheimers disease and is marketed in the United States, beginning in 2004, and in Europe, beginning in 2003, by our
marketing partners Merz and Forest. The Company recorded significant revenue from the licensing and sale of Memantine during 2004, and accordingly, is no longer a development stage enterprise.



In the course of our development activities, we have incurred significant
losses and, although the Company was profitable in the year ended June 30, 2001, it will likely incur additional losses over at least the next fiscal year ending June 30, 2005. The Company may seek to raise additional funds whenever market
conditions permit. However, there can be no assurance that funding will be available, or, if available, that it will be available on acceptable terms. If the Company is not able to raise adequate funds, it may be required to delay, scale back, or
terminate its clinical trials or to obtain funds through entering into arrangements with collaborative partners or others.



Revenue Recognition



Revenue related to license fees with non-cancelable, non-refundable terms and no future performance obligations are recognized when collection is assured.
Such revenues are deferred and recognized over the performance period if future performance obligations exist. Non-refundable up-front payments received in connection with research and development activities are deferred and recognized on a
straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenues associated with milestones are recognized as earned, based on completion of development milestones, either upon receipt, or when
collection is assured. Revenues associated with royalty agreements on sales of products by our marketing partners are recognized when the proceeds are received due to the limited sales history of the product and our inability to estimate such sales.



Research and Development Expenses



Research and development expenditures are charged to operations, as
incurred. Research and development expenses, including direct and allocated expenses, consist of independent research and development costs and costs associated with sponsored research and development.



Our research and development expenses include certain expenses that are
incurred over multiple reporting periods, such as fees for contractors and consultants, fees to collaborators for pre-clinical research studies, patient treatment costs related to clinical trials and related clinical manufacturing costs, and license
fees for use of third-party intellectual property rights. Management assesses how much of these multi-period costs should be charged



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



to research and development expense in each reporting period. In determining whether clinical trial activities and preclinical animal studies performed by
third parties should be recognized in a specific reporting period, management considers:



| |  | estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with the third-party service providers; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | estimates of the percentage of work completed over the life of the individual study in accordance with discussions with internal clinical and preclinical personnel and independent
service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The assessment of the percentage of work completed that determines the amount of research and development expense that should be recognized in a given
period requires significant judgment, and could have a material impact on our balance sheet and results of operations. These estimates may or may not match the actual services performed by the service providers as determined by patient enrollment
levels, pre-clinical animal study schedules, and related activities. We monitor service provider activities to the extent possible; however, if we underestimated activity levels associated with various studies at a given point in time, we could
record significant research and development expenses in future periods.



Use of Estimates



The preparation of financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our
estimates upon actual experience and other current indications that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. Estimates in the financial statements include, but are not limited to, accrued
but unbilled expenses incurred in the performance of clinical trials and pre-clinical studies, expenses incurred and to be deducted from prepayments made for services related to clinical trials, fees and expenses incurred by independent experts and
consultants who assist us with clinical trials and pre-clinical studies, and useful lives of property and equipment for depreciation calculations.



Cash Equivalents and Investments



The Company considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. Our investments include
obligations of government agencies and corporate debt securities with maturities ranging between three months to sixteen months. All of the Companys investment securities are classified as available for sale. Available-for-sale securities are
carried at estimated fair value, based on available market information, with unrealized gains and losses reported as a component of stockholders equity. Realized gains or losses, amortization of premiums, accretion of discounts and earned
interest are included in investment income. The cost of securities when sold is based upon specific identification.



Property and Equipment



Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective asset, generally two to seven years.



Net Loss per Share



Basic and diluted net loss
per share is calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share includes the impact of potentially dilutive securities. As the
Companys potentially dilutive securities (stock options,



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



warrants, and convertible preferred stock) were anti-dilutive for the years ended June 30, 2004, 2003 and 2002, they have been excluded from the computation
of weighted-average shares used in computing diluted net loss per share.



The computation of diluted net loss per share for the year ended June 30, 2004 excludes the impact of options to purchase 783,271 shares of common stock, warrants to purchase 294,492 shares of common stock, and the
conversion of convertible preferred stock into 626,055 shares of common stock. The computation of diluted net loss per share for the year ended June 30, 2003 excludes the impact of options to purchase 788,221 shares of common stock, warrants to
purchase 1,511,824 shares of common stock, and the conversion of convertible preferred stock into 1,295,462 shares of common stock. The computation of diluted net loss per share for the year ended June 30, 2002 excludes the impact of options to
purchase 628,449 shares of common stock, warrants to purchase 1,369,263 shares of common stock, and the conversion of convertible preferred stock into 1,543,841 shares of common stock.



Stock-Based Compensation



The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the
grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations because the alternative fair value accounting provided
under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) requires the use of option valuation models that were not developed for use in valuing employee stock options.
Under APB 25, when the exercise price of our employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.



Stock-based compensation arrangements to non-employees are accounted for in accordance with SFAS 123, EITF 96-18, and
related Interpretations, using a fair value approach, and the compensation costs of such arrangements are subject to re-measurement over their vesting terms, as earned.



As permitted by SFAS 123, and as amended by Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, (SFAS 148), the Company elected to continue to apply the provisions of APB 25 and related interpretations in accounting for its employee stock option and stock purchase
plans. The Company is generally not required under APB 25 and related interpretations to recognize compensation expense in connection with its employee stock option and stock purchase plans when exercise prices are not less than fair value.



Pro forma information regarding net loss and net loss per
share is required by SFAS 148 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by the SFAS 123. The fair value for these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility calculations based on historical data (0.846), expected option lives of five years, and no dividend yield for each of 2004, 2003, and 2003.
Risk free interest rates assumptions were based on U.S. government bonds with maturities equal to the expected option lives of 3.07%, 4.08%, and 1.27% and for 2004, 2003 and 2002, respectively.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using the
straight-line method. The Companys pro forma information follows (in thousands).



|                                                       |  |                     |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | Year ended June 30, |       
|                                                       |  | 2004                |        |   | 2003 |   |        | 2002 | 
|Net lossas reported                                   |  | $                   | (1,808 | ) |      | $ | (2,686 | )    |  | $ | (4,266 | )
|                                                       |  |                     |       
|Add back:                                              |  |                     |        |   |      |   |        |      |  |   |        |  
|Deferred compensation expense                          |  |                     | 55     |   |      |   | 55     |      |  |   | 55     |  
|                                                       |  |                     |       
|Deduct:                                                |  |                     |        |   |      |   |        |      |  |   |        |  
|Stock-based employee expense determined under SFAS 123 |  |                     | (616   | ) |      |   | (491   | )    |  |   | (518   | )
|                                                       |  |                     |        |   |      |   |        |      |  |   |        |  
|Pro forma net loss                                     |  | $                   | (2,369 | ) |      | $ | (3,122 | )    |  | $ | (4,729 | )
|                                                       |  |                     |        |   |      |   |        |      |  |   |        |  
|Basic and diluted net loss per shareas reported       |  | $                   | (0.09  | ) |      | $ | (0.15  | )    |  | $ | (0.24  | )
|                                                       |  |                     |        |   |      |   |        |      |  |   |        |  
|Basic and diluted pro forma net loss per share         |  | $                   | (0.11  | ) |      | $ | (0.17  | )    |  | $ | (0.27  | )
|                                                       |  |                     |        |   |      |   |        |      |  |   |        |  



The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock options and employee stock purchase plans have characteristics significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair market value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options, nor do they necessarily
represent the effects of employee stock options on reported net income (loss) for future years.



Comprehensive Income (Loss)



In accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), we are required
to display comprehensive income (loss) and its components as part of our complete set of financial statements. Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
includes certain changes in equity that are excluded from our net income (loss), specifically, the unrealized gains and losses on available-for-sale securities. For the years ended June 30, 2004, 2003 and 2002, the components of comprehensive income
(loss) have been included in the Statement of Stockholders Equity.



Impairment of Long-Lived Assets



The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss
would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. Through June
30, 2004, there have been no such losses.



Derivative
Financial Instruments



In March 2004, the Company raised
$19,400,000 in gross offering proceeds from the sale of 3,880,000 shares of common stock at a price of $5.00 per share. Investors also received warrants to purchase an additional 582,000 shares of common stock at a price of $6.73 per share. The
Company also issued warrants to its placement agent to purchase 155,200 shares of common stock at a purchase price of $6.00 per share and 23,280 shares at $8.08 per share. The common stock and warrants issued in this private placement were initially

unregistered. The Company filed a registration statement on Form S-3 with the Securities and Exchange



35



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



Commission on April 14, 2004, to register the shares issued in the private placement as well as the shares to be issued upon exercise of the warrants. In
accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the warrants were reported as a liability and valued at fair value on the date of issuance.
The warrants were revalued each period until the effective date of the registration statement, and the change in the fair value from the date of issuance through the date that the registration statement was effective in the amount of $477,239, has
been recorded as non-cash income. The warrants were transferred to permanent equity when they were registered.



Fair Value of Financial Instruments



The fair value of cash equivalents and investments is based on quoted market prices. The carrying amount of cash equivalents and investments are
considered to be representative of their respective fair values at June 30, 2004 and 2003.



Note 2.    Investments



Available-for-sale securities were as follows (in thousands):



|                                      |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|------------------------------------- |  | ---- | ------ | --------------------- | - | ------------------------ |  | - | ----------- | - |  | - | ------
|                                      |  | Cost |        | Gross UnrealizedGains |   | Gross Unrealized(Losses) |  |   | MarketValue
|June 30, 2004                         |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Corporate debt obligations:           |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Maturing within 1 year                |  | $    | 7,772  |                       | $ |                         |  | $ | (6          | ) |  | $ | 7,766 
|Maturing after 1 year through 5 years |  |      | 2,623  |                       |   |                         |  |   | (25         | ) |  |   | 2,598 
|U.S. Government obligations:          |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Maturing within 1 year                |  |      | 4,097  |                       |   |                         |  |   | (13         | ) |  |   | 4,084 
|Maturing after 1 year through 5 years |  |      | 4,302  |                       |   |                         |  |   | (29         | ) |  |   | 4,273 
|                                      |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Total investments                     |  | $    | 18,794 |                       | $ |                         |  | $ | (73         | ) |  | $ | 18,721
|                                      |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|June 30, 2003                         |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Corporate debt obligations:           |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Maturing within 1 year                |  | $    | 2,826  |                       | $ | 9                        |  | $ |            |   |  | $ | 2,835 
|U.S. Government obligations:          |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Maturing within 1 year                |  |      | 1,500  |                       |   | 1                        |  |   |            |   |  |   | 1,501 
|                                      |  |      |        |                       |   |                          |  |   |             |   |  |   |       
|Total investments                     |  | $    | 4,326  |                       | $ | 10                       |  | $ |            |   |  | $ | 4,336 
|                                      |  |      |        |                       |   |                          |  |   |             |   |  |   |       



Estimated fair value
is based upon quoted market prices for these or similar instruments. There were no realized gains or losses during the years ended June 30, 2004, 2003 and 2002.



Note 3.    Property and Equipment



Property and equipment consisted of the following:



|                              |  |      |          |   |      |   |          |  
|----------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                              |  | 2004 |          |   | 2003 |  
|Machinery and equipment       |  | $    | 199,415  |   |      | $ | 200,679  |  
|Furniture and fixtures        |  |      | 145,426  |   |      |   | 145,426  |  
|                              |  |      |          |   |      |   |          |  
|                              |  |      | 344,841  |   |      |   | 346,105  |  
|Less accumulated depreciation |  |      | (338,632 | ) |      |   | (336,032 | )
|                              |  |      |          |   |      |   |          |  
|                              |  | $    | 6,209    |   |      | $ | 10,073   |  
|                              |  |      |          |   |      |   |          |  



Depreciation expense
was $5,967, $8,715 and $23,364 during the years ended June 30, 2004, 2003 and 2002, respectively.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



Note 4.    Operating Lease Commitments



On April 1, 2001, the Company entered into an assignment and assumption of
lease of its executive offices in Richmond, California. The master lease commenced in July 1997 and expired in July 2002. The lease has since been renewed three times for sequential one-year terms, with the current term expiring in July 2005 and
with rental payments of approximately $7,800 per month. Effective August 1, 2004, the monthly rent increased by $1,078 as the Company took additional office space. As of June 30, 2004, our future minimum lease payments under operating leases are
approximately $105,000 for our Richmond, California facilities. The future minimum lease payments for our New Jersey facilities are approximately $108,000 (see Note 9). Rent expense for the years ending June 30, 2004, 2003 and 2002 was $103,000,
$89,000 and $91,000 respectively.



Note
5.    Stockholders Equity



Convertible Preferred Stock



At June 30, 2004,
the Company has 534,000 shares of Series A convertible preferred stock outstanding. The holders of the Series A convertible preferred stock are entitled to receive annual noncumulative dividends of 8% per share per annum, when and if declared by the
Board of Directors. These dividends are in preference to any declaration or payment of any dividend on the common stock of the Company. As of June 30, 2004, no dividends had been declared.



Each share of Series A preferred stock is convertible, at the holders
option, subject to antidilution provisions, into one share of common stock. Additionally, each share of the preferred stock will be automatically converted into one share of common stock upon the election of more than 50% of the Series A preferred
stock to convert into common stock. The holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which their preferred stock is convertible.



In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A preferred stock have a liquidation preference, over holders of common stock, of $0.50 per share plus any declared but unpaid dividends. After payment has been made to the holders of Series A preferred stock, the entire
remaining assets and funds of the Company legally available for distribution, if any, would be distributed ratably among the holders of common stock.



Warrants to Purchase Common Stock



At June 30, 2004, the Company had a total of 1,670,860 outstanding warrants to purchase shares of common stock as follows:



|                 |  |                |      |            |               |                 |              
|---------------- |  | -------------- | ---- | ---------- | ------------- | --------------- | -------------
|Number of Shares |  | Exercise Price |      | Issue Date |               | Expiration Date
|900,380          |  | $              | 1.75 |            | November 1999 |                 | November 2004
|10,000           |  | $              | 5.14 |            | December 2003 |                 | December 2006
|582,000          |  | $              | 6.73 |            | March 2004    |                 | August 2009  
|155,200          |  | $              | 6.00 |            | March 2004    |                 | February 2007
|23,280           |  | $              | 8.08 |            | March 2004    |                 | February 2007
|                 |  |                |      |            |               |                 |              
|1,670,860        |  |                |      |            |               |                 |              



Stock Option Plan



In September 2003, the Board of Directors adopted,
subject to stockholder approval, the 2003 Equity Incentive Plan (the 2003 Plan). The 2003 Plan was approved by the stockholders in December 2003. The 2003 Plan provides for the issuance of options and stock awards and reserves up to
1,000,000 shares of common stock for issuance under the plan. In general, options are granted at fair market value on the date of the grant, have a term of 10 years and become exercisable over a period of up to 48 months.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



The Companys 1993 Stock Plan expired in November 2003, at which time 250,606 shares were
available for issuance thereunder.



A summary of the
Companys stock option activity, and related information for the three years ended June 30, 2004 follows:



|                         |  |                            |   |  |                     |   |  |                                |     
|------------------------ |  | -------------------------- | - |  | ------------------- | - |  | ------------------------------ | ----
|                         |  |                            |   |  | Options Outstanding
|                         |  | Options Availablefor Grant |   |  | Number of Shares    |   |  | Weighted Average ExercisePrice
|Balance at June 30, 2001 |  | 74,365                     |   |  | 1,678,958           |   |  |                                | 2.52
|Options granted          |  | (111,500                   | ) |  | 111,500             |   |  |                                | 3.08
|Options canceled         |  | 1,071                      |   |  | (1,071              | ) |  |                                | 3.73
|Options authorized       |  | 200,000                    |   |  |                    |   |  |                                |    
|                         |  |                            |   |  |                     |   |  |                                |     
|Balance at June 30, 2002 |  | 163,936                    |   |  | 1,789,387           |   |  |                                | 2.49
|Options granted          |  | (4,000                     | ) |  | 4,000               |   |  |                                | 3.82
|Options canceled         |  | 72,250                     |   |  | (72,250             | ) |  |                                | 4.17
|Options exercised        |  |                           |   |  | (70,108             | ) |  |                                | 1.51
|                         |  |                            |   |  |                     |   |  |                                |     
|Balance at June 30, 2003 |  | 232,186                    |   |  | 1,651,029           |   |  | $                              | 2.46
|Options granted          |  | (134,000                   | ) |  | 134,000             |   |  |                                | 5.98
|Options canceled         |  | 22,420                     |   |  | (22,420             | ) |  |                                | 3.70
|Options exercised        |  |                           |   |  | (5,455              | ) |  |                                | 3.31
|Options expired          |  | (250,606                   | ) |  |                    |   |  |                                |    
|Options authorized       |  | 1,000,000                  |   |  |                    |   |  |                                |    
|                         |  |                            |   |  |                     |   |  |                                |     
|Balance at June 30, 2004 |  | 870,000                    |   |  | 1,757,154           |   |  | $                              | 2.71
|                         |  |                            |   |  |                     |   |  |                                |     



At June 30, 2004, 2003
and 2002, options to purchase 1,403,308, 1,269,988 and 1,158,285 shares of common stock were exercisable, respectively. The weighted-average exercise price of options exercisable at June 30, 2004, 2003 and 2002 was $2.59, $2.46 and $2.38,
respectively. The weighted-average fair value of options granted during 2004, 2003 and 2002 was $4.14, $3.17 and $4.65, respectively.



The following table summarizes information concerning currently outstanding and exercisable options:



|                        |  |                     |  |                                                 |  |                              |  |                   |  |                              
|----------------------- |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- |  | ----------------- |  | -----------------------------
|Options Outstanding     |  | Options Exercisable
|Range ofExercise Prices |  | SharesOutstanding   |  | WeightedAverageRemainingContractualLife (years) |  | WeightedAverageExercisePrice |  | SharesExercisable |  | WeightedAverageExercise Price
|$0.01  1.99            |  | 820,198             |  | 4.26                                            |  | $0.84                        |  | 670,198           |  | $0.85                        
|2.00  3.99             |  | 506,841             |  | 4.53                                            |  | 2.85                         |  | 437,464           |  | 2.84                         
|4.00  5.99             |  | 42,928              |  | 8.11                                            |  | 5.21                         |  | 8,928             |  | 4.81                         
|6.00  8.00             |  | 387,187             |  | 6.84                                            |  | 6.21                         |  | 286,718           |  | 6.21                         
|                        |  |                     |  |                                                 |  |                              |  |                   |  |                              
|                        |  | 1,757,154           |  | 5.00                                            |  | $2.71                        |  | 1,403,308         |  | $2.59                        
|                        |  |                     |  |                                                 |  |                              |  |                   |  |                              



In connection with the
grant of certain stock options to senior management, we recorded deferred compensation of $274,000 in fiscal 2000. Deferred compensation represents the difference in the market value of the stock on the date granted and the exercise price of these
options. Deferred compensation is presented as a reduction of stockholders equity and is amortized over the vesting period of the option using a straight-line method. We recognized amortization of deferred stock compensation expense of $55,000
each fiscal year ended June 30, 2004, 2003, and 2002.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



Employee Stock Purchase Plan



In September 2003, the Board of Directors adopted, subject to stockholder approval, the 2003 Employee Stock Purchase Plan
(the 2003 ESPP). The 2003 ESPP was approved by the stockholders in December 2003. The 2003 ESPP reserves up to 500,000 shares of common stock for sale under the ESPP. The 2003 ESPP permits eligible employees to purchase common stock at a
discount through payroll deductions during defined accumulation periods. The price at which the stock is purchased is equal to the lower of 85% of the fair value of the common stock on the last trading day before the commencement of the applicable
offering period or 85% of the fair value of the common stock on the last trading day of the accumulation period. Under the plan, 496,612 shares remain available for issuance at June 30, 2004. The weighted average purchase price per share for shares
purchased under the 2003 ESPP was $3.16.



The Companys
1994 Employee Stock Purchase Plan expired in February 2004, at which time 122,871 shares were available for issuance thereunder.



Stock Repurchase Program



In August 2002, the Board of Directors authorized a stock repurchase program of up to 500,000 shares of the Companys common stock. Depending on
market conditions and other factors, repurchases will be made from time to time in the open market and in negotiated transactions, including block transactions, and may be discontinued at any time. No shares were repurchased in the year ended June
30, 2004. In the year ended June 30, 2003, the Company repurchased 32,000 shares of its common stock for $87,000. All shares repurchased have been retired.



Common Stock Reserved for Future Issuance



At June 30, 2004, the Company has reserved shares of common stock for future issuance as follows:



|                                                |  |          
|----------------------------------------------- |  | ---------
|Conversion of preferred stock into common stock |  | 534,000  
|1993 Stock Plan and 2003 Equity Incentive Plan  |  | 2,627,154
|Warrants                                        |  | 1,670,860
|2003 Employee Stock Purchase Plan               |  | 496,612  
|                                                |  |          
|                                                |  | 5,328,626
|                                                |  |          



Note
6.    Income Taxes



The Company uses
the liability method to account for income taxes as required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rules and laws that will be in effect when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce differed tax assets to the amounts expected to be realized.



There was no provision (benefit) for income taxes for the year ended June 30, 2004 and 2003. The provision (benefit) for income taxes for the year ended
June 30, 2002 consists of the following (in thousands):



|         |  |      |     |  
|-------- |  | ---- | --- | -
|         |  | 2002 |    
|Current: |  |      |     |  
|Federal  |  | $    | (40 | )
|State    |  |      | (2  | )
|         |  |      |     |  
|Total    |  | $    | (42 | )
|         |  |      |     |  



39



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



The income tax provision (benefit) for 2002 is a result of the federal alternative minimum tax and is
primarily due to a change in federal tax law. There was no deferred income tax expense for the years ended June 30, 2004, and 2003.



A reconciliation of the income tax benefit at the federal statutory rate to the income tax benefit at the effective tax rate is as follows (in thousands):



|                                                     |  |                     |        |  
|---------------------------------------------------- |  | ------------------- | ------ | -
|                                                     |  | Year Ended June 30, |       
|                                                     |  | 2002                |       
|Benefit at U.S. statutory rate                       |  | $                   | (1,508 | )
|Unbenefited loss (utilization of net operating loss) |  |                     | 1,508  |  
|Alternative minimum tax                              |  |                     | (42    | )
|Other                                                |  |                     |       |  
|                                                     |  |                     |        |  
|Total                                                |  | $                   | (42    | )
|                                                     |  |                     |        |  



Deferred income taxes
reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Companys deferred tax assets (in thousands) are as follows:



|                          |  |          |        |   |      |   |        |  
|------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                          |  | June 30, |       
|                          |  | 2004     |        |   | 2003 |  
|Deferred tax assets:      |  |          |        |   |      |   |        |  
|Net operating losses      |  | $        | 6,830  |   |      | $ | 6,230  |  
|Research credits          |  |          | 430    |   |      |   | 430    |  
|Other                     |  |          | 290    |   |      |   | 360    |  
|                          |  |          |        |   |      |   |        |  
|Total deferred tax assets |  |          | 7,550  |   |      |   | 7,020  |  
|Valuation allowance       |  |          | (7,550 | ) |      |   | (7,020 | )
|                          |  |          |        |   |      |   |        |  
|Net deferred tax assets   |  | $        |       |   |      | $ |       |  
|                          |  |          |        |   |      |   |        |  



Realization of the
deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by $530,000
and $1,150,000 during 2004 and 2003, respectively.



As of June
30, 2004, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17,140,000 which will expire in the years 2006 through 2024, and federal research and development tax credits of approximately $213,000
which will expire in the years 2007 through 2024.



As of June
30, 2004, the Company had net operating loss carryforwards for state income tax purposes of approximately $14,400,000 which will expire in the years 2005 through 2014, and state research and development tax credits of approximately $323,000 which do
not expire.



Utilization of the Companys net operating
loss and credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of net
operating loss and credits before utilization.



40



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



Note 7.    Collaboration Agreement



In April 1998, we entered into a strategic research and marketing
cooperation agreement with Merz Pharmaceuticals GmbH and Childrens Medical Center Corporation to further the clinical development and commercialization of Memantine. Pursuant to this agreement, NTI and Merz share scientific, clinical and
regulatory information about Memantine, particularly safety data, to facilitate regulatory review and marketing approval by the Food and Drug Administration and foreign regulatory authorities. Pursuant to this agreement, we will continue to share in
future revenues from sales of Memantine for all indications. We received $255,369, $10,949 and $0 in royalty payments for the fiscal years ended June 30, 2004, 2003, and 2002, respectively, for the sales of Memantine.



In June 2000, Merz entered into an agreement with Forest Laboratories, Inc.
for the development and marketing of Memantine in the United States for the treatment of Alzheimers disease, neuropathic pain and AIDS-related dementia. In August 2000, Merz entered into a strategic license and cooperation agreement with H.
Lundbeck A/S of Copenhagen, Denmark for the further development and marketing of Memantine for the treatment of Alzheimers disease, neuropathic pain and AIDS-related dementia. Lundbeck has acquired exclusive rights to Memantine in certain
European markets, Canada, Australia and South Africa and semi-exclusive rights to co-market Memantine with Merz in other markets worldwide, excluding the United States, where Forest has development rights, and Japan, where Merz has granted
development rights to Daiichi Suntory Pharma Co., Ltd., respectively. Through June 30, 2004, we have received approximately $11.6 million from Merz under our 1998 strategic research and marketing cooperation agreement, representing our portion of
the payments received by Merz pursuant to Merzs agreements with Forest and Lundbeck.



Note 8.    401(k) Plan



NTI maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time employees. Participating employees may defer a portion of their pretax
earnings, up to the limit established by the Internal Revenue Service. NTI made employer contributions to the plan of $3,673, $3,215, and $3,606 in 2004, 2003 and 2002, respectively.



Note 9.    Subsequent Event



On July 14, 2004, NTI acquired Empire Pharmaceuticals, Inc. (Empire), a privately held corporation, through the
merger of Empire into Empire Acquisition Corp., a wholly-owned subsidiary of NTI. Pursuant to the transaction, NTI acquired worldwide rights to Viprinex(ancrod), a late-stage reperfusion therapy for use in treatment of ischemic stroke. The acquisition of Empire will be accounted for
using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations and under SFAS No. 142, Goodwill and Other Intangible Assets.



As a result of the acquisition, all of Empires issued and outstanding capital stock immediately prior to the
acquisition was automatically converted into the right to receive an aggregate of 2,399,168 shares of NTIs common stock and $1,500,000 in cash. Additionally, NTI paid $500,000 to Empires principal stockholder to partially reimburse
advances previously made by the stockholder to Empire. If pivotal Phase III trials for Viprinex are commenced as currently planned, NTI will issue an additional 2,375,176 shares and pay an additional $1,515,675 to the selling stockholders of Empire
and will pay Empires principal stockholder the balance of $484,325 for the remainder of advances previously made by the stockholder to Empire. The aggregate purchase price was $12,517,722, which consists of the common stock valued at
$9,452,722, cash of $2,000,000 and acquisition-related expenses estimated at $1,065,000. The additional amounts due upon commencement of the Phase III trials are being treated as contingent consideration.



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##### Table of Contents

NEUROBIOLOGICAL TECHNOLOGIES, INC.



NOTES TO FINANCIAL STATEMENTS(Continued)



The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition. NTI is in the process of obtaining third-party valuations of certain intangible assets and summarizing the costs incurred for the acquisition, and as a consequence, the determination and allocation of the purchase
price are subject to refinement and finalization. Contingent consideration, described above, will, if issued, be recorded as intangible and other acquired assets and acquired in-process research and development, in a pro rata manner consistent with
the allocation of the initial consideration.



|                                                               |  |                                                          |            |  
|-------------------------------------------------------------- |  | -------------------------------------------------------- | ---------- | -
|                                                               |  | Valued as ofMarch 31, 2004, the most recentreported date |           
|Current assets                                                 |  | $                                                        | 285,948    |  
|Property and equipment, net                                    |  |                                                          | 16,944     |  
|License agreement and other acquired assets                    |  |                                                          | 8,153,987  |  
|Acquired in-process research and development                   |  |                                                          | 4,127,640  |  
|                                                               |  |                                                          |            |  
|Total assets acquired                                          |  |                                                          | 12,584,519 |  
|                                                               |  |                                                          |            |  
|Accounts payable and accrued expenses                          |  |                                                          | (66,797    | )
|Acquired in-process research and development to be written-off |  |                                                          | (4,127,640 | )
|                                                               |  |                                                          |            |  
|Net assets acquired                                            |  | $                                                        | 8,390,082  |  
|                                                               |  |                                                          |            |  



Intangible assets
acquired, for which no material residual value is anticipated, consist of: $7,141,070 for a royalty-bearing license agreement with Abbott Laboratories, which will be amortized over an estimated useful life of twelve years; $75,969 for certain
patents, which will be amortized over an estimated useful life of twelve years; and, $936,948 for snake venom and snake venom compound concentrate from which Viprinex is derived, which will be amortized over estimated useful lives of eight years and
four years, respectively. As the acquisition and merger was completed subsequent to June 30, 2004, the balances above are reported for informational purposes and no balances related to the transaction are included in the accompanying financial
statements as of June 30, 2004.



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



None.



ITEM 9A.    CONTROLS AND PROCEDURES



The Companys principal executive and financial officer carried out an evaluation of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, this officer concluded that the Companys disclosure controls and procedures were adequate and designed to
ensure that material information relating to the Company would be made known to him by others within the Company.



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##### Table of Contents

PART III.



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The directors and executive officers of the Company, their ages and positions as of September 13, 2004 are as follows:



|                          |  |     |  |                                                   
|------------------------- |  | --- |  | --------------------------------------------------
|Name                      |  | Age |  | Position                                          
|Paul E. Freiman           |  | 70  |  | President and Chief Executive Officer and Director
|Lisa U. Carr, M.D., Ph.D. |  | 49  |  | Vice President, Medical Affairs                   
|Stephen J. Petti          |  | 57  |  | Vice President, Product Development               
|David E. Levy, M.D.       |  | 63  |  | Vice President, Clinical Development              
|Abraham E. Cohen          |  | 68  |  | Chairman of the Board of Directors                
|Enoch Callaway, M.D.      |  | 80  |  | Director                                          
|Theodore L. Eliot, Jr.    |  | 76  |  | Director                                          
|Abraham D. Sofaer         |  | 66  |  | Director                                          
|John B. Stuppin           |  | 71  |  | Director                                          
|F. Van Kasper             |  | 67  |  | Director                                          



Paul E. Freimanjoined the Company as a director in April 1997 and was elected President and Chief Executive Officer in May 1997. He is the former chairman and chief executive officer of Syntex Corporation, where he had a long and successful career and was
instrumental in the sale of Syntex to Roche Holdings for $5.3 billion. He is credited with much of the marketing success of Syntexs lead product Naprosyn and was responsible for moving the product to over-the-counter status, marketed by
Proctor & Gamble as Aleve. Mr. Freiman currently serves as chairman of the boards of SciGen Pte. Ltd. and serves on the boards of Penwest Pharmaceutical Co., Calypte Biomedical Corporation, Alexza Molecular Delivery Corp., Phytos Inc. and
Otsuka America Pharmaceuticals, Inc. He has been chairman of the Pharmaceutical Manufacturers Association of America (PhARMA) and has also chaired a number of key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a San
Francisco merchant bank. Mr. Freiman holds a B.S. degree from Fordham University and an honorary doctorate from the Arnold & Marie Schwartz College of Pharmacy.



Lisa U. Carr, M.D., Ph.D. was appointed Vice President of Medical Affairs in September 1998. Prior to joining the
Company in June 1998 as Director of Medical Affairs, Dr. Carr was Associate Medical Director at the Institute of Clinical Immunology and Infectious Diseases at Syntex Development Research in Palo Alto, California. Dr. Carr has more than eight years
of international industry experience in conducting clinical drug trials in immunosuppression, nephrology, neurology, gastroenterology and cardiovascular disorders. She was Lead Clinical Research Physician at Syntex, directing a pivotal clinical
trial of mycophenolate mofetil, for which an IND and NDA were approved for solid organ transplantation. Dr. Carr holds a medical degree and a Ph.D. degree magna cum laude from the University of Munich in Germany.



Stephen J. Pettiwas appointed Vice President of Product Development
in July 2004 in connection with our acquisition of Empire Pharmaceuticals. Mr. Petti founded Empire Pharmaceuticals in February 2001 and served at its Chief Executive Officer until its acquisition in July 2004. From February 1998 until Empires
founding in February 2001, Mr. Petti served as Vice President, Drug Development at Dov Pharmaceuticals. From October 1995 to December 1997, he was Vice President of Global Consulting Operations at Barnett International/PAREXEL, a contract research
organization in the pharmaceutical industry. He established a European presence for Barnett International/PAREXEL by starting its first overseas office in Paris. From July 1980 to August 1995, Mr. Petti held a variety of clinical research management
positions with American Cyanamid, now Wyeth-Ayerst, including the position of Director of Global Clinical Research Training and Process Development. He is a member of the Drug Information Association and the Society of Research Administrators. Mr.
Petti received his B.B.A. from St. Johns University in 1968 and a B.S.N (Nursing) in 1973 from Dominican College.



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##### Table of Contents

David E. Levy, M.D.was appointed Vice President of Clinical Development in September 2004
following the Companys acquisition of Empire Pharmaceuticals. Prior to joining NTI, Dr. Levy was international project team leader at Eisai Medical Research, Inc. where he directed a clinical program to develop a novel, new therapy in
Alzheimers disease as well as acute ischemic stroke programs. He had previously served as an advisor to Empire Pharmaceuticals and as senior director of medical research at DOV Pharmaceutical, where he directed several clinical development
programs. From 1991 to 2001, Dr. Levy was with Knoll Pharmaceuticals, serving initially as senior director and therapeutic head of clinical CNS and then as senior director of cardiovascular/internal medicine. Dr. Levy served as executive vice chair
of neurology from 1988 to 1991 at Weill-Cornell Medical College and New York Presbyterian Hospital and continues to serve as adjunct associate professor of neurology and adjunct associate attending neurologist at these institutions. Dr. Levy is a
fellow of the American Academy of Neurology, the American College of Physicians, and the Stroke Counsel of the American Heart Association. Dr. Levy holds a B.A. degree from Harvard College and an M.D. degree Harvard Medical School.



Abraham E. Cohen has been a director of the Company since March 1993
and has been chairman of the Board since August 1993. From 1982 to 1992, Mr. Cohen served as Senior Vice President of Merck & Co. and from 1977 to 1988 as President of the Merck Sharp & Dohme International Division (MSDI). While
at Merck, he played a key role in the development of Mercks international business, initially in Asia, then in Europe and, subsequently, as President of MSDI, which manufactures and markets human health products outside the United States.
Since his retirement from Merck and MSDI in January 1992, Mr. Cohen has been active as an international business consultant. He was a director of Agouron Pharmaceuticals, Inc. until its merger with Warner-Lambert Company. He is currently Chairman
and President of Kramex Corporation and serves as a director of four other public companies: Akzo Nobel N.V., Chugai Pharmaceutical Co., Teva Pharmaceutical Industries, Ltd. and Vasomedical, Inc.



Enoch Callaway, M.D. is a founder of the Company and has served as a
director of the Company since September 1987. Dr. Callaway previously served as chairman of the Board of the Company from September 1987 to November 1990, as co-chairman of the Board of the Company from November 1990 until August 1993, as Vice
President of the Company from September 1988 until August 1993 and as Secretary of the Company from September 1988 until September 1991. Dr. Callaway has been Emeritus Professor of Psychiatry at the University of California, San Francisco since
1986, where he also served as Director of Research at the Langley Porter Psychiatric Institute from 1959 to 1986. Dr. Callaway was Staff Psychiatrist, SFVAMC, 1996-1997. He is a member of the Institutional Review Board for SAM Technologies, Inc. and
Abratek, Inc. Dr. Callaway is a former director of Phytos, Inc., a biotechnology company. He holds A.B. and M.D. degrees from Columbia University.



Theodore L. Eliot, Jr. has served as a director of the Company since August 1992. Previously, he served as a director of the Company from September
1988 until April 1992, and as a Vice President of the Company from September 1988 until September 1991. Mr. Eliot retired from the United States Department of State in 1978, after a 30-year career in which he held senior posts in Washington and was
Ambassador to Afghanistan. He was Dean of the Fletcher School of Law and Diplomacy from 1978 to 1985 and a director of Raytheon Co. from 1983 to 1998. He is currently a director of Fiberstars, Inc. and of several non-profit organizations. Mr. Eliot
holds B.A. and M.P.A. degrees from Harvard University.



Abraham D. Sofaer has served as a director of the Company since April 1997. Mr. Sofaer is the first George P. Shultz Distinguished Scholar & Senior Fellow at the Hoover Institution, Stanford University, appointed in 1994. He has
also been a Professor of Law (by courtesy) at Stanford Law School. From 1990 to 1994, Mr. Sofaer was a partner at the legal firm of Hughes, Hubbard & Reed in Washington, D.C., where he represented several major U.S. public companies. From 1985
to 1990, he served as the Legal Adviser to the United States Department of State, where he was principal negotiator on several international disputes. From 1979 to 1985, he served as a federal judge in the Southern District of New York. Mr. Sofaer
is registered as a qualified arbitrator with the American Arbitration Association and is a member of the National Panel of the Center for Public Resolution of Disputes (CPR), a leading organization in the area of resolution of disputes outside
litigation. He has mediated major commercial cases. Additionally, he acts regularly as an arbitrator in merger-acquisition disputes, commercial cases involving valuation of technology, and securities class action



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##### Table of Contents

suits. Mr. Sofaer is on the board of directors of Gen-Probe, Inc. and the International Advisory Committee of Chugai Biopharmaceuticals, Inc., and is an
advisor to Soligence Corp., a start-up company with expertise in efficiency analysis. He is president of American Friends of the Koret Israel Economic Development Fund and a director of the Koret Foundation and as a Trustee of the National Museum of
Jazz. Mr. Sofaer holds a B.A. degree from Yeshiva College and a L.L.B. degree from New York University.



John B. Stuppin is a founder of the Company and has served as a director of the Company since September 1988. From September 1987 until October
1990, Mr. Stuppin served as President of the Company, from November 1990 to August 1993 as co-chairman of the Board, from October 1990 until September 1991 as Executive Vice President, and from April 1991 until July 1994 as Treasurer. He also served
as acting Chief Financial Officer of the Company from the Companys inception through December 1993 and has continued to serve as an employee of the Company in a business development capacity since that time. Mr. Stuppin is an investment banker
and a venture capitalist. He has over 25 years experience in the start up and management of companies active in emerging technologies and has been the president of a manufacturing company. He is chairman of the board of Fiberstars, Inc. Mr. Stuppin
holds an A.B. degree from Columbia University.



F. Van
Kasperwas appointed as a director and chairman of NTIs audit committee in January 2004. Mr. Kasper served as Chairman of Wells Fargo Securities, the institutional brokerage and investment bank for Wells Fargo and Company, prior to
his retirement in March 2003. Mr. Kasper entered the brokerage business in 1964 with Merrill Lynch and in 1978 co-founded Van Kasper and Company, a regional investment bank. As Chairman and CEO of Van Kasper, he guided its growth from a handful of
employees to a bank with over 350 employees in 15 offices in 4 states when it was sold in 1999. During his investment career, Mr. Kasper was elected as a Governor of the National Association of Securities Dealers (NASD) and as a Director and Vice
Chairman of the Securities Industry Association (SIA). Mr. Kasper is active in San Francisco, California area non-profit community, most recently as Chairman of the Investment Committee for the University of California San Francisco Foundation
(UCSF) and serves as Chairman Emeritus for San Franciscos Exploratorium Museum. Mr. Kasper holds a B.S. degree from California State University.



Section 16(a) Beneficial Ownership Reporting Compliance



The information required by Item 405 of Regulation S-K is hereby incorporated by reference to the Section entitled Section 16(a) Beneficial
Ownership Reporting Compliance in our Proxy Statement for the Annual Meeting of Stockholders to be held November 18, 2004.



ITEM 11.    EXECUTIVE COMPENSATION



The information required by this item is hereby incorporated by reference to the section entitled Executive Compensation in our Proxy Statement for the Annual Meeting of Stockholders to be held November
18, 2004.



|ITEM 12.    SECURITY | OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------------------- | -------------------------------------------------------------------------------------



The information required by this item is hereby incorporated by reference to the section entitled Security Ownership
of Certain Beneficial Owners and Management in our Proxy Statement for the Annual Meeting of Stockholders to be held November 18, 2004.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is hereby incorporated by reference to the section entitled Certain Relationships and Related
Transactions in our Proxy Statement for the Annual Meeting of Stockholders to be held November 18, 2004.



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is hereby incorporated by reference to the section entitled Audit Fees in our Proxy Statement for the
Annual Meeting of Stockholders to be held November 18, 2004.



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##### Table of Contents

PART IV.



ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)Financial Statements and Schedules:    Financial Statements for the three years ended June 30, 2004
are included in Item 8. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.



(b)Reports on Form 8-K:    On May 10, 2004, the registrant filed a
Current Report on Form 8-K furnishing under Item 12 a press release reporting its results of operations for the three and nine months ended March 31, 2004.



(c)    Exhibits:



The following exhibits are incorporated by reference or filed as part of this report.



|              |  |                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                    
|              | 
|3.1           |  | Restated Certificate of Incorporation of Registrant. (1)                                                                                                                       
|              | 
|3.2           |  | Bylaws of Registrant. (1)                                                                                                                                                      
|              | 
|3.3           |  | Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Registrant. (3)                                                                             
|              | 
|4.1           |  | Form of Common Stock Certificate. (1)                                                                                                                                          
|              | 
|4.2           |  | Form of Warrant to Purchase Common Stock. (3)                                                                                                                                  
|              | 
|4.3           |  | Form of Warrant, issued March 1, 2004, to Purchase Common Stock. (6)                                                                                                           
|              | 
|10.1          |  | 1993 Stock Plan of Neurobiological Technologies, Inc. (5)*                                                                                                                     
|              | 
|10.2          |  | Form of Indemnity Agreement between the Company and its directors and officers. (1)*                                                                                           
|              | 
|10.3          |  | License Agreement between the Company and Research Corporation Technologies, Inc. dated May 30, 1990. (1)+                                                                     
|              | 
|10.4          |  | License Agreement between the Company and The Salk Institute for Biological Studies dated March 31, 1989, as amended.
(1)+                                                     
|              | 
|10.5          |  | License Agreement between the Company and the Regents of the University of California dated June 13, 1990, as amended.
(1)+                                                    
|              | 
|10.6          |  | Amended and Restated Neurobiological Technologies, Inc. Employee Stock Purchase Plan. (4)*                                                                                     
|              | 
|10.7          |  | Cooperative Agreement among Company, Merz + Co. GmbH & Co. and Childrens Medical Center Corp., effective as of April 16, 1998.
(2)+                                           
|              | 
|10.8          |  | Payment Agreement between the Company and Childrens Medical Center Corp., effective as of April 16, 1998. (2)+                                                                
|              | 
|10.9          |  | First Amendment to Lease, dated June 2, 2003. (7)                                                                                                                              
|              | 
|10.10         |  | Second Amendment to Lease, signed April 15, 2004.                                                                                                                              
|              | 
|10.11         |  | Third Amendment to Lease, signed July 14, 2004, effective August 1, 2004 for additional office space.                                                                          
|              | 
|10.12         |  | 2003 Equity Incentive Plan. (8)*                                                                                                                                               
|              | 
|10.13         |  | 2003 Employee Stock Purchase Plan. (8)*                                                                                                                                        
|              | 
|10.14         |  | Agreement and Plan of Reorganization, dated as of July 14, 2004, by and among Neurobiological Technologies, Inc., Empire Acquisition Corp.
and Empire Pharmaceuticals, Inc. (9)



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|              |  |                                                                                                                                                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                 
|              | 
|10.15         |  | Stockholders Agreement, dated as of July 14, 2004, by and among Neurobiological Technologies, Inc., Empire Acquisition Corp., Biotech Value
Fund, LP, as Stockholder Representative and the stockholders of Empire Pharmaceuticals, Inc. (9)
|              | 
|10.16         |  | Employment Agreement, dated July 14, 2004, by and between Neurobiological Technologies, Inc. and Stephen J. Petti *                                                                                                                         
|              | 
|10.17         |  | Services Agreement, dated August 30, 2004.                                                                                                                                                                                                  
|              | 
|23.1          |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                
|              | 
|24.1          |  | Powers of Attorney. (Contained on Signature Page)                                                                                                                                                                                           
|              | 
|31.1          |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
|              | 
|32.1          |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    

---

|(1) | This exhibit is filed as an exhibit to Issuers Registration Statement on Form SB-2 (Registration No. 33-74118-LA) and is incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This exhibit is filed as an exhibit to the Registrants Annual Report on Form 10-KSB for the year ended June 30, 1998 and is incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This exhibit is filed as an exhibit to the Registrants Annual Report on Form 10-KSB for the year ended June 30, 1999 and is incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | This exhibit is filed as an appendix to the Registrants Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 16, 2000 and is
incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | This exhibit is filed as an appendix to the Registrants Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 9, 2001 and is
incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | This exhibit is filed as an exhibit to the Registrants Current Report on Form 8-K filed March 4, 2004 and is incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(7) | This exhibit is filed as an exhibit to the Registrants Annual Report on Form 10-K for the year ended June 30, 2003 and is incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | This exhibit is filed as an appendix to the Registrants Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 9, 2003 and is
incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | This exhibit is filed as an exhibit to the Registrants Current Report on Form 8-K filed July 15, 2004 and is incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|+ | Confidential treatment has been granted with respect to certain portions of these agreements.
|- | ---------------------------------------------------------------------------------------------

|* | This exhibit is a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------------



47



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##### Table of Contents

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.



NEUROBIOLOGICAL TECHNOLOGIES, INC.By:

/S/    PAUL E.
FREIMANPaul E. FreimanPresident, Chief Executive Officer




Dated: September 13, 2004



POWERS OF ATTORNEY AND SIGNATURES



KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul E. Freiman as his true and lawful 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 sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities Exchange Commission, 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, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute may lawfully do or cause to be done by virtue hereof.



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 and on the dates indicated.



|                                                    |  |                                                                                                                                             |  |                   
|--------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|Signature                                           |  | Title                                                                                                                                       |  | Date              
|                                                    |  |                                                                                                                                            
|/S/    PAUL E.
FREIMANPaul E.
Freiman               |  | Director, President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting
Officer) |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    ABRAHAM E.
COHENAbraham E.
Cohen             |  | Chairman of the Board                                                                                                                       |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    ENOCH
CALLAWAYEnoch
Callaway                 |  | Director                                                                                                                                    |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    THEODORE L. ELIOT,
JR.Theodore L. Eliot,
Jr. |  | Director                                                                                                                                    |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    ABRAHAM D.
SOFAERAbraham D.
Sofaer           |  | Director                                                                                                                                    |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    JOHN B.
STUPPINJohn B.
Stuppin               |  | Director                                                                                                                                    |  | September 13, 2004
|                                                    |  |                                                                                                                                            
|/S/    F. VAN
KASPERF. Van
Kasper                   |  | Director                                                                                                                                    |  | September 13, 2004



48