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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   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, 2001

                                      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

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

                      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)

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

   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. [_]

   As of August 31, 2001, the issuer had outstanding 17,503,699 shares of
common stock and the aggregate market value of the shares of common stock held
by non-affiliates on that date was $71,000,819 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 Item 10 and Items 11 and 12 of Part III incorporate by reference
information from the issuer's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 15, 2001 (the "Proxy Statement").


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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                    Part I

<C>     <S>                                                                 <C>
Item 1  Business...........................................................  3
Item 2  Properties......................................................... 13
Item 3  Legal Proceedings.................................................. 13
Item 4  Submission of Matters to a Vote of Security Holders................ 13

                                    Part II

Item 5  Market for Common Stock and Related Shareholder Matters............ 14
Item 6  Selected Financial Data............................................ 15
Item 7  Management's Discussion and Analysis of Financial Condition and
        Results of Operations.............................................. 17
Item 7a Quantitative and Qualitative Disclosure about Market Risk.......... 21
Item 8  Financial Statements and Supplementary Data........................ 22
Item 9  Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure............................................... 37

                                    Part III

Item 10 Directors and Executive Officers of the Registrant................. 37
Item 11 Executive Compensation............................................. 39
Item 12 Security Ownership of Certain Beneficial Owners and Management..... 39
Item 13 Certain Relationships and Related Transactions..................... 39

                                    Part IV

Item 14 Exhibits, Financial Statements, Financial Statement Schedules and
        Reports on Form 8-K................................................ 39
</TABLE>

                                      2

<PAGE>

                                    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, and include, but are not limited to, statements and concerns about
plans to: continue development of our current product candidates; conduct
clinical trials with respect to product candidates; seek regulatory approvals;
address certain markets; engage third party manufacturers to supply our
commercial requirements; market, sell and distribute our products; and evaluate
additional product candidates for subsequent clinical and commercial
development. 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 risk and uncertainties that may cause our or our industry's 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
under the captions "Business", "Risks Associated with Our Business" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations". Except as 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 as "NTI,"
"we," "us," "our," or the "Company") is an emerging drug development company
focused on the clinical development 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, brain cancer and AIDS-related
dementia.

   Our strategy is to in-license and develop early 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 seeks partnerships with
pharmaceutical and biotechnology companies for late-stage development and
marketing of our product candidates. We currently have two product candidates
that have completed or are in Phase II or Phase III human clinical testing.
These candidates, Memantine and Xerecept, are described below.

  MEMANTINE

   Memantine is an orally-dosed compound that appears to restore the function
of impaired neurons by modulation of the N-methyl-D-aspartate (NMDA) receptor,
integral to the membranes of these cells. Restoration of this function inhibits
injured or damaged neurons from firing abnormally, a pathological process
associated with many neurological conditions, including dementia, Alzheimer's
disease, neuropathic pain (persistent pain resulting from abnormal signals to
the brain) and AIDS-related dementia.

   In April 1998, we entered into a strategic research and marketing
cooperation agreement with Merz + Co. ("Merz") 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 to facilitate regulatory review and
marketing approval by the Food and Drug Administration ("FDA") and foreign
regulatory authorities. Pursuant to this agreement, we will share in future
revenues from sales, if any, of Memantine for all indications. Memantine has
been marketed by Merz in Germany since 1989 with the labeling "dementia
syndrome."

                                      3

<PAGE>

   In June 2000, Merz entered into an agreement with Forest Laboratories, Inc.
("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 ("Lundbeck") 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, 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 Suntory Ltd., respectively.
In October 2000, we received $2.5 million and in April 2001 we received $2.3
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.

   In January 2001, Forest announced the outcome of its meeting with the FDA to
review a summary of the clinical study results for Memantine in treating
moderately severe to severe Alzheimer's disease. The FDA agreed that the
summary data of the Phase III study conducted in the United States, if
confirmed in a full submission, provided evidence of efficacy in treating
moderately severe to severe Alzheimer's disease. The FDA indicated that a
second study performed in Europe would likely need to be reviewed by an
advisory committee to determine whether the specific endpoints utilized were
adequate to qualify it as a second study required to demonstrate efficacy. As a
result, Forest is preparing a New Drug Application ("NDA") that it expects to
file with the FDA in late 2001 or early 2002. Forest initiated an additional
Phase III study in the United States of Memantine for moderately severe to
severe Alzheimer's disease in July 2001. We anticipate that this study will be
completed in the second half of 2002 and will be used as additional evidence of
efficacy as needed.

   The AIDS-related dementia clinical trial was completed in May 2001 and we
observed consistent, though statistically insignificant, trends of improvement
for both neuropsychological performance and neuropathy.

   In August 2001, we announced that Forest would be conducting the second of
two trials necessary for registration of an NDA to the FDA for diabetic
neuropathy. This will be a large-scale, multi-center, double-blind placebo
controlled trial to assess the safety and efficacy of Memantine in the
treatment of diabetic neuropathy and is expected to be completed in 2002. We
conducted the first such trial with an enrollment of over 400 patients and
reported positive results in January 2000.

  XERECEPT (TM)

   We are also 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). XERECEPT received orphan drug
designation for this indication by 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. We are currently planning a
second Phase II trial of XERECEPT for peritumoral brain edema.

   In August 2000, we announced that we had signed an option with the
University of California, Berkeley to license its patents on
corticotropin-releasing hormone (CRH) analogues. The option agreement includes
a work plan that will encompass in vivo models of the hormones to screen
CRH-analogues to arrive at the optimum CRH-analogue for clinical purposes.

                                      4

<PAGE>

PRODUCT CANDIDATES

<TABLE>
<CAPTION>
      Product/Indication                   Development Status                 Primary Benefit Sought
      ------------------                   ------------------                 ----------------------
<C>                             <S>                                       <C>

MEMANTINE

Diabetic Neuropathic Pain...... Phase IIB trial completed by NTI.         Treatment of chronic pain
                                Results showed statistically significant  associated with diabetic
                                improvement of 40mg of Memantine          neuropathy.
                                over placebo in reducing chronic pain.
                                The FDA accepted trial as one of two
                                pivotal trials. NTI's collaborative
                                partner Forest Laboratories initiated a
                                year-long Phase III trial in July 2001.

Mild to Moderate Vascular
  Dementia..................... Phase III trials completed by Merz in     Functional and cognitive
                                the United Kingdom and France.            improvement.
                                Results showed significantly improved
                                cognitive abilities compared to patients
                                who received placebo as demonstrated
                                by the Activities of Daily Living and
                                cognitive performance evaluations.

Moderate to Severe Dementia and
  Alzheimer's Disease.......... Phase III trial completed by Merz in      Functional and cognitive
                                the United States showing                 improvement.
                                improvement in functional
                                independence and reduction in
                                required level of care. Forest initiated
                                an additional Phase III trial in July
                                2001 to confirm these initial results.

AIDS-Related Dementia and
  Neuropathic Pain............. Phase II trial completed. Consistent      Improvement in
                                but statistically insignificant trends of neuropsychological function and
                                improvement observed for both             peripheral neuropathy.
                                neuropsychological performance and
                                neuropathy. Further studies to validate
                                initial data are under consideration.


XERECEPT(TM) (CORTICOTROPIN-RELEASING FACTOR)

Peritumoral Brain Edema........ Phase II trial completed. Results         Stabilization or improvement of
                                confirmatory but not definitive.          neurological function.
                                Further study in planning.
</TABLE>

                                      5

<PAGE>

SCIENTIFIC BACKGROUND

   Our therapeutic focus is neuroprotection and neuromodulation: 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, brain cancer, and AIDS-related dementia.

   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 an orally-available neuromodulatory agent that has been
marketed in Germany by Merz since 1989 with the labeling "dementia syndrome."
It 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
overstimulation 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.

   We have been developing Memantine both as a treatment for neuropathic pain
as well as for neurological deficits associated with AIDS. Estimates are that
approximately 1,000,000 patients in the United States suffer from intractable
neuropathic pain. In addition, as many as one-third of AIDS patients eventually
develop neurological problems, such as loss of cognition and coordination.

   Nerve cells in the brain communicate by sending signals to excite or inhibit
each other. These signals are initiated by compounds known as
neurotransmitters. 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 overstimulation 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.

                                      6

<PAGE>

   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.

   The profound psychotic side effects associated with other NMDA receptor
antagonists previously evaluated in human clinical trials were virtually absent
with Memantine. Merz has carefully documented Memantine's history of safe
clinical use in Germany over years of post-launch clinical experience and
active surveillance. In a post-marketing surveillance study sponsored by Merz
with 1,420 dementia outpatients treated for up to more than one year, Memantine
was rated as having very good to good tolerability in 93.8% of the cases at the
end of the observation period.

  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 treatments 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 overactivation 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 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 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.

                                      7

<PAGE>

   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 was observed.

   In August 2001, we announced that Forest would be conducting an additional
large-scale, multi-center, double-blind placebo controlled trial to assess the
safety and efficacy of Memantine in the treatment of diabetic neuropathy.

  AIDS-Related Dementia and Neuropathic Pain

   Recent research indicates that infection of the CNS with HIV, the virus
associated with AIDS, also leads to neuronal impairment. Such impairment may
result in neurological complications, including loss of cognition, movement,
and sensation, referred to as AIDS-related dementia Complex. Approximately
one-half of children and one-third of adults with AIDS are expected to develop
these symptoms. There are currently no therapies specifically directed towards
HIV-associated neuronal impairment. Current AIDS therapies, even if effective
at reducing the circulating virus level, do not appear to be effective at
eliminating AIDS-induced impairment to the CNS.

   Besides the AIDS-related cognitive impairments, many AIDS patients
experience painful peripheral neuropathies due to overstimulation of NMDA
receptors. This often occurs in the later stages of AIDS and results in a
burning pain of the feet as well as pain from anything that touches the skin.
Walking in particular may become extremely difficult. Effective treatments are
still unavailable for this incapacitating condition and certain AIDS therapies
may aggravate this type of neuropathic pain.

   Memantine has been shown to reduce NMDA receptor-mediated neuronal
impairment in both in vitro (outside the body) experiments and in vivo (inside
the body) animal models. Neuronal dysfunction due to HIV infection has been
shown to be mitigated by antagonists of the NMDA receptor, including Memantine.

   In December 1996, we announced the initiation of a Phase II clinical trial
of Memantine as a treatment for AIDS-related dementia and neuropathic pain.
This study was funded by the National Institute of Allergy and Infectious
Diseases (NIAID) of the National Institutes of Health and was being conducted
by the AIDS Clinical Trials Group (ACTG), a clinical trials consortium funded
by the NIAID. In December 1999, enrollment was completed at 140 AIDS patients.
The results of the blinded portion of this trial indicate consistent trends of
improvement for both neuropsychological performance and neuropathy. However,
because these results cannot be considered statistically significant, further
studies are necessary. The ACTG also implemented a protocol extension
permitting open-label dosing for up to 60 weeks following the blinded phase of
the trial. This open-label phase will provide data on the long-term safety of
Memantine. NTI will have the right to use the resulting data to further the
commercial development of Memantine for that indication.

  Agreement with Merz and Additional Indications

   In April 1998, we entered into a strategic research and marketing
cooperation agreement with Merz and a new revenue sharing partnership with
Children's Medical Center Corporation to further the clinical development and
commercialization of Memantine. Pursuant to this agreement, Children's Medical
Center Corporation terminated its existing license to NTI for AIDS-related
dementia and neuropathic pain and granted exclusive rights to Merz. NTI and
Merz share scientific, clinical and regulatory information about Memantine,
particularly safety data, to facilitate regulatory review and marketing
approval by the FDA and foreign regulatory authorities. Pursuant to the
agreement with Merz, NTI will share in future revenues from sales of Memantine
for all indications.

                                      8

<PAGE>

XERECEPT (Human Corticotropin-Releasing Factor)

   XERECEPT is our synthetic preparation of the human peptide
Corticotropin-Releasing Factor (hCRF) which 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 preclinical studies and
pilot human clinical trials previously sponsored by the Company have
demonstrated the compound's potential to reduce swelling in brain tissue and to
be well-tolerated and apparently safe. 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 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
monies for clinical research under the Orphan Drug Grant Program.

   hCRF is a natural neuroendocrine peptide hormone found in humans both
centrally (within the brain) and peripherally (outside the brain). Researchers
discovered anti-edema affects of hCRF through systemic administration. 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.
Preclinical studies sponsored by us have shown that XERECEPT reduces the flow
of fluid 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 initially 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 result 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.

   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 the adverse side effects associated with
current therapies. 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.

   Results from pilot human clinical trials previously sponsored by us
demonstrated the potential of XERECEPT to reduce swelling of brain tissue and
to be well-tolerated and apparently safe. Based on these

                                      9

<PAGE>

results, we initiated a Phase II human clinical trial in 1997 to evaluate the
efficacy of XERECEPT to stabilize or improve neurological symptoms caused by
peritumoral brain edema. Patients enrolled in this randomized, double-blind,
positive-controlled trial had neurological symptoms requiring stable dosing of
synthetic corticosteroids, the current standard treatment. We closed enrollment
for this trial at 33 patients (one third of projected enrollment) in order to
provide expedited but abbreviated analysis of the data. All responders, as
defined by the trial protocol, were in the XERECEPT treatment groups. However,
rigorous statistical analysis of the data was not meaningful due to the small
numbers enrolled. The clinical study should be regarded as confirmatory but not
definitive with regard to neurologic improvements that may be attained with
XERECEPT in symptomatic brain tumor patients. We are currently planning a
second Phase II trial of XERECEPT for peritumoral brain edema.

COMPETITION

   Competition in the biopharmaceutical industry is intense and is expected to
increase. There are other therapies under development for each of these
therapeutic targets and the development and sale of drugs for the treatment of
the therapeutic targets we are pursuing is highly competitive. We may not be
able to develop products that will be as efficacious or as cost-effective as
currently-marketed products. We have both exclusive and non-exclusive licenses
to patent rights covering certain uses of XERECEPT(TM). Consequently, others
may develop, manufacture and market products that could compete with those that
we are developing.

   We 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.

   We believe that our ability to compete successfully will depend on our
ability to obtain funding, create and maintain scientifically advanced
technology, develop proprietary products, attract and retain scientific
personnel, obtain patent or other protection for our products, obtain required
regulatory approvals and manufacture and successfully market products either
alone or through other parties. Most of our competitors have substantially
greater financial, marketing and human resources than us. Therefore, we expect
to encounter significant competition.

SUPPLIERS

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

   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 ("cGMP") regulations. Fresh materials produced under a new process
have been supplies to the company. 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 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 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.

                                      10

<PAGE>

   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 TECHNOLOGY

   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.

   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.
However, we also have exclusive rights to four issued patents and one patent
application covering 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.

   In August 2000, we announced that we had signed an option with the
University of California, Berkeley for Berkeley's patents on
corticotropin-releasing hormone analogues. The option agreement includes a work
plan that will encompass in vivo models of the hormones to screen CRH-analogues
to arrive at the optimum CRH-analogue for clinical purposes.

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

  .  patents involve complex legal and factual issues that have recently 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 and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to our business.
Some of these technologies, applications or patents may conflict with our or
any of our licensors' technologies or patent applications. Such conflict could
limit the scope of the patents, if any, that we may be able to obtain or to
which we have a license or result in the denial of our patent applications or
the patent applications for which we have licenses. In addition, if patents
that cover our activities have been or are issued to other companies, there can
be no assurance that we would be able to obtain licenses to these patents at a
reasonable cost, or be able to develop an alternative technology.

   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

                                      11

<PAGE>

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 preclinical 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.

   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 preclinical and clinical testing are submitted to the FDA
in the form of a new drug application, or 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
current Good Manufacturing Practice or 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.


                                      12

<PAGE>

   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 preclinical or early stage clinical trials does not
assure success in later stage 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

   As of June 30, 2001, we employed 10 people, 5 of whom are full-time
employees.

   We use consultants to complement our staffing. Our employees are not subject
to any collective bargaining agreements, and we regard our relations with
employees to be good.

ITEM 2. PROPERTIES

   Our executive offices are located in Richmond, California. On April 1, 2001,
we entered into an assignment and assumption of lease to sublease approximately
4,333 square feet of space. The master lease under which we sublease these
facilities expires in July 2002. Rental payments are approximately $7,600 per
month over the term of the sublease.

   We believe that our facilities are adequate for our current needs and that,
if required, we will be able to lease suitable alternative or additional space
on commercially acceptable terms.

ITEM 3. LEGAL PROCEEDINGS

   Currently we are not a party to 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, 2001.

                                      13

<PAGE>

                                    PART II

ITEM 5. MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

   From February 1998 to July 2000, our common stock was traded on the Nasdaq
Stock Market's Over-the-Counter (OTC) Bulletin Board. Since July 2000, our
common stock has been quoted on The Nasdaq SmallCap Market under the symbol
NTII.

   High and low closing sales prices shown below through July 2000 refer to the
high and low bid quoted on the OTC Bulletin Board. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. High and low closing sales prices shown
after July 2000 refer to the high and low trading prices during that period as
reported on The Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
Fiscal 2000                                                  High   Low
-----------                                                 ------ -----
<S>                                                         <C>    <C>
First Quarter.............................................. $ 1.53 $0.84
Second Quarter............................................. $ 3.75 $0.84
Third Quarter.............................................. $ 9.28 $2.81
Fourth Quarter............................................. $ 8.50 $3.88
<CAPTION>

Fiscal 2001                                                  High   Low
-----------                                                 ------ -----
<S>                                                         <C>    <C>
First Quarter.............................................. $11.00 $5.94
Second Quarter............................................. $ 7.88 $3.47
Third Quarter.............................................. $ 5.00 $1.84
Fourth Quarter............................................. $ 3.44 $1.56
</TABLE>

   As of June 30, 2001 there were approximately 264 holders of record of our
common stock and 17,503,699 shares of common stock outstanding. No dividends
have been paid on the common stock since our inception, and we do not
anticipate paying any dividends in the foreseeable future.

                                      14

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following selected financial information has been derived from audited
consolidated financial statements. 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 consolidated financial statements
and related notes thereto in Item 8.

<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                        August 27, 1987
                                                     Year Ended June 30,                  (inception)
                                      ------------------------------------------------      through
                                        2001      2000      1999      1998      1997     June 30, 2001
                                      --------  --------  --------  --------  --------  ---------------
                                            (in thousands, except per share data)
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>
Statement of Operations Data:
Total revenue........................ $  4,781  $     --  $    100  $  2,100  $     --     $  7,031

Expenses:............................
   Research and development..........    1,194     1,896     2,780     2,026     5,478       28,158
   General and administrative........    2,556     1,380     1,059     2,347     2,298       15,333
                                      --------  --------  --------  --------  --------     --------
Total expenses.......................    3,750     3,276     3,839     4,373     7,776       43,491
                                      --------  --------  --------  --------  --------     --------
Operating income (loss)..............    1,031    (3,276)   (3,739)   (2,273)   (7,776)     (36,460)
Interest income......................      599       161        47       100       407        2,938
                                      --------  --------  --------  --------  --------     --------
Income (loss) before income tax......    1,630    (3,115)   (3,692)   (2,173)   (7,369)     (33,522)
Provision for income tax.............       42        --        --        --        --           42
                                      --------  --------  --------  --------  --------     --------
Net income (loss).................... $  1,588  $ (3,115) $ (3,692) $ (2,173) $ (7,369)    $(33,564)
                                      ========  ========  ========  ========  ========     ========
Basic net income (loss) per share.... $    .10  $   (.27) $   (.49) $   (.32) $  (1.13)
                                      ========  ========  ========  ========  ========
Diluted net income (loss) per share.. $    .08  $   (.27) $   (.49) $   (.32) $  (1.13)
                                      ========  ========  ========  ========  ========
Weight1ed average shares of common
  stockoutstanding--basic............   16,532    11,461     7,555     6,862     6,527
                                      ========  ========  ========  ========  ========
Weighted average shares of common
  stockoutstanding--diluted..........   21,071    11,461     7,555     6,862     6,527
                                      ========  ========  ========  ========  ========
<CAPTION>
                                                          June 30,
                                      ------------------------------------------------
                                        2001      2000      1999      1998      1997
                                      --------  --------  --------  --------  --------
                                                       (in thousands)
<S>                                   <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
  investments........................ $ 10,182  $  8,554  $    201  $  2,021  $  3,838
Working capital (deficit)............    9,806     7,886      (890)    1,582     3,013
Total assets.........................   11,458     8,683       249     2,133     4,207
Total current liabilities............      762       769     1,135       498       997
Deficit accumulated during
  development stage..................  (33,564)  (35,152)  (32,037)  (28,345)  (26,172)
Stockholders' equity (deficit).......   10,696     7,913      (886)    1,636     3,211
</TABLE>


                                      15

<PAGE>

<TABLE>
<CAPTION>
                                                                         2001
                                                  --------------------------------------------------
                                                  September 30 December 31 March 31 June 30   Total
-                                                 ------------ ----------- -------- -------  -------
                                                       (in thousands, except per share amounts)
                                                                      (Unaudited)
<S>                                               <C>          <C>         <C>      <C>      <C>
Quarterly Results of Operations:
Total revenue....................................   $    --      $ 2,531   $    --  $ 2,250  $ 4,781
Research and development.........................      (236)        (318)     (451)    (189)  (1,194)
General and administrative.......................      (529)        (591)     (808)    (628)  (2,556)
Interest income..................................       147          166       152      134      599
                                                    -------      -------   -------  -------  -------
Income (loss) before income taxes................      (618)       1,788    (1,107)   1,567    1,630
Income tax expense...............................        --           --        --       42       42
                                                    -------      -------   -------  -------  -------
Net income (loss)................................   $  (618)     $ 1,788   $(1,107) $ 1,525  $ 1,588
                                                    =======      =======   =======  =======  =======
Basic net income (loss) per share................   $ (0.04)     $  0.11   $ (0.07) $  0.09  $  0.10
                                                    =======      =======   =======  =======  =======
Diluted net income (loss) per share..............   $ (0.04)     $  0.08   $ (0.07) $  0.08  $  0.08
                                                    =======      =======   =======  =======  =======
Weighted average shares of common stock
  outstanding--basic.............................    16,104       16,104    16,506   17,328   16,532
                                                    =======      =======   =======  =======  =======
Weighted average shares of common stock
  outstanding--diluted...........................    16,104       21,649    16,506   20,108   21,071
                                                    =======      =======   =======  =======  =======
<CAPTION>

                                                                         2000
                                                  --------------------------------------------------
                                                  September 30 December 31 March 31 June 30   Total
                                                  ------------ ----------- -------- -------  -------
                                                       (in thousands, except per share amounts)
                                                                      (Unaudited)
<S>                                               <C>          <C>         <C>      <C>      <C>
Quarterly Results of Operations:
Total revenue....................................   $    --      $    --   $    --  $    --  $    --
Research and development.........................      (536)        (625)     (402)    (333)  (1,896)
General and administrative.......................      (247)        (245)     (328)    (560)  (1,380)
Interest income..................................         2           21        37      101      161
                                                    -------      -------   -------  -------  -------
Loss before income taxes.........................      (781)        (849)     (693)    (792)  (3,115)
Income tax expense...............................        --           --        --       --       --
                                                    -------      -------   -------  -------  -------
Net loss.........................................   $  (781)     $  (849)  $  (693) $  (792) $(3,115)
                                                    =======      =======   =======  =======  =======
Basic and diluted net loss per common share......   $ (0.10)     $ (0.07)  $ (0.05) $ (0.05) $ (0.27)
                                                    =======      =======   =======  =======  =======
Weighted average shares of common stock
  outstanding--basic and diluted.................     7,690       11,519    13,563   14,924   11,461
                                                    =======      =======   =======  =======  =======
</TABLE>

                                      16

<PAGE>

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 our dependence on Merz and its marketing partners for
the successful development of Memantine, our ability to properly design,
implement and complete planned trials, meet regulatory requirements,
demonstrate safety and efficacy for products, manage third party contractors,
and avoid infringement of third-party proprietary rights, as well as other
risks detailed from time to time in our Securities and Exchange Commission
filings. Actual results may differ materially from those projected. These
forward-looking statements represent our judgment as of the date of the
release. We disclaim, however, any intent or obligation to update these
forward-looking statements.

OVERVIEW

   We are an emerging drug development company focused on the clinical
development 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, brain cancer and AIDS-related dementia. Our strategy is to
in-license and develop early-stage drug candidates that target major medical
needs and that may be rapidly commercialized.

   Except for the current year, we have incurred significant losses since our
inception. As of June 30, 2001, our accumulated deficit was $34 million and
total stockholders' equity was $11 million. We expect to incur additional
operating losses over at least the next year as we continue to expand our
research and development efforts. Operating expenses decreased from $3.8
million in 1999 to $3.3 million in 2000 and increased to $3.8 million for 2001.

RESULTS OF OPERATIONS

   TOTAL REVENUES. In April 1998, we entered into a strategic research and
marketing cooperation agreement with Merz + Co. (Merz) 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 FDA and foreign
regulatory authorities. Pursuant to this agreement, we will share in future
revenues from sales of Memantine for all indications.

   In fiscal 2001, we had revenue of $4,781,000, which consisted of license fee
payments from Merz, which represents our portion of the payments received by
Merz pursuant to Merz's agreements with Forest and Lundbeck. In fiscal 2000, we
had no revenue. In fiscal 1999, we had revenue of $100,000 from a Small
Business Innovative Research grant awarded by the National Institutes of
Health.

   RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,194,000 in fiscal 2001, compared to $1,896,000 in fiscal 2000 and $2,780,000
in fiscal 1999. The decrease in fiscal 2001 was primarily due to the absence of
any ongoing clinical costs other than the remaining cost for patient data
analysis. The decrease in fiscal 2000 was primarily due to the completion of
our Phase IIB human clinical trial to evaluate Memantine as a treatment for
peripheral diabetic neuropathy. We expect that our research and development
expenditures will increase in future years to support additional product
development activities and clinical trials. The rate of increase depends on a
number of factors, including progress in research and development and clinical
trials.

   GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2,556,000 in fiscal 2001, compared to $1,380,000 in fiscal 2000 and
$1,059,000 in fiscal 1999. The increase in fiscal 2001 was

                                      17

<PAGE>

primarily due to an increase in rent expense, employee bonuses, and activities
relating to seeking financing and corporate partnerships. The increase in
fiscal 2000 reflected expenditures in activities relating to seeking financing
and corporate partnerships and relisting our common stock on The Nasdaq
SmallCap Market.

   INTEREST INCOME. Interest income was $599,000 in fiscal 2001 compared to
$161,000 in fiscal 2000 and $47,000 in fiscal 1999. The increases were
primarily due to increases in average cash balances as a result of a private
financing in 2000 and revenue payments received in 2001.

   INCOME TAXES. The income tax provision in fiscal 2001 is a result of the
federal alternative minimum tax. Due to our loss position, there was no income
tax provision in fiscal 2000 and fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

   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 the current year, 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.

   We believe that our available cash and cash equivalents and investments of
$11,044,000 as of June 30, 2001 are adequate to fund our operations through at
least the next twelve months. In the course of our development activities, we
have incurred significant losses, although we were profitable in the year ended
June 30, 2001, and expect additional losses in the year ending June 30, 2002.
We expect to incur ongoing costs in fiscal 2002 primarily for Phase II and
Phase III clinical trials of XERECEPT(TM) and CRH-analogues and related
administrative support. Merz and Merz's marketing partners will pay all future
development costs of Memantine.

   Our operating activities (used) provided cash of $(3,198,000) in 1999,
$(3,234,000) in 2000 and $1,372,000 in 2001. Sources and uses of cash in
operating activities were primarily derived from net operating income (losses).

   Net cash provided by (used in) investing activities was $8,000 in 1999,
$(1,256,000) in 2000 and $(6,213,000) in 2001. The cash used in 2001 primarily
represented purchases of investments of $11,742,000, less maturities of
investments of $5,551,000.

   Financing activities provided cash of $1,370,000 in 1999, $11,617,000 in
2000 and $1,140,000 in 2001. The 2000 amount primarily consists of the net
proceeds we received from the sale of common stock. The 2001 amount primarily
consists of the net proceeds we received from the issuance of common stock upon
exercise of stock options and warrants.

   We may seek to raise additional funds whenever market conditions permit. 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;

  .  competing technological and market developments;

  .  our ability to establish collaborative relationships; and

  .  the development of commercialization activities and arrangements.

                                      18

<PAGE>

RISKS ASSOCIATED WITH OUR BUSINESS

   You should consider carefully the following risk factors, along with the
other information contained or incorporated by reference in this Annual Report
on Form 10-K. These factors, among others, may cause actual results, events or
performance to differ materially from those expressed in any forward-looking
statements we make in this Annual Report or our other reports and prospectuses
filed with the Securities and Exchange Commission.

Because all our potential products are in clinical development, we may not
develop a candidate product that will receive required regulatory approval or
be successfully commercialized.

   We are still in the development stage and have no marketable products. As a
result, we have no revenues from product sales, and most of our resources are
dedicated to the development of selected candidate pharmaceutical products. The
results of our preclinical studies and early stage clinical trials are not
necessarily indicative of those that will be obtained upon further clinical
testing in later stage clinical trials. It is possible that none of our
candidate products will receive regulatory approval or be successfully
commercialized.

Our potential products are subject to the risks of failure inherent in the
development of products based on new technologies.

   Our potential products are subject to the risks of failure inherent in the
development of products based on new technologies. These risks include the
possibility that the potential products 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 uneconomical
     to market;

  .  be precluded from marketing by us due to the proprietary rights of third
     parties; and

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

   Further, our development activities may not result in any commercially
viable products. We do not expect to be able to commercialize any products for
a number of years, if at all.

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

   All of our revenues in fiscal 2001 were license fee payments from Merz
related to our portion of payments received by Merz pursuant to Merz's
agreements with its partners. The only revenues that we will receive in the
foreseeable future for Memantine are royalties on product sales by Merz or its
marketing partners and our share of payments received by Merz from its
partners. Under certain circumstances, Merz can terminate our agreement upon
six months notice. The termination of our agreement with Merz or any failure by
Merz or its partners to successfully commercialize Memantine after its
development would have a material adverse effect on our business, financial
conditions and results of operations.

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

   We have entered into various contractual arrangements (many of which are
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 preclinical 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

                                      19

<PAGE>

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 to 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 pay
royalties and make other payments to such parties. Our failure to make such
payments could cause us to lose rights to technology or data under these
agreements.

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 only to
cover liabilities arising from clinical trials. 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 commercial sales of
products. We can not 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.

Further 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 five persons full-time and five persons part-time. Any further
reduction in force 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 during fiscal 2001 has
been low compared to that of other biopharmaceutical companies. Our common
stock was delisted from The Nasdaq Stock Market in February 1998 because we
failed to meet the financial conditions necessary to remain listed. In July
2000, we were approved for listing on The Nasdaq SmallCap Market. However, we
may not continue to qualify for listing on that market.

   Factors that may cause volatility in our stock price include:

  .  the results of preclinical studies and clinical trials by us, Merz or its
     marketing partners or our competitors;

  .  other evidence of the safety or efficacy of our products of the Company,
     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; and

  .  market conditions for life science companies' stocks in general.

                                      20

<PAGE>

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, 2001,
approximately 92% of our total portfolio will mature in one year or less, with
the remainder maturing in less than two years. 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.

                                      21

<PAGE>

ITEM 8. FINANCIAL STATEMENTS

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Neurobiological Technologies, Inc.

   We have audited the accompanying balance sheets of Neurobiological
Technologies, Inc. (a development stage company) as of June 30, 2001 and 2000,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended June 30, 2001, and
for the period from August 27, 1987 (inception) through June 30, 2001. 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 auditing standards generally
accepted in the 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, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2001, and for the period from August 27, 1987 (inception) through June
30, 2001, in conformity with accounting principles generally accepted in the
United States.

                                          /s/ ERNST & YOUNG LLP

Palo Alto, California
August 10, 2001

                                      22

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        June 30,
                                                                               --------------------------
                                                                                   2001          2000
                                                                               ------------  ------------
<S>                                                                            <C>           <C>

                                   ASSETS

Current assets:
   Cash and cash equivalents.................................................. $  3,626,700  $  7,328,456
   Short-term investments.....................................................    6,555,575     1,225,592
   Interest receivable........................................................      132,044        58,620
   Prepaid expenses and other current assets..................................      253,827        42,297
                                                                               ------------  ------------
Total current assets..........................................................   10,568,146     8,654,965
Long-term investments.........................................................      861,313            --
Property and equipment, net...................................................       28,820        27,778
                                                                               ------------  ------------
                                                                               $ 11,458,279  $  8,682,743
                                                                               ============  ============

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable........................................................... $     92,008  $    243,541
   Accrued expenses...........................................................      628,210       525,852
   Income taxes payable.......................................................       41,831            --
                                                                               ------------  ------------
Total current liabilities.....................................................      762,049       769,393
Commitments
Stockholders' equity:
   Convertible preferred stock, $.001 par value, 5,000,000 shares authorized,
     2,332,000 issued in series, 1,582,000 and 2,282,000 outstanding at
     June 30, 2001 and 2000, respectively (aggregate liquidation preference
     of $791,000 at June 30, 2001)............................................      791,000     1,141,000
   Common stock, $.001 par value, 35,000,000 shares authorized, 17,503,699
     and 15,647,397 outstanding at June 30, 2001 and 2000, respectively.......   43,660,557    42,170,818
   Deferred stock compensation................................................     (191,626)     (246,376)
   Deficit accumulated during development stage...............................  (33,563,701)  (35,152,092)
                                                                               ------------  ------------
Total stockholders' equity....................................................   10,696,230     7,913,350
                                                                               ------------  ------------
                                                                               $ 11,458,279  $  8,682,743
                                                                               ============  ============
</TABLE>


                            See accompanying notes.

                                      23

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                          August 27,
                                                                                             1987
                                                            Year Ended June 30,           (inception)
                                                   ------------------------------------     through
                                                      2001        2000         1999      June 30, 2001
                                                   ----------- -----------  -----------  -------------
<S>                                                <C>         <C>          <C>          <C>
REVENUES
License........................................... $ 4,781,250 $        --  $        --  $  6,881,250
Grant.............................................          --          --       99,544       149,444
                                                   ----------- -----------  -----------  ------------
   Total revenue..................................   4,781,250          --       99,544     7,030,694
EXPENSES
Research and development..........................   1,193,731   1,896,023    2,780,305    28,158,440
General and administrative........................   2,556,272   1,379,708    1,058,421    15,332,552
                                                   ----------- -----------  -----------  ------------
   Total expenses.................................   3,750,003   3,275,731    3,838,726    43,490,992
                                                   ----------- -----------  -----------  ------------
Operating income (loss)...........................   1,031,247  (3,275,731)  (3,739,182)  (36,460,298)
Interest income...................................     598,975     160,999       46,949     2,938,428
                                                   ----------- -----------  -----------  ------------
Income (loss) before income tax expense...........   1,630,222  (3,114,732)  (3,692,233)  (33,521,870)
Income tax expense................................      41,831          --           --        41,831
                                                   ----------- -----------  -----------  ------------
NET INCOME (LOSS)................................. $ 1,588,391 $(3,114,732) $(3,692,233) $(33,563,701)
                                                   =========== ===========  ===========  ============
BASIC NET INCOME (LOSS) PER SHARE................. $      0.10 $     (0.27) $     (0.49)
                                                   =========== ===========  ===========
Shares used in basic net income (loss) per share
  calculation.....................................  16,531,649  11,460,599    7,554,522
                                                   =========== ===========  ===========
DILUTED NET INCOME (LOSS) PER SHARE............... $      0.08 $     (0.27) $     (0.49)
                                                   =========== ===========  ===========
Shares used in diluted net income (loss) per share
  calculation.....................................  21,070,598  11,460,599    7,554,522
                                                   =========== ===========  ===========
</TABLE>



                            See accompanying notes.

                                      24

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>

                                                                     Preferred Stock          Common Stock        Deferred
                                                                 -----------------------  ---------------------    Stock
                                                                   Shares      Amount      Shares     Amount    Compensation
                                                                 ----------- -----------  --------- ----------- ------------
<S>                                                              <C>         <C>          <C>       <C>         <C>
Period from August 27, 1987 (inception) through June 30, 1998
  Issuance of common stock......................................          -- $        --    740,863 $ 1,616,706  $      --
  Issuance of warrants to purchase 304,786 shares of common
   stock........................................................          --          --         --      43,290         --
  Issuance of common stock and warrants at $0.55 per unit.......          --          --  1,010,410     555,725         --
  Issuance of common stock for services and license rights......          --          --     88,248     120,875         --
  Issuance of common stock upon exercise of options and
   warrants.....................................................          --          --    232,119     296,421         --
  Issuance of common stock under employee stock purchase
   plan.........................................................          --          --     65,147     160,520         --
  Issuance of 5,691,000 shares of Series A preferred stock, net
   of issuance costs............................................   5,691,000   5,573,194         --          --         --
  Issuance of 2,657,881 shares of Series B preferred stock, net
   of issuance costs............................................   2,657,881   1,653,888         --          --         --
  Conversion of preferred stock in connection with the initial
   public offering.............................................. (8,348,881)  (7,227,082) 1,046,912   7,227,082         --
  Issuance of common stock at $8.00 per share in connection
   with initial public offering net of issuance costs...........          --          --  1,840,000  12,817,000         --
  Issuance of common stock at $3.25 per share in connection
   with public offering net of issuance costs...................          --          --  2,530,000   7,143,279         --
  Net loss and comprehensive loss...............................          --          --         --          --         --
                                                                 ----------- -----------  --------- -----------  ---------
     Balances at June 30, 1998..................................          --          --  7,553,699  29,980,898         --

  Issuance of common stock under employee stock purchase
   plan.........................................................          --          --      9,876       4,454         --
  Issuance of 2,332,000 shares of Series A preferred stock and
   warrants at $2.50 per unit, net of issuance costs............   2,332,000   1,166,000         --          --         --
  Net loss and comprehensive loss...............................          --          --         --          --         --
                                                                 ----------- -----------  --------- -----------  ---------
     Balances at June 30, 1999..................................   2,332,000   1,166,000  7,563,575  29,985,352         --
</TABLE>
<TABLE>
<CAPTION>
                                                                    Deficit
                                                                 Accumulated in      Total
                                                                  Development    Stockholders'
                                                                     Stage      Equity (Deficit)
                                                                 -------------- ----------------
<S>                                                              <C>            <C>
Period from August 27, 1987 (inception) through June 30, 1998
  Issuance of common stock......................................  $         --    $  1,616,706
  Issuance of warrants to purchase 304,786 shares of common
   stock........................................................            --          43,290
  Issuance of common stock and warrants at $0.55 per unit.......            --         555,725
  Issuance of common stock for services and license rights......            --         120,875
  Issuance of common stock upon exercise of options and
   warrants.....................................................            --         296,421
  Issuance of common stock under employee stock purchase
   plan.........................................................            --         160,520
  Issuance of 5,691,000 shares of Series A preferred stock, net
   of issuance costs............................................            --       5,573,194
  Issuance of 2,657,881 shares of Series B preferred stock, net
   of issuance costs............................................            --       1,653,888
  Conversion of preferred stock in connection with the initial
   public offering..............................................            --              --
  Issuance of common stock at $8.00 per share in connection
   with initial public offering net of issuance costs...........            --      12,817,000
  Issuance of common stock at $3.25 per share in connection
   with public offering net of issuance costs...................            --       7,143,279
  Net loss and comprehensive loss...............................   (28,345,127)    (28,345,127)
                                                                  ------------    ------------
     Balances at June 30, 1998..................................   (28,345,127)      1,635,771

  Issuance of common stock under employee stock purchase
   plan.........................................................            --           4,454
  Issuance of 2,332,000 shares of Series A preferred stock and
   warrants at $2.50 per unit, net of issuance costs............            --       1,166,000
  Net loss and comprehensive loss...............................    (3,692,233)     (3,692,233)
                                                                  ------------    ------------
     Balances at June 30, 1999..................................   (32,037,360)       (886,008)
</TABLE>

                                                   (continued on following page)

                                      25

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

           STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>

                                                                      Preferred Stock         Common Stock        Deferred
                                                                   --------------------  ----------------------    Stock
                                                                    Shares     Amount      Shares     Amount    Compensation
                                                                   --------- ----------  ---------- ----------- ------------
<S>                                                                <C>       <C>         <C>        <C>         <C>
 Balances at June 30, 1999........................................ 2,332,000 $1,166,000   7,563,575 $29,985,352  $      --
  Issuance of common stock and warrants at $4.00 per unit, net of
   issuance costs.................................................        --         --   5,434,700   4,051,898         --
  Issuance of common stock at $5.30 per unit, net of issuance
   costs..........................................................        --         --   1,200,000   5,727,400         --
  Issuance of common stock upon exercise of options and
   warrants.......................................................        --         --   1,357,278   2,017,635         --
  Options granted to consultants for services rendered............        --         --          --      70,200         --
  Deferred stock compensation.....................................        --         --          --     273,750   (273,750)
  Amortization of deferred stock compensation.....................        --         --          --          --     27,374
  Conversion of preferred stock to common stock...................  (50,000)    (25,000)     50,000      25,000         --
  Issuance of common stock under employee stock purchase plan.....        --         --      41,844      19,583         --
  Net loss and comprehensive loss.................................        --         --          --          --         --
                                                                   --------- ----------  ---------- -----------  ---------
     Balances at June 30, 2000.................................... 2,282,000  1,141,000  15,647,397  42,170,818   (246,376)

  Issuance of common stock upon exercise of options and
   warrants.......................................................        --         --   1,129,925   1,115,945         --
  Amortization of deferred stock compensation.....................        --         --          --          --     54,750
  Conversion of preferred stock to common stock................... (700,000)   (350,000)    700,000     350,000         --
  Issuance of common stock under employee stock purchase plan.....        --         --      26,377      23,794         --
  Net income and comprehensive income.............................        --         --          --          --         --
                                                                   --------- ----------  ---------- -----------  ---------
     Balances at June 30, 2001.................................... 1,582,000 $  791,000  17,503,699 $43,660,557  $(191,626)
                                                                   ========= ==========  ========== ===========  =========
</TABLE>
<TABLE>
<CAPTION>
                                                                      Deficit
                                                                   Accumulated in      Total
                                                                    Development    Stockholders'
                                                                       Stage      Equity (Deficit)
                                                                   -------------- ----------------
<S>                                                                <C>            <C>
 Balances at June 30, 1999........................................  $(32,037,360)   $  (886,008)
  Issuance of common stock and warrants at $4.00 per unit, net of
   issuance costs.................................................            --      4,051,898
  Issuance of common stock at $5.30 per unit, net of issuance
   costs..........................................................            --      5,727,400
  Issuance of common stock upon exercise of options and
   warrants.......................................................            --      2,017,635
  Options granted to consultants for services rendered............            --         70,200
  Deferred stock compensation.....................................            --             --
  Amortization of deferred stock compensation.....................            --         27,374
  Conversion of preferred stock to common stock...................            --             --
  Issuance of common stock under employee stock purchase plan.....            --         19,583
  Net loss and comprehensive loss.................................    (3,114,732)    (3,114,732)
                                                                    ------------    -----------
     Balances at June 30, 2000....................................   (35,152,092)     7,913,350

  Issuance of common stock upon exercise of options and
   warrants.......................................................            --      1,115,945
  Amortization of deferred stock compensation.....................            --         54,750
  Conversion of preferred stock to common stock...................            --             --
  Issuance of common stock under employee stock purchase plan.....            --         23,794
  Net income and comprehensive income.............................     1,588,391      1,588,391
                                                                    ------------    -----------
     Balances at June 30, 2001....................................  $(33,563,701)   $10,696,230
                                                                    ============    ===========
</TABLE>

                            See accompanying notes.

                                      26

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                Period from
                                                                                              August 27, 1987
                                                                                                (Inception)
                                                                                                  through
                                                          2001         2000         1999       June 30, 2001
                                                      ------------  -----------  -----------  ---------------
<S>                                                   <C>           <C>          <C>          <C>
Operating Activities:
Net income (loss).................................... $  1,588,391  $(3,114,732) $(3,692,233)  $(33,563,701)
Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
   Depreciation and amortization.....................       22,481        6,018       41,792        666,705
   Gain on sale of property and equipment............       (1,500)          --           --         (1,500)
   Amortization of deferred stock compensation.......       54,750       27,374           --         82,124
   Issuance of common stock, options and
     warrants for license rights and services........           --       70,200           --        209,975
   Changes in assets and liabilities:................
       Interest receivable...........................      (73,424)     (58,620)          --       (132,044)
       Prepaid expenses and other current assets.....     (211,530)       1,536       15,183       (253,827)
       Accounts payable and accrued expenses.........      (49,175)    (165,446)     437,261        720,218
       Income taxes payable..........................       41,831           --           --         41,831
                                                      ------------  -----------  -----------   ------------
          Net cash provided by (used in)
            operating activities.....................    1,371,824   (3,233,670)  (3,197,997)   (32,230,219)

Investing Activities:
Purchase of investments..............................  (11,742,170)  (1,225,592)          --    (46,807,440)
Maturities of investments............................    5,550,874           --           --     39,390,552
Purchases of property and equipment, net.............      (23,523)     (30,000)       7,859       (412,463)
Proceeds from sale of property and equipment.........        1,500           --           --          1,500
Additions to patents and licenses....................           --           --           --       (283,062)
                                                      ------------  -----------  -----------   ------------
          Net cash (used in) provided by
            investing activities.....................   (6,213,319)  (1,255,592)       7,859     (8,110,913)

Financing Activities:
Payment of note payable..............................           --     (200,000)          --       (200,000)
Proceeds of short-term borrowings....................           --           --      200,000        435,000
Issuance of common stock, net........................    1,139,739   11,816,516        4,454     35,574,750
Issuance of preferred stock, net.....................           --           --    1,166,000      8,158,082
                                                      ------------  -----------  -----------   ------------
          Net cash provided by financing
            activities...............................    1,139,739   11,616,516    1,370,454     43,967,832
                                                      ------------  -----------  -----------   ------------
(Decrease) increase in cash and cash equivalents.....   (3,701,756)   7,127,254   (1,819,684)     3,626,700
Cash and cash equivalents at beginning of period.....    7,328,456      201,202    2,020,886             --
                                                      ------------  -----------  -----------   ------------
Cash and cash equivalents at end of period........... $  3,626,700  $ 7,328,456  $   201,202   $  3,626,700
                                                      ============  ===========  ===========   ============

Supplemental Disclosures:
Conversion of short-term-borrowings to Series A
  preferred stock.................................... $         --  $        --  $        --   $    235,000
                                                      ============  ===========  ===========   ============
Conversion of preferred stock to common stock........ $    350,000  $    25,000  $        --   $  7,602,082
                                                      ============  ===========  ===========   ============
Deferred stock compensation related to options
  granted............................................ $         --  $   273,750  $        --   $    273,750
                                                      ============  ===========  ===========   ============
</TABLE>

                            See accompanying notes.

                                      27

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                         NOTES TO FINANCIAL STATEMENTS

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

  Description of Business

   Neurobiological Technologies, Inc. ("NTI(R)", "we", or the "Company") is an
emerging drug development company focused on the clinical evaluation and
regulatory approval of neuroscience drugs. The Company's strategy is to
in-license and develop early-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.

   The Company's principal activities to date involve 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. The Company
is classified as a development stage company.

   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 in the year ending June 30, 2002.
The Company may seek to raise additional funds whenever market conditions
permit. However, there can be no assurance that funding will be available from
any of these sources, 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. Revenue associated with milestones
are recognized as earned, based on completion of development milestones, either
upon receipt, or when collection is assured.

  Research and Development

   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.

  Reclassification

   Certain prior year balances have been reclassified to conform to the current
year presentation.

  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. Actual results could differ from those
estimates.

                                      28

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  Cash Equivalents and Investments

   The Company considers all highly liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. All of the Company's
investment securities are classified as available for sale and are stated at
amounts which approximate fair market value. The Company did not have any
material realized or unrealized gains or losses on its investments. 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 Income (Loss) per Share

   Net loss per share is presented under the requirements of FAS No. 128,
"Earnings per Share" ("FAS 128"), which requires disclosure of basic and
diluted earnings per share. Basic and diluted earnings per share is calculated
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Diluted earnings per share
includes the impact of potentially dilutive securities. As the Company's
potentially dilutive securities (stock options, warrants, and convertible
preferred stock) were anti-dilutive for the years ended June 30, 2000 and 1999,
they have been excluded from the computation of weighted-average shares used in
computing diluted net loss per share for the years ended June 30, 2000 and
1999.

   The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                      ------------------------
                                                       2001    2000     1999
                                                      ------- -------  -------
<S>                                                   <C>     <C>      <C>
Net income (loss) attributable to common stockholders $ 1,588 $(3,115) $(3,692)
                                                      ======= =======  =======
Weighted-average shares outstanding:
   Denominator for basic earnings per share..........  16,532  11,461    7,555
   Common stock equivalents:
       --stock options...............................     779      --       --
       --warrants....................................   1,682      --       --
       --convertible preferred stock.................   2,078      --       --
                                                      ------- -------  -------
Denominator for diluted earnings per share...........  21,071  11,461    7,555
                                                      ======= =======  =======
Net income (loss) per share:
   Basic............................................. $  0.10 $ (0.27) $ (0.49)
                                                      ======= =======  =======
   Diluted........................................... $  0.08 $ (0.27) $ (0.49)
                                                      ======= =======  =======
</TABLE>

  Stock-Based Compensation

   We grant 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.
We account 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
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 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.


                                      29

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

   Stock-based compensation arrangements to non-employees are accounting for in
accordance with FAS 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.

  Comprehensive Income (Loss)

   The Company has no items of other comprehensive income (loss), and,
accordingly, its net income (loss) is equal to its comprehensive income (loss).

  Impairment of Long-Lived Assets

   In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("FAS 121"), we review 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. Under FAS 121, 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,
2001, there have been no such losses.

  Accounting for Derivative Financial Instruments and for Hedging Activities

   As of July 1, 2000 the Company adopted the Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such instruments
at fair value. As the Company does not hold any material derivatives or engage
in hedging transactions, the adoption of these statements did not have a
material impact on the Company's financial statements.

Note 2. Investments

   The Company's investment portfolio is as follows (in thousands):

<TABLE>
<CAPTION>
                             June 30,
                           -------------
                            2001   2000
                           ------ ------
<S>                        <C>    <C>
Corporate debt obligations $4,596 $  931
Commercial paper..........     --    295
US Government obligations.  2,821     --
                           ------ ------
   Total investments...... $7,417 $1,226
                           ====== ======
</TABLE>

   At June 30, 2001, the contractual maturities of investments were as follows
(in thousands):

<TABLE>
<CAPTION>
                    Amortized
                      Cost
                    ---------
<S>                 <C>
Due within one year  $6,556
Due after one year.     861
                     ------
                     $7,417
                     ======
</TABLE>

   All investments at June 30, 2000 were due within one year.


                                      30

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 3. Property and Equipment

   Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                              2001       2000
                                            ---------  ---------
              <S>                           <C>        <C>
              Machinery and equipment...... $ 187,347  $ 176,756
              Furniture and fixtures.......   145,426    145,426
                                            ---------  ---------
                                              332,773    322,182
              Less accumulated depreciation  (303,953)  (294,404)
                                            ---------  ---------
                                            $  28,820  $  27,778
                                            =========  =========
</TABLE>

Note 4. Operating Lease Commitments

   On April 1, 2001 the Company entered into an assignment and assumption of
lease of the executive offices in Richmond, California. The master lease, which
commenced in July 1997, will expire in July 2002. Rent expense for the years
ending June 30, 2001, 2000 and 1999 was $92,000, $52,000 and $47,000
respectively. Future minimum annual payments are approximately $91,000 for the
period ending June 30, 2002 and $7,600 for the period ending June 30, 2003. The
Company received sublease income on its former premises of $0, $26,000, and
$8,000 for the years ending June 30, 2001, 2000, and 1999, respectively.

Note 5. Stockholders' Equity

  Convertible Preferred Stock

   At June 30, 2001, the Company has 1,582,000 shares of Series A convertible
preferred stock issued and 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, 2001, 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.


                                      31

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  Warrants to Purchase Common Stock

   At June 30, 2001, the Company had outstanding warrants to purchase shares of
common stock as follows:

<TABLE>
<CAPTION>
    Number of Shares Exercise Price  Issue Date        Expiration Date
    ---------------- --------------  ----------        ---------------
    <S>              <C>            <C>           <C>
        631,200          $1.00       April 1999           April 2004
      1,814,880          $1.75      November 1999       November 2004
        431,000          $4.40      November 1999       November 2004
      ---------
      2,877,080       $1.00-$4.40                  April 2004-November 2004
      =========       ===========                  ========================
</TABLE>

   The Company issued 1,044,015 and 752,321 shares of common stock upon
exercise of warrants in fiscal years 2001 and 2000, respectively.

  Stock Option Plan

   The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock option awards because, as discussed below,
the alternative fair value accounting provided under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock option equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

   The Board of Directors adopted the Company's first stock option plans in
1989. In November 1993, the Board combined the plans and adopted the 1993 Stock
Plan. The 1993 Stock Plan was subject to amendment and/or restatement in
February 1994, November 1994, October 1996, November 1997 and November 1999.
Under the 1993 Stock Plan, 2,500,000 shares of common stock have been reserved
for issuance. 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.

   A summary of the Company's stock option activity, and related information
for the three years ended June 30, 2001 follows:

<TABLE>
<CAPTION>
                                                Number of     Weighted
                                                  Shares      Average
                                       Shares   Subject to Exercise Price
                                     Authorized  Options     per Share
                                     ---------- ---------- --------------
<S>                                  <C>        <C>        <C>
Balance at June 30, 1998............   369,109  1,575,081      $2.42
   Options granted..................  (488,500)   488,500       0.65
   Options canceled.................   259,783   (259,783)      2.51
                                      --------  ---------
Balance at June 30, 1999............   140,392  1,803,798       1.93
   Options granted..................  (553,500)   553,500       3.96
   Options canceled.................    36,349    (36,349)      2.66
   Options exercised................        --   (604,957)      2.51
   Options authorized...............   500,000         --         --
                                      --------  ---------
Balance at June 30, 2000............   123,241  1,715,992       2.38
   Options granted..................  (111,500)   111,500       3.00
   Options canceled.................    62,624    (62,624)      3.11
   Options exercised................        --    (85,910)      1.00
                                      --------  ---------
Balance at June 30, 2001............    74,365  1,678,958      $2.52
                                      ========  =========
</TABLE>

                                      32

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   At June 30, 2001, options to purchase 74,365 shares of common stock remained
available for grant, and options to purchase 966,272 shares of common stock
were exercisable. The weighted average exercise price of options exercisable at
June 30, 2001 was $2.15. The weighted average fair value of options granted
during 2001, 2000, and 1999 were $1.97, $3.23, and $0.37, respectively.

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

<TABLE>
<CAPTION>
                      Options Outstanding                           Options Exercisable
--------------------------------------------------------------- ----------------------------
                              Weighted Average
                                 Remaining
Range of Exercise   Shares    Contractual Life Weighted Average   Shares    Weighted Average
     Prices       Outstanding     (years)       Exercise Price  Exercisable  Exercise Price
----------------- ----------- ---------------- ---------------- ----------- ----------------
<S>               <C>         <C>              <C>              <C>         <C>
   $0.01-1.99        878,483        7.22            $0.92         537,712        $0.90
    2.00-3.99        472,647        6.09             2.95         312,647         2.84
    4.00-5.99         11,228        5.10             4.70           5,928         4.08
    6.00-8.00        316,600        8.86             6.22         109,985         6.23
                   ---------                                      -------
                   1,678,958        7.20            $2.52         966,272        $2.15
                   =========                                      =======
</TABLE>

   Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, which requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method. The fair value
of each option grant has been estimated as of the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for 1999, 2000 and 2001: Expected volatility calculations
based on historical data (.846), expected option lives of five years, and no
dividend yield. Risk free interest rate assumptions were based on U.S.
government bonds with maturities equal to the expected option lives of 6.50%,
6.50%, and 5.32% for 1999, 2000, and 2001, respectively.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price volatility and
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of employee's
options.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                                 -----------------------
                                                  2001   2000     1999
                                                 ------ -------  -------
<S>                                              <C>    <C>      <C>
Net income (loss)--as reported.................. $1,588 $(3,115) $(3,692)
Net income (loss)--pro forma....................  1,065  (3,363)  (3,940)
Basic net income (loss) per share--as reported..   0.10   (0.27)   (0.49)
Diluted net income (loss) per share--as reported   0.08   (0.27)   (0.49)
Basic net income (loss) per share--pro forma....   0.06   (0.29)   (0.52)
Diluted net income (loss) per share--pro forma..   0.05   (0.29)   (0.52)
</TABLE>

                                      33

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   In connection with the grant of certain stock options to senior management,
we recorded deferred compensation of $274,000 in 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 deferred stock
compensation expense of $55,000 in 2001 and $27,000 in 2000.

  Stock Purchase Plan

   Effective February 1994, the Company established an employee stock purchase
plan under which the employees may purchase common stock at 85% of the lower of
the share price at the beginning or end of a designated period. In November
1996, the amount of shares reserved for issuance under the plan was increased
by 50,000 to 100,000. In November 1999 the amount of shares were increased an
additional 50,000 to 150,000. In November 2000 the amount of shares were
increased an additional 150,000 to 300,000. Under the plan, 156,756 shares
remain available for issuance at June 30, 2001.

  Common Stock Reserved for Future Issuance

   At June 30, 2001, the Company has reserved shares of common stock for future
issuance as follows:

<TABLE>
     <S>                                                         <C>
     Conversion of preferred stock into common stock............ 5,000,000
     1993 Stock Plan............................................ 1,753,323
     Warrants................................................... 2,877,080
     Employee stock purchase plan...............................   156,756
                                                                 ---------
                                                                 9,787,159
                                                                 =========
</TABLE>

Note 6. Income Taxes

   The Company uses the liability method to account for income taxes as
required by FASB Statement No. 109, "Accounting for Income Taxes." 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.

   The provision for income taxes for the year ended June 30, 2001 consists of
the following (in thousands):

<TABLE>
        <S>                                                         <C>
        Current:
           Federal................................................. $40
           State...................................................   2
                                                                    ---
               Total............................................... $42
                                                                    ===
</TABLE>

   The current income tax provision for 2001 is a result of the federal
alternative minimum tax. There was no current income tax expense for the years
ended June 30, 2000 and 1999. There was no deferred income tax expense for the
years ended June 30, 2001, 2000, and 1999.

                                      34

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                       Years Ended June 30,
                                                     -----------------------
                                                     2001    2000     1999
                                                     -----  -------  -------
<S>                                                  <C>    <C>      <C>
Provision (benefit) at U.S. federal statutory rate.. $ 571  $(1,090) $(1,292)
Unbenefited loss (utilization of net operating loss)  (591)   1,090    1,292
Alternative Minimum Tax.............................    42       --       --
Other...............................................    20       --       --
                                                     -----  -------  -------
   Total............................................ $  42  $    --  $    --
                                                     =====  =======  =======
</TABLE>

   Significant components of the Company's deferred tax assets (in thousands)
are as follows:

<TABLE>
<CAPTION>
                                                               June 30,
                                                          ------------------
                                                            2001      2000
                                                          --------  --------
<S>                                                       <C>       <C>
Net operating loss carryforward.......................... $ 13,044  $ 12,019
Research and development carryforward....................      955     2,275
Capitalized research and development.....................      180       233
Other temporary differences..............................      248       210
                                                          --------  --------
Gross deferred tax assets................................   14,427    14,737
Valuation allowance......................................  (14,427)  (14,737)
                                                          --------  --------
   Net deferred tax assets............................... $     --  $     --
                                                          ========  ========
</TABLE>

   Realization of the deferred tax assets is dependent upon future taxable
income, if any, the amount and timing of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The
net valuation allowance decreased by approximately $310,000, increased by
$1,817,000 and increased by $1,320,000 during the years ended June 30, 2001,
2000 and 1999, respectively.

   As of June 30, 2001, the Company had federal operating loss carryforwards of
approximately $34,000,000. The Company also had federal research and
development tax credit carryforwards of approximately $700,000. The net
operating loss and tax credit carryforwards will expire at various dates
beginning in 2007, if not utilized.

   Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.

Note 7. Collaboration Agreement

   In April 1998, we entered into a strategic research and marketing
cooperation agreement with Merz + Co. (Merz) 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 share in future revenues from sales of Memantine for all indications.

                                      35

<PAGE>

                      NEUROBIOLOGICAL TECHNOLOGIES, INC.
                         (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   In June 2000, Merz entered into an agreement with Forest Laboratories, Inc.
("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 ("Lundbeck") 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
Suntory Ltd. In October 2000, we received $2.5 million and in April 2001 we
received $2.3 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.



                                      36

<PAGE>

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

   Not applicable.

                                   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 10, 2001 are as follows:

<TABLE>
<CAPTION>
            Name              Age                      Position
            ----              ---                      --------
<S>                           <C> <S>
Paul E. Freiman.............. 67  President and Chief Executive Officer and Director
Lisa U. Carr, M.D., Ph.D..... 46  Vice President, Medical Affairs
Abraham E. Cohen............. 65  Chairman of the Board of Directors
Enoch Callaway, M.D.......... 77  Director
Theodore L. Eliot, Jr........ 73  Director
Abraham D. Sofaer............ 63  Director
John B. Stuppin.............. 68  Director
</TABLE>

   Paul E. Freiman joined 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 Digital GeneTechnologies, Inc., a
private genomics company, and SciGen Pte. Ltd. Mr. Freiman currently serves on
the boards of Penwest Pharmaceutical Co., Calypte Biomedical Corporation,
Omware, Inc., 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 (IND and NDA approved for solid organ
transplantation). Dr. Carr holds a medical degree and a Ph.D. magna cum laude
from the University of Munich in Germany.

   Abraham E. Cohen has been a director of the Company since March 1993 and has
been Chairman of the Board of Directors 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

                                      37

<PAGE>

merger with Warner-Lambert Company. He is currently a director of seven other
public companies: Akzo Nobel N.V., Axonyx, Inc., Chugai Pharmaceutical Co.,
Pharmaceutical Product Development, Inc., Smith Barney Mutual Funds, Teva
Pharmaceutical Industries, Ltd. and Vasomedical, Inc. Additionally, he serves
as a Trustee on The Population Council.

   Enoch Callaway, M.D. is a founder and former employee 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 Directors 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 IRB for SAM Technologies, Inc. and Abratek, Inc. Dr.
Callaway is a Director of Phytos, Inc. 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 since 1997. From
1990 to 1994, Mr. Sofaer was a partner at the legal firm of Hughes, Hubbard and
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 suits. Mr. Sofaer is on the
International Advisory Board of Chugai Biopharmaceuticals, Inc., a director of
Koret Israel Economic Development Fund and a Trustee of the National Museum of
Jazz. Mr. Sofaer holds a B.A. degree from Yeshiva College and a L.L.B. from New
York University.

   John B. Stuppin is a founder and employee 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 of Directors, 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. 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 College.

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 of the Securities and Exchange Act of 1934" in
our Proxy Statement for the Annual Meeting of Stockholders to be held November
15, 2001.

                                      38

<PAGE>

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 15, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   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 15, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   None.


                                      39

<PAGE>

                                    PART IV

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

   (a) Financial Statements and Schedules: Financial Statements for the three
years ended June 30, 2001 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: None

   (c) Exhibits:

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

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>     <S>

   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.(5)

   4.1  Form of Common Stock Certificate.(1)

   4.2  Form of Warrant issued to Van Kasper & Co.(1)

   4.3  Form of Warrant issued to Van Kasper & Co. and Gerard Klauer Mattison & Co., LLC.(1)

   4.4  Form of Class A Warrant to Purchase Common Stock.(4)

   4.5  Form of Class B Warrant to Purchase Common Stock.(4)

   4.6  Form of Warrant to Purchase 25,000 Shares of Common Stock.(4)

   4.7  Form of Warrant to Purchase 100,000 Shares of Common Stock.(4)

   4.8  Form of Warrant to Purchase Common Stock.(5)

  10.1  1993 Stock Plan of Neurobiological Technologies, Inc.(6)*

  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 among the Company, Dynorphin Partnership, Nancy M. Lee and Horace C. Loh
          dated April 1, 1989, as amended.(1)+

  10.5  License Agreement between the Company and Immuno-Dynorphin Partnership dated October 1,
          1990.(1)+

  10.6  License Agreement between the Company and des-Tyr Dynorphin Partnership dated December 20,
          1992.(1)+

  10.7  License Agreement between the Company and DUZ Partnership dated December 20, 1992.(1)+

  10.8  License Agreement between the Company and The Salk Institute for Biological Studies dated
          March 31, 1989, as amended.(1)+

  10.9  License Agreement between the Company and the Regents of the University of California dated
          June 13, 1990, as amended.(1)+

 10.10  Option Agreement between the Company and the Regents of the University of California dated
          December 1, 1992.(1)+

 10.11  Amended and Restated Neurobiological Technologies, Inc. Employee Stock Purchase Plan.(6)*

 10.12  Cooperative Agreement among Company, Merz + Co. GmbH & Co. and Children's Medical Center
          Corp., effective as of April 16, 1998.(4)+
</TABLE>

                                      40

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                         Description
------                                         -----------
<C>     <S>

 10.13  Payment Agreement between the Company and Children's Medical Center Corp., effective as of
          April 16, 1998.(4)+

 10.14  Retention Agreement between the Company and Dr. Lisa Carr dated February 1, 1999.(5)*

 10.15  Sublease Agreement between the Company and Ladbroke Racing Corp. dated May 1, 2000.(7)

  23.1  Consent of Ernst & Young LLP, Independent Auditors.

  24.1  Powers of Attorney. (Contained on Signature Page)
</TABLE>
--------
(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, 1995 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, 1996 and is incorporated herein by
     reference.
(4) 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.
(5) 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.
(6) This exhibit is filed as an exhibit to Registrant's Registration Statement
    on Form S-8 (Registration Number 333-92425) filed December 9, 1999 and is
    incorporated herein by reference.
(7)This exhibit is filed as an exhibit to the Registrant's Annual Report on
   Form 10-KSB for the year ended June 30, 2000 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.

                                      41

<PAGE>

   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.

                                             /s/ PAUL E. FREIMAN
Dated: September 27, 2001
                                          By: _________________________________
                                             Paul E. Freiman
                                             President, Chief Executive Officer

                       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.

<TABLE>
<CAPTION>
        Signature                         Title                       Date
        ---------                         -----                       ----
<C>                        <S>                                 <C>

   /s/ PAUL E. FREIMAN     President, Chief Executive Officer  September 27, 2001
--------------------------   (Principal Executive Officer and
     Paul E. Freiman         Principal Financial Officer and
                             Principal Accounting Officer) and
                             Director

   /s/ ABRAHAM E. COHEN    Chairman of the Board               September 27, 2001
--------------------------
     Abraham E. Cohen

    /s/ ENOCH CALLAWAY     Director                            September 27, 2001
--------------------------
      Enoch Callaway

/s/ THEODORE L. ELIOT, JR. Director                            September 27, 2001
--------------------------
  Theodore L. Eliot, Jr.

  /s/ ABRAHAM D. SOFAER    Director                            September 27, 2001
--------------------------
    Abraham D. Sofaer

   /s/ JOHN B. STUPPIN     Director                            September 27, 2001
--------------------------
     John B. Stuppin
</TABLE>

                                      42