UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                             ----------------------

                                  FORM 10-KSB

           [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended June 30, 1997
                         Commission file number 0-23280

                       NEUROBIOLOGICAL TECHNOLOGIES, INC.
          (Name of small business issuer as specified in its charter)

                Delaware                              94-3049219
        (State of incorporation)             (IRS Employer Identification No.)

               1387 Marina Way South, Richmond, California 94804
                    (Address of principal executive offices)

                                 (510) 215-8000
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                          Common stock $.001 Par Value

                                (Title of class)

Check 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 ___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation SB contained herein, and no disclosure will be contained, to the best
of the Registrant's  knowledge,  in definitive  proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ X ]

Registrant's revenues for its most recent fiscal year were $407,307.

As of August 29, 1997,  the  Registrant  had  6,540,314  shares of Common Stock,
$.001 par value, outstanding,  and the aggregate market value of the shares held
by non-affiliates on that date was $22,073,560 based upon the last sale price of
the Issuer's Common Stock reported on the Nasdaq National Market.

                      DOCUMENTS INCORPORATED BY REFERENCE

Items 10 through 12 of Part III  incorporate by reference  information  from the
Registrant's  Proxy  Statement for the Annual Meeting of Shareholders to be held
on November 4, 1997.

<PAGE>

ITEM 1. BUSINESS

This  Business  section  and other  parts of this  Annual  Report on Form 10-KSB
contain  certain  forward-looking  statements  as that  term is  defined  in the
Private  Securities   Litigation  Reform  Act  of  1995.  Such   forward-looking
statements are subject to a number of risks and uncertainties  which could cause
actual results to differ materially from those discussed in the  forward-looking
statements.  Factors  that might cause such a  difference  include,  but are not
limited to, those discussed  under the headings  "Business,"  "Risks  Associated
with  Product  Development,"  and  "Management's   Discussion  and  Analysis  of
Financial Condition and Results of Operations."

OVERVIEW 

Neurobiological Technologies,  Inc. ("NTI" or the "Company") is an emerging drug
development  company focused on the clinical testing and regulatory  approval of
neuroprotective  drug  candidates.  NTI's  strategy is to in-license and develop
early stage products that have shown clear evidence of preclinical  efficacy and
safety,  appear to have a clear path  through  clinical  testing and  regulatory
approval,  and target major medical needs.  NTI's  experienced  management  team
focuses on the drug development activities and the clinical testing necessary to
bring  its drug  candidates  to  commercialization.  The  Company  is  currently
evaluating two drug candidates in human clinical trials:

Memantine  is  being  evaluated  as a  potential  neuroprotectant  drug  for the
treatment  of  injured  and dying  neurons.  Memantine  is an  orally  available
compound that acts to modulate the N-methyl-D-aspartate ("NMDA") receptor in the
central  nervous  system.  Modulating the NMDA receptor may protect  against the
neuronal  injury  and death  associated  with a number of  disorders,  including
chronic conditions of neuropathic pain,  dementia,  and Alzheimer's  disease, as
well as acute  conditions of traumatic  brain injury and stroke.  The Company is
currently  conducting a Phase II human  clinical  trial of Memantine to evaluate
the  analgesic  efficacy  and safety of  Memantine  in patients  who  experience
neuropathic pain (persistent pain resulting from abnormal signals to the brain).
Patients with peripheral  neuropathy due to diabetes  mellitus and patients with
post-herpetic  neuralgia,  a chronic pain  condition due to shingles  (infection
with the herpes  Zoster virus) are being  enrolled in the trial.  The Company is
also working  with the Adult AIDS  Clinical  Trials  Group  ("AACTG") to advance
human clinical  testing of Memantine for treatment of AIDS-related  neurological
conditions.  The  Company has  completed  a Phase I safety and  pharmacokinetics
trial of Memantine in normal volunteers and in AIDS patients.

Xerecept(TM) is the Company's synthetic preparation of the natural human peptide
Corticotropin-Releasing  Factor ("CRF").  In preclinical  studies,  Xerecept has
been found to be a potent  inhibitor  of swelling,  or edema.  Xerecept is being
developed for its ability to reduce  cerebral edema  (swelling in the brain),  a
dangerous  condition  associated  with brain tumors,  traumatic brain injury and
stroke.  The Company has completed two Phase I/II trials of Xerecept in patients
with brain  tumors,  and expects to begin a follow-on  Phase II trial in similar
patients  during  fiscal  1998.  Based on the results of human  clinical  trials
completed to date and preclinical  studies  demonstrating  Xerecept's ability to
reduce  cerebral  edema  following  traumatic  brain injury,  the American Brain
Injury Consortium ("ABIC") has agreed to collaborate with the Company to conduct
a separate Phase II human clinical trial of Xerecept in patients  suffering from
traumatic  brain  injury.  The ABIC  includes  160 centers  which  benefit  from
standardized  study  procedures.  This  collaboration  is expected to facilitate
trial initiation, enrollment of patients, and trial completion.

<PAGE>
<TABLE>

PRODUCT CANDIDATES
<CAPTION>
Product/Indication          Development Status                   Benefit Sought
------------------          ------------------                   --------------

<S>                         <C>                                  <C>
MEMANTINE

Neuropathic Pain            Phase II trial in progress           Pain Relief
(Diabetes and Shingles)

AIDS-related Dementia       Phase II trial in progress           Improvement in
and Neuropathic Pain                                             neurological function
                                                                 and pain relief

XERECEPT (CORTICOTROPIN-RELEASING FACTOR)

Peritumoral Brain Edema     Two Phase I/II trials                Reduction of edema and
                            completed                            improvement in
                                                                 neurological function

                            Phase II trial planned to
                            begin late 1997

Traumatic Brain Injury      Phase II trial planned for 1998      Reduction of intracranial 
                                                                 pressure, and recovery 
                                                                 of neurological function

--------------------------------------------------------------------------------------------
</TABLE>

STRATEGY

DEMONSTRATE PRODUCT EFFICACY AND SAFETY         

The Company has  prioritized  product  development  activities  to maximize  the
potential for regulatory approval of its drug candidates.  The Company leverages
the  experience of its management  team and staff to manage product  development
tasks,  relying  primarily upon third-party  contractors to meet  manufacturing,
preclinical,  and  clinical  development  requirements.  These  contractors  are
selected based on their  qualifications  to complete the required  activities to
the standards of the Company and the Food and Drug Administration  ("FDA").  The
Company also  leverages its  relationships  with academia,  government,  and the
medical community to form collaborations to conduct human clinical trials of its
product candidates.

FOCUS PRODUCT DEVELOPMENT       

The Company is managing its capital  carefully to develop its  portfolio of drug
candidates  in a focused  and prudent  manner.  A  financial  strategy  has been
designed to concentrate  the resources of the Company on key clinical  trials of
its drug  candidates.  Strategic  decisions  regarding actual and potential drug
development  programs are made  contingent  on funding  levels and only programs
evaluating neurological indications are currently being pursued.

ESTABLISH CORPORATE ALLIANCES  

As the Company continues its product development and commercialization  efforts,
it will seek corporate alliances, which may include the granting of licenses and
marketing  rights for  selected  products  in  certain  geographic  regions  and
markets. To attract corporate  partners,  the Company designs and conducts human
clinical  trials with  sufficient  patient  enrollment to establish  therapeutic
efficacy and  pharmacoeconomic  viability.  The Company also targets major unmet
medical needs for its clinical  development  programs.  Through  alliances,  the
Company will seek additional funding for the continued  clinical  development of
its  potential   products,   potential  long-term  revenue  through  royalty  or
profit-sharing  arrangements,  assistance with foreign regulatory approvals,  as
well as technical, development, production, and marketing capabilities. Although
the  Company  is  currently  seeking  corporate  development  partners  for  its
potential products, there can be no assurance that any alliances will be entered
into on terms  acceptable to the Company,  or if entered into, that they will be
successful.

<PAGE>

PRODUCTS IN DEVELOPMENT

MEMANTINE

Memantine is a compound in a class of potential  neuroprotective  agents  called
NMDA-receptor  antagonists.  Recent  research has indicated that  modulating the
NMDA  receptor  may  protect  against the  neuronal  injury and  cellular  death
associated  with a number  of  medical  conditions.  The  Company  is  currently
developing Memantine both as a treatment for neuropathic pain as well as for the
neurological deficits associated with AIDS. The Company estimates that there are
approximately 1,000,000 patients in the United States suffering from intractable
neuropathic  pain. As many as one-third of AIDS patients may eventually  develop
neurological problems, such as loss of cognition and coordination.

Increasing evidence from several  independent  research  laboratories  indicates
that  overstimulation  of NMDA receptors  contributes to the injury and death of
neurons.  This occurs in a variety of acute neurological  conditions,  including
traumatic  brain  injury,   hypoxic/ischemic  injury  secondary  to  stroke  and
prolonged  open  heart  or  brain  surgery.  It  also  happens  in  chronic  and
neurodegenerative  diseases including  neuropathic pain,  dementia,  Alzheimer's
disease,  Huntington's disease, and Amyotrophic Lateral Sclerosis ("ALS"). There
are currently no neuroprotective  treatments approved for any of the pathologies
associated with NMDA-receptor overstimulation.

Nerve  cells in the brain  communicate  by sending  signals to excite or inhibit
each other. These signals are sent by compounds known as neurotransmitters.  The
principal  excitatory  neurotransmitter  is  glutamate,  which binds to the NMDA
receptor  embedded in the cell membrane of the neuron.  When glutamate  binds to
the  receptor,  a channel  into the neuron opens which  allows  charged  calcium
molecules to flow freely.  Normally,  the presence 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 movement,  sensation,  memory,  and cognition.  In certain medical
conditions, glutamate concentrations surrounding neurons are elevated, which has
the effect of overstimulating the NMDA receptor. In these situations,  excessive
amounts of calcium  enter the neuron,  causing it to swell and burst,  releasing
internally  stored glutamate into the surrounding  area. This glutamate  further
stimulates NMDA receptors on neighboring neurons,  causing a cascade of neuronal
cell death throughout the area.

Scientists are now trying to find a way to prevent the damaging influx of excess
calcium  into  neurons.  One  approach is to prevent the NMDA  receptor  calcium
channel from  opening.  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.
Memantine,  on the other hand, is an uncompetitive NMDA receptor antagonist that
appears to interfere  relatively little with normal functioning,  while reducing
the abnormal  signals  associated  with excessive  calcium  influx.  Rather than
blocking the NMDA receptor  calcium channel for long periods of time,  Memantine
appears to restore regulation of the channel to near normal activity, permitting
routine neurotransmission.

Product development status

Neuropathic  Pain  Neuropathic pain is associated with a type of neuronal injury
that produces abnormal pain signals,  and it frequently includes persistent pain
in the absence of an obvious stimulus. This condition can result from irritation
or injury to  peripheral  nerves as a result of diabetes or shingles  (infection
with the herpes Zoster virus), as well as  chemotherapeutic  treatment.  Current
treatments  for these  conditions  are limited and may only  provide  short-term
benefit.
<PAGE>

Memantine has been shown to inhibit abnormal pain signals through its modulation
of the NMDA receptor in several animal models of neuropathic  pain. Based on the
results of these  studies,  the Company  initiated a 100 patient  Phase II human
clinical trial of Memantine in patients experiencing neuropathic pain. The trial
is currently  enrolling  patients  with  painful  peripheral  neuropathy  due to
diabetes  mellitus or patients  with  post-herpetic  neuralgia,  a chronic  pain
condition  due to shingles.  The trial's  primary  endpoint is reduction in pain
symptoms as determined by both  physician  and patient  assessment  according to
standard analgesic measurements.

AIDS:  Neuropathic  Pain and  Dementia  Many AIDS  patients  experience  painful
peripheral neuropathies due to overstimulation of the 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.

Recent research indicates that infection of the central nervous system with HIV,
the virus associated with AIDS, also leads to neuronal  damage.  Such damage may
result in neurological complications, including loss of cognition, movement, and
sensation, referred to as AIDS dementia.  Approximately one-half of children and
one-third of adults with AIDS may eventually  develop these symptoms.  There are
currently no therapies  specifically  directed towards  HIV-associated  neuronal
damage.

Memantine  has been shown to reduce NMDA  receptor-mediated  neuronal  damage in
both in vitro (outside the body)  experiments  and animal  models.  The neuronal
injury  caused  by AIDS was  shown to be  modified  by  antagonists  of the NMDA
receptor, including Memantine.

The  Company  has  completed  a Phase I  clinical  trial to verify the safety of
Memantine in AIDS patients and healthy volunteers.  In this trial, Memantine was
shown to be safe and well-tolerated.

In December 1996,  the Company  announced the start of a Phase II clinical trial
conducted  by the  AACTG,  a  clinical  trials  consortium  associated  with the
Division of AIDS of the  National  Institutes  of Health  ("NIH").  The trial is
evaluating  Memantine's  ability to provide relief from dementia and neuropathic
pain symptoms in AIDS patients. The trial protocol submitted under the Company's
Investigational  New Drug ("IND")  application  calls for the  enrollment of 120
AIDS patients with painful peripheral neuropathies and symptoms of dementia, all
of whom will have been  treated  with an  FDA-approved  drug for at least  eight
weeks prior to trial entry. The Company is supplying Memantine for the trial and
will  have  the  right  to use the  resulting  data to  further  the  commercial
development of Memantine.

Additional  Indications  Because of the important  role played by  NMDA-receptor
mediated  neuronal injury in a variety of acute and chronic medical  conditions,
the Company is also  considering  the  potential  for human  clinical  trials of
Memantine in other  indications,  such as ALS and stroke.  The Company  believes
that the positive  attributes of Memantine,  including its oral availability and
favorable  safety  profile,  may  provide  a  strong  therapeutic   opportunity,
particularly  for  chronic  conditions.  As  has  been  widely  reported,  other
NMDA-receptor   antagonists   in  human  clinical   development   have  recently
encountered  delays  because  of  concerns  about  the  risk/benefit  ratio  for
patients.  The profound side effects  associated  with many other  NMDA-receptor
antagonists  have not been  reported  with  Memantine,  which  is  approved  and
marketed in Germany for neurodegenerative disorders.
<PAGE>

XERECEPT

Xerecept is a synthetic preparation of the human peptide Corticotropin-Releasing
Factor  which the  Company is  developing  as a treatment  for brain  cancer and
traumatic  brain  injury.  The Company  believes  that  Xerecept  may reduce the
build-up  of fluids in the  brain  associated  with  these  conditions,  thereby
preventing  dangerous  swelling which can lead to poor patient outcomes.  In the
U.S.,  500,000 patients with brain injuries require  hospitalization  each year.
Approximately 30,000 patients in the United States are diagnosed every year with
primary brain tumors.

Xerecept is a natural  peptide  hormone found both centrally  (within the brain)
and peripherally (outside the brain). Xerecept was originally discovered to be a
key  brain   hormone   involved   in   stimulating   the   release   of  natural
corticosteroids.  More recently,  researchers  have discovered  novel anti-edema
effects of Xerecept when  administered  peripherally.  Research by NTI scientist
collaborators has revealed that Xerecept significantly reduces edema or swelling
of damaged tissue.

Edema is a condition  that often  results in swelling  after tissue  damage when
fluid, plasma proteins, and white blood cells flow from small blood vessels into
the  surrounding  tissues.  The  causes of this  fluid  migration  are  unknown.
However,  recent research has shown that after an injury,  the  interstitial gel
that surrounds  cells may expand and draw fluid from blood vessels.  Preclinical
studies  sponsored by the Company have shown that  Xerecept  reduces the flow of
fluid through blood vessels at sites of traumatic  tissue injury.  Specifically,
the Company  has shown that  Xerecept  injected  systemically  into  animals can
reduce brain edema after traumatic  injury,  brain edema  associated with cancer
tumors, and swelling in muscle tissue following surgical incision.

Product development status

Peritumoral  Brain  Edema The  Company is  initially  testing  Xerecept  for the
treatment of cerebral  edema caused by brain tumors,  referred to as peritumoral
brain edema. In these patients, the tumor promotes increased permeability of the
small blood vessels in the brain resulting in the flow of fluids into the brain,
swelling  of brain  tissue,  and a  consequent  loss of  neurological  function.
Current   therapies  for  the  treatment  of  peritumoral  brain  edema  include
corticosteroids,  which have serious  adverse  side  effects  when  administered
chronically.   Reactions   can  include   muscle   wasting,   immunosuppression,
osteoporosis,  hyperglycemia, glaucoma, and other potentially dose-limiting side
effects.

Although  endogenous  Xerecept is involved in stimulating the release of natural
corticosteroids,  studies  sponsored  by the  Company  have shown that  Xerecept
exerts  its  anti-edema  action  independent  of  corticosteroid   release  when
administered   systemically.   The  Company   believes,   based  on   Xerecept's
pharmacological  profile,  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 the  Company,  Xerecept  was well  tolerated  and  appeared  to be safe  when
administered in more than 230 courses of treatment.

The Company has  completed  two Phase I/II pilot  trials of Xerecept in patients
with peritumoral  brain edema. In these trials,  Xerecept was well tolerated and
appeared to improve neurological function by an average of 42% based on National
Cancer Institute Neurological Exam scores in seven patients who were treated for
seven  days by  continuous  infusion.  Based on these  results,  the  Company is
preparing for a larger Phase II trial to evaluate  Xerecept's  ability to reduce
edema associated with brain tumors which is expected to begin in late 1997.

Traumatic  Brain  Injury  In  addition  to  the  current  clinical  program  for
peritumoral  edema,  the Company also plans to initiate in 1998 a Phase II human
clinical  trial of Xerecept in patients with  traumatic  brain  injury.  In such
injuries, nerve

<PAGE>

tissue, blood vessels,  and the tissues surrounding the brain are damaged.  This
damage results in swelling, subsequent decreased flow of blood to the brain, and
decreased  brain  function.  In addition,  edema  increases  pressure inside the
skull,  which can lead to the fatal  rupture of brain tissue  through  naturally
occurring openings at the base of the skull. In animal models of traumatic brain
injury,  Xerecept significantly reduced brain water content shortly after injury
and  significantly  improved  neurologic  recovery during the month following an
injury.  Based on these results,  the ABIC has agreed to collaborate with NTI to
plan a  preliminary  Phase II human  clinical  trial of Xerecept.  This trial is
being  designed  to  evaluate  Xerecept's  ability  to reduce  the  intracranial
pressure  associated  with cerebral edema and to improve  patient's  recovery of
neurological function following injury.

Additional Indications Though the Company had previously investigated Xerecept's
anti-inflammatory  potential,  it is no  longer  actively  developing  for these
indications in order to  concentrate  its efforts on Xerecept as a treatment for
cerebral edema.

The Company previously conducted a Phase II human clinical trial of Xerecept for
the  treatment of patients  with  rheumatoid  arthritis  ("RA").  As compared to
patients  receiving  placebo,  patients  receiving Xerecept did not experience a
statistically  significant  improvement in clinical parameters as defined by the
American College of Rheumatology,  including  improvements in painful or swollen
joints.  Xerecept-treated  patients did show greater improvement in daily living
activities as compared to  placebo-treated  patients,  but the trial results did
not support continued development of Xerecept for RA.

During 1995, the Company  initiated two clinical  trials of Xerecept in patients
with asthma.  The results of these trials showed that there was no statistically
significant  difference  in  reduction  of  asthma  symptoms  between  those who
received treatment compared to those who received placebo.

In the Company's first human clinical study of Xerecept,  the compound was found
to be  safe  and  well  tolerated  when  used  as a  single-dose  treatment  for
post-surgical  facial  swelling.  In  addition,  all Xerecept  treatment  groups
experienced  reduced average  post-surgical  swelling  compared with the placebo
group. Due to the small number of patients and the variability of the condition,
the  results  from  this  trial,   though  positive,   were  not   statistically
significant.  The  Company  currently  has no  plans  to  develop  Xerecept  for
post-surgical edema in order to focus its efforts on cerebral edema.

PATENTS AND PROPRIETARY TECHNOLOGY

Patents and other proprietary rights are critical to the Company's business. The
Company's policy is to file patent  applications  seeking to protect technology,
inventions and  improvements to its inventions that are considered  important to
the  development  of its  business.  The Company has also sought to obtain,  and
intends  to  continue  to seek,  licenses  from third  parties to patent  rights
covering the technology,  inventions and improvements that the Company considers
important to the  development  of its business.  The Company is obligated to pay
royalties  pursuant to these license agreements and is responsible for the costs
of patent  prosecution  of a number of the patent  applications  to which it has
exclusive  licenses.  In  addition,  most  of  the  license  agreements  can  be
terminated  by the  licensor if the Company  does not  demonstrate  diligence in
commercializing the licensed rights.

The Company may be required to obtain additional  licenses from third parties in
order to continue to develop its existing  product  candidates and to expand its
product development  program.  There can be no assurance that such licenses will
be available on commercially reasonable terms, if at all.

<PAGE>

The patent positions of pharmaceutical  and biotechnology  companies,  including
NTI, are uncertain and involve complex legal and factual questions. In addition,
the coverage claimed in a patent application can be significantly reduced before
a patent is issued.  Consequently,  the Company does not know whether any of its
patent  applications,  or the patent  applications  it has licensed from others,
will  result in the  issuance  of  patents or if any of the  patents  which have
issued or may issue  will  provide  significant  proprietary  protection.  Since
patent  applications are maintained in secrecy until patents issue in the United
States or their foreign counterparts,  if any, are published, the Company cannot
be certain that it or any licensor was the first to file patent applications for
such inventions. Moreover, the Company might have to participate in interference
proceedings  declared  by the U.S.  Patent  and  Trademark  Office to  determine
priority of invention,  which could result in  substantial  cost to the Company,
even if the eventual outcome were favorable.  There can be no assurance that the
Company's patents,  or the patents which the Company has licensed,  will be held
valid or  enforceable  by a court or that a  competitor's  technology or product
would be found to infringe such patents.

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 the Company's  business.
Some of these  technologies,  applications  or  patents  may  conflict  with the
Company's or any of its licensors'  technologies  or patent  applications.  Such
conflict  could limit the scope of the patents,  if any, that the Company may be
able to  obtain or to which it has a  license  or  result  in the  denial of the
Company's patent  applications or the patent  applications  that the Company has
licensed.  In addition, if patents that cover the Company's activities have been
or are issued to other  companies,  there can be no  assurance  that the Company
would be able to obtain  licenses to these  patents,  at all, or at a reasonable
cost, or be able to develop or obtain alternative technology.

In  addition  to  patent  protection,  the  Company  relies  upon  trade  secret
protection for its  confidential  and proprietary  information.  There can be no
assurance that others will not independently  develop  substantially  equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such  technology or that the Company can  meaningfully
protect its trade secrets.

Memantine The Company has an exclusive license to a series of patents and patent
applications  relating to certain  non-ophthalmic uses of Memantine.  Certain of
these  patents  and patent  applications  cover the use of  antagonists  of NMDA
receptor  mediated  neuronal  damage  to  treat  AIDS-related  neuronal  damage.
Memantine and similar  compounds are generally  considered to be such compounds.
In addition,  certain of these patents and patent  applications cover the use of
Memantine   for  certain  other  medical   indications,   including   peripheral
neuropathy. The Company also has an option to license exclusively any patentable
compounds or combination  of compounds  discovered in the course of the research
the Company is sponsoring.

Xerecept The Company has a non-exclusive  worldwide  license to four issued U.S.
patents and one U.S.  patent  application  covering the composition of matter of
Xerecept and various analogues,  together with the corresponding foreign patents
and patent  applications.  The Company also has exclusive  rights to four issued
patents and two patent applications covering uses of Xerecept and analogues.  In
addition,  the Company has an option to obtain an exclusive worldwide license to
a patent and patent  application  covering  novel  small  peptide  analogues  of
Xerecept. The Company is responsible for the costs of prosecuting the two patent
applications  related  to  Xerecept  for  which it has  exclusive  licenses.  In
addition to the patents and pending  applications  the Company has licensed from
others,  the Company has filed one  formulation  patent  application  related to
Xerecept.
<PAGE>

MANUFACTURING

NTI  currently  uses  outside  contractors  to  manufacture  compounds  for  the
Company's preclinical studies and clinical trials. The manufacturers of clinical
products  have  represented  to the Company  that they are  qualified to produce
drugs under FDA  regulations  and that they follow  current  Good  Manufacturing
Practice  ("cGMP").  The Company performs audits on  manufacturers  from time to
time to assess compliance with the cGMP regulations.  Memantine and Xerecept are
manufactured   by  established   methods  using   chemical   synthesis  and  are
manufactured to NTI specifications. Alternative cGMP suppliers of the bulk drugs
and of finished  dosage form products are available to the Company.  The Company
currently has no plans to build or develop an in-house manufacturing capability.

GOVERNMENT REGULATION

Regulation by governmental  authorities in the United States and other countries
will be a  significant  factor in the  production  and marketing of any products
which may be developed  by the Company.  The nature and the extent to which such
regulation  may apply to the Company  will vary  depending  on the nature of any
such products.  All of the Company's products will require  regulatory  approval
prior to  commercialization.  In  particular,  human  therapeutic  products  are
subject to rigorous  preclinical and clinical testing and other FDA requirements
in the United  States  and  similar  health  authorities  in foreign  countries.
Various federal and, in some cases,  state statutes and regulations  also govern
or influence the manufacturing,  safety,  labeling,  storage,  recordkeeping and
marketing of such products,  including the use, manufacture,  storage,  handling
and disposal of hazardous  materials and certain waste products.  The process of
obtaining  these  approvals  and  the  subsequent  compliance  with  appropriate
federal,  state and foreign statutes and regulations  require the expenditure of
substantial  resources.  The Company cannot yet accurately predict when it might
first submit for approval  any  products to the FDA or other  regulatory  review
agency.

In order to  clinically  test,  produce and market  products for  diagnostic  or
therapeutic  use, a company  must comply with  mandatory  procedures  and safety
standards  established by the FDA and comparable  agencies in foreign countries.
Before  beginning human clinical testing of an  investigational  new drug in the
United States, a company must file an IND and receive no objection from the FDA.
This  application is a summary of the preclinical  studies that were carried out
to characterize the drug, including toxicity, efficacy and safety, as well as an
in-depth discussion of the human clinical studies which are being proposed.

The human  clinical  testing  program  required  for  approval  by the FDA of an
investigational   new  drug  typically  involves  a  time-consuming  and  costly
three-phase  process.  In Phase I, clinical  trials are  conducted  with a small
number of patients or healthy  volunteers to determine the early safety  profile
and the pattern of drug  distribution  and metabolism.  Phase II clinical trials
are conducted  with groups of patients  afflicted with a target disease in order
to determine  preliminary  efficacy,  optimal  dosage and  expanded  evidence of
safety.  When initial human testing is performed in patients  afflicted with the
disease,  rather than healthy  volunteers,  such studies may provide preliminary
evidence of efficacy  traditionally obtained in Phase II trials. Such trials are
frequently  referred  to as "Phase  I/II"  trials.  In Phase  III,  large-scale,
multi-center,  comparative clinical trials are conducted with patients afflicted
with the specific disease in order to provide enough data for statistical  proof
of efficacy and safety required by the FDA and non-U.S. regulatory agencies.

Clinical trials may be sponsored by the Company or be  "investigator-sponsored."
An  investigator-sponsored  clinical  trial  is  defined  as  a  clinical  trial
conducted by an investigator under an IND issued in such investigators own name,
rather than in the Company's name.

<PAGE>

The FDA closely  monitors  the  progress of each of the three phases of clinical
testing and may, at its discretion,  reevaluate, alter, suspend or terminate the
testing  based on the  data  that has been  accumulated  to that  point  and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for carrying out such clinical  testing vary between two and ten years.
Upon completion of such clinical testing, a company typically submits a New Drug
Application  ("NDA") to the FDA that  summarizes  and  analyzes  the results and
observations   of  the  clinical   trials.   The  NDA  also  provides   detailed
manufacturing  information.  Based on its review of the NDA, the FDA will decide
whether or not to approve the drug.  This review  process can be quite  lengthy,
and  approval  may not be  granted at all.  Thus,  the  process  of seeking  and
obtaining approval for the marketing of a new pharmaceutical product can require
a number of years and  substantial  funding.  There can be no assurance that any
approvals will be granted on a timely basis,  if at all. Among the  requirements
for product approval is the requirement  that each domestic  manufacturer of the
product  conform to the FDA's cGMP  regulations,  which must be  followed at all
times. In complying with standards set forth in these regulations, manufacturers
must  continue to expend time,  money and effort in the area of  production  and
quality control to ensure full technical compliance.

Once the sale of a product is approved, FDA regulations govern the manufacturing
process and marketing activities,  and a post-marketing testing and surveillance
program may be required to  continuously  monitor a product's usage and effects.
Product  approvals may be withdrawn if compliance with  regulatory  standards is
not maintained.  Other countries, in which any products developed by the Company
may be marketed,  impose a similar regulatory process. For marketing outside the
United States,  the Company also is subject to foreign  regulatory  requirements
governing  human  clinical  trials  and  marketing   approval  for  drugs.   The
requirements  governing  the  conduct of  clinical  trials,  product  licensing,
pricing and reimbursement vary widely from country to country.

COMPETITION

Competition  in the  biopharmaceutical  industry  is intense  and is expected to
increase. The development and sale of drugs for the treatment of the therapeutic
targets being pursued by the Company is highly  competitive.  There are existing
therapies approved and under development for each of these therapeutic  targets.
There can be no assurance that the Company will develop products that will be as
efficacious or as cost-effective as currently marketed products. The Company has
exclusive  licenses to patent  rights  covering  certain uses of  Memantine  and
Xerecept.  However, certain of the Company's licenses for Memantine and Xerecept
are  non-exclusive  and there is no  composition  of matter patent in the United
States for Memantine.  Consequently,  others may develop, manufacture and market
products that could compete with those being developed by the Company.

The Company will be faced with intense competition from pharmaceutical, chemical
and biotechnology  companies both in the United States and abroad in its attempt
to discover,  develop and market its products.  Companies that complete clinical
trials,  obtain required  regulatory  approvals and 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.

The Company believes that its ability to compete successfully will depend on its
ability to create  and  maintain  scientifically  advanced  technology,  develop
proprietary products, attract and retain scientific personnel,  obtain patent or
other  protection for its products,  obtain  required  regulatory  approvals and
manufacture  and  successfully  market  products  either alone or 

<PAGE>

through other  parties.  Most of the Company's  competitors  have  substantially
greater  financial,  marketing  and human  resources  than those of the Company.
Therefore, the Company expects to encounter significant competition.

HUMAN RESOURCES

As of June 30,  1997,  the Company  had 22 full time  employees.  The  Company's
scientific staff includes individuals with expertise in chemistry, biochemistry,
cell biology,  immunology,  pharmacology,  neuropharmacology,  pharmaceutics and
pharmaceutical manufacturing.

It is the  Company's  policy  that each  employee  enter into a  confidentiality
agreement  which contains  provisions  generally  prohibiting  the disclosure of
confidential  information to anyone outside the Company and requiring disclosure
to the  Company of ideas,  developments,  discoveries  or  inventions  conceived
during  employment and  assignment to the Company of proprietary  rights to such
matters related to the business and technology of the Company.

RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT

Except for the historical  information  contained  herein,  this report contains
forward-looking  statements that involve risks and uncertainties.  The Company's
actual  results  could differ  materially  from those  discussed in this report.
Factors that could cause or contribute to such differences  include, but are not
limited to, those discussed below. The forward-looking statements in this report
speak only as of the date of this report.  The Company disclaims,  however,  any
intent or obligation to update these forward-looking statements.

Future capital needs; uncertainty of additional funding 

The Company anticipates that it will be able to meet its capital and operational
requirements  at least  through the second  quarter of fiscal 1998.  The Company
will  require   substantial   additional  funds  to  conduct  the  research  and
development and preclinical and clinical  testing of its potential  products and
to market any products  that may be  developed.  Although the Company  currently
plans to contract  with third  parties to  manufacture  clinical and  commercial
scale  quantities  of  its  potential  products,   to  the  extent  the  Company
subsequently  determines  to establish  its own  manufacturing  facilities,  the
Company will require  substantial  additional  capital.  The  Company's  capital
requirements depend on numerous factors, including the progress of its research,
preclinical  development and 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,  changes  in the  Company's
existing  research  relationships,  the  ability  of the  Company  to  establish
collaborative relationships, the development of commercialization activities and
arrangements and the purchase of additional capital equipment.  Thereafter,  the
Company  will  need  to  raise  substantial   additional  capital  to  fund  its
operations.  The Company intends to seek such additional  funding through public
or  private  financings,  collaborative  or other  arrangements  with  corporate
partners,  or from other  sources.  There can be no  assurance  that  additional
financing will be available from any of these sources, or, if available, that it
will be available on acceptable  terms. The Company may seek to raise additional
funds whenever market  conditions so permit.  If additional  funds are raised by
issuing equity securities, further significant dilution to existing shareholders
may result. If adequate funds are not available,  the Company may be required to
delay,  scale back,  or eliminate  one or more of its  research,  discovery,  or
development  funds or to obtain funds through  entering into  arrangements  with
collaborative  partners or others  that may  require  the Company to  relinquish
rights to certain of its technologies,  product  candidates or products that the
Company would not otherwise relinquish.
<PAGE>

Going concern disclosure in independent auditors' report

The report of the Company's  independent  auditors with respect to the Company's
financial  statements  included  in this Form  10-KSB  includes a going  concern
modification,  indicating  that the  Company's  losses and  deficits  in working
capital and  stockholders'  equity raise  substantial  doubt about the Company's
ability  to  continue  as a going  concern.  See  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results  of  Operations"  and "Notes to
Financial Statements."

Possible delisting of stock

As of June 30,  1997,  the  Company  failed to  satisfy  the  continued  listing
requirements of the Nasdaq National  Market.  If the Company were to be delisted
from the Nasdaq National  Market,  it could adversely  affect the trading volume
and price volatility of the Company's common stock.

Early stage of development; technological uncertainty 

NTI is at an early stage of development and currently has no marketed  products.
All of the Company's potential products are in research, preclinical development
or clinical development, and no revenues have been generated from product sales.
To date, most of the Company's resources have been dedicated to the research and
development of selected candidate  pharmaceutical  products, and there can be no
assurance that the Company will be able to develop a candidate product that will
receive required  regulatory  approvals or be successfully  commercialized.  The
Company is currently  evaluating two potential  products in early stage clinical
trials. Results attained in preclinical studies and in such early stage clinical
trials are not  necessarily  indicative  of results  that will be obtained  upon
further  human  clinical  testing.   The  potential   products  currently  under
development by the Company will require significant  additional clinical testing
prior to submission  of any  regulatory  application  for  commercial  use. Such
activities will require  substantial  resources and will necessitate the raising
of substantial additional capital.

The Company's potential products are subject to the risks of failure inherent in
the development of products based on new  technologies.  These risks include the
possibilities  that  any or all of the  potential  products  will be found to be
unsafe,  ineffective or toxic, or otherwise fail to receive necessary regulatory
clearances;  that the  products,  if safe and  effective,  will be  difficult to
manufacture on a large scale or uneconomical to market;  that proprietary rights
of third  parties will  preclude the Company from  marketing  products;  or that
third parties market or will market superior or equivalent  products.  There can
be no assurance  that the Company's  development  activities  will result in any
commercially  viable  products.  The  Company  does  not  expect  to be  able to
commercialize any products for a number of years, if at all.

Dependence on third parties

The Company has only limited internal  resources and thus the Company has relied
and  will  continue  to  rely  heavily  on  others  for  research,  development,
manufacture and  commercialization  of its potential  products.  The Company has
entered  into  various  arrangements  (many of  which  are  non-exclusive)  with
consultants,  academic  collaborators,  licensors,  licensees,  contractors  and
others,  and it is dependent upon the level of commitment and subsequent success
of these outside parties in performing their responsibilities.  Certain of these
agreements  place  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.  Should such
collaborator, licensor or contractor fail to perform, the Company's business may
be adversely affected.

The Company has entered into certain agreements and licenses with third parties,
a number of which require the Company to pay  royalties.  The Company has relied
on  scientific,  technical,  clinical,  commercial  and other data  supplied and
disclosed by others in entering into these agreements and will rely on such data
in support of  applications  to enter human  clinical  trials for its  potential
products.  Although the Company has no reason to believe  that this  information
contains  errors or omissions of fact,  there can be no assurance that there are
no errors or omissions of fact that would change  materially  the Company's view
of the future  likelihood  of FDA  approval  or  commercial  viability  of these
potential products.
<PAGE>

Government regulation and product approval

The FDA and state and local  agencies,  and comparable  agencies and entities in
foreign  countries  impose  substantial  requirements on the  manufacturing  and
marketing  of  human  therapeutics  through  lengthy  and  detailed  laboratory,
preclinical animal studies and clinical testing procedures,  sampling activities
and  other  costly  and  time  consuming   procedures.   Satisfaction  of  these
requirements  typically takes many years and varies  substantially  based on the
type,  complexity,  and novelty of the drug. The effect of government regulation
may be to delay for a  considerable  period of time or prevent the  marketing of
any product that the Company may develop and/or to impose costly procedures upon
the Company's activities,  the result of which may be to furnish an advantage to
its competitors. There can be no assurance that FDA or other regulatory approval
for any  products  developed by the Company will be granted on a timely basis or
at all. Any such delay in obtaining  or failure to obtain such  approvals  would
adversely  affect the  marketing  of the  Company's  proposed  products  and its
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  promulgated  which could delay  regulatory  approval of the
Company's  potential products.  Adverse government  regulation which might arise
from future legislation or administrative action cannot be predicted.

Uncertainty of protection of patents and proprietary rights

The  Company's  success will depend,  in large part, on its ability to obtain or
license patents,  protect trade secrets and operate without  infringing upon the
proprietary  rights of others. A substantial  number of patents have been issued
to  other  pharmaceutical,   biotechnology  and   biopharmaceutical   companies.
Moreover,  other competitors may have filed patent applications for, or may have
been issued  patents or may obtain  additional  patents and  proprietary  rights
relating to, products or processes competitive with those of the Company.

There can be no assurance  that any of the patent  applications  licensed to the
Company will be approved,  that the Company  will develop  proprietary  products
that are  patentable,  that any issued  patents  licensed  to the  Company  will
provide the Company with adequate  protection  for its inventions or will not be
challenged by others,  or that the patents of others will not impair the ability
of the  Company to do  business.  The patent  position  of  biotechnology  firms
generally is highly uncertain,  involving  complex legal and factual  questions,
and has 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.  Finally,  there can be no assurance that others will not independently
develop similar products,  duplicate any of the Company's potential products, or
design around any potential patented products of the Company. As a result, there
can be no assurance that patent applications relating to the Company's potential
products or processes will result in patents being issued,  or that patents,  if
issued, will provide protection against  competitors who successfully  challenge
the Company's  patents,  obtain  patents that may have an adverse  effect on the
Company's  ability to conduct  business,  or be able to circumvent the Company's
patent  position.  In view of the time delay in patent  approval and the secrecy
afforded United States patent  applications,  the Company does not know if other
applications that would have priority over the Company's  applications have been
filed.

Manufacturing limitations

The  Company  currently  does  not  have  its own  manufacturing  facilities  to
manufacture  products  under the cGMP  requirements  prescribed  by the FDA. The
Company has  established  arrangements  with  contract  manufacturers  to supply
potential  products  for  clinical  trials  and  intends  to  establish  similar
arrangements  for the  manufacture,  packaging,  labeling  and  distribution  of
products, if approved for marketing.  If the Company's contractors are unable to
supply sufficient quantities of

<PAGE>

product candidates manufactured in accordance with cGMP on acceptable terms, the
Company's  human  clinical  testing  schedule  would be delayed.  If the Company
should  encounter  delays or  difficulties in  establishing  relationships  with
manufacturers   to  produce,   package  and  distribute  its  products,   market
introduction and subsequent sales of such products would be adversely  affected.
Moreover,  contract  manufacturers  that the Company may use must adhere to cGMP
regulations  enforced by the FDA through its facilities  inspection  program. If
these facilities cannot pass a pre-approval plant inspection, the FDA pre-market
approval of the products would be adversely affected.  The Company's  dependence
on third  parties for the  manufacture  of  products  may  adversely  affect the
Company's  results of operations and its ability to develop and deliver products
on a timely and competitive basis.

Risk of product liability

Clinical  trials or marketing  of any of the  Company's  potential  products may
expose the  Company  to  liability  claims  from the use of such  products.  The
Company's  product  liability  insurance  does  not  cover  commercial  sales of
products.  The Company has a limited  amount of product  liability  insurance to
cover liabilities  arising from clinical trials.  There can be no assurance that
the Company's  insurance will be adequate to cover any liabilities  arising from
the Company's  clinical trials,  that the Company will be able to obtain product
liability insurance covering  commercial sales or, if 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 developed by
the Company.

Dependence on qualified personnel and advisors

The Company is highly  dependent upon its scientific and management staff and on
consultants and advisors,  the loss of whose services might  significantly delay
the achievement of planned development  objectives.  In addition, the Company is
dependent on  collaborators at research  institutions.  Recruiting and retaining
qualified personnel, collaborators, advisors and consultants will be critical to
the Company's success. There is intense competition for such qualified personnel
in the area of the Company's activities,  and there can be no assurance that the
Company will be able to continue to attract and retain the  personnel  necessary
for the development of the Company's business.  The Company's planned activities
will require  additional  expertise in areas such as clinical trial  management,
regulatory affairs,  manufacturing,  and marketing. Such activities will require
the  addition of new  personnel  including  management  and the  development  of
additional expertise by existing management personnel.  The inability to acquire
such services or to develop such expertise could have a material  adverse effect
on the Company's operations.

Volatility of stock price; limited market capitalization

The market price of the shares of Company common stock,  like that of the common
stock of many other biotechnology  companies, has been and is likely to continue
to be, highly volatile.  Factors such as the results of preclinical  studies and
clinical trials by the Company, or its competitors, other evidence of the safety
or efficacy of products  of the  Company or its  competitors,  announcements  of
technological  innovations  or new  therapeutic  products  by the Company or its
competitors,  government  regulation,  health care legislation,  developments in
patent or other proprietary  rights of the Company or its competitors  including
litigation,   fluctuations  in  the  Company's  operating  results,  and  market
conditions for life sciences stocks in general could have a significant  adverse
impact on the future price of the common stock.  In addition,  the average daily
trading volume of the Company's  common stock since public trading of the common
stock   commenced   has  been   relatively   low   compared  to  that  of  other
biopharmaceutical  companies. To the extent this trading pattern continues,  the
price of the common stock may fluctuate  significantly as a result of changes in
demand for such shares and sales of stock by stockholders.
<PAGE>

Possible enforcement proceedings

In late  January  1996,  two  executive  officers  of the Company  purchased  an
aggregate of 1,600 shares of the  Company's  common stock prior to the Company's
proposed  public  offering of common stock.  After these  officers  informed the
Company's  outside legal counsel of such  purchases,  such counsel  advised that
such  purchases  constituted a violation of Rule 10b-6 under the  Securities and
Exchange  Act of 1934,  as amended.  The SEC  instituted  a  voluntary  informal
inquiry into this matter and may seek  enforcement  action  against the officers
who made the purchases,  both of whom have since left the employ of the Company.
The SEC has  indicated  that it has no  present  intention  to seek  enforcement
action  against the  Company.  Any action  taken by the SEC with  respect to the
matter may have a material  adverse effect on the Company's  financial  position
and results of operations.

ITEM 2. PROPERTIES

NTI's executive offices are located in Richmond, California. NTI leases a 12,500
square foot facility.  The lease started in April 1995 and is for a term of five
years.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceeding.

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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended June 30, 1997.

PART II.

ITEM 5. MARKET PRICE OF NTI COMMON STOCK; DIVIDENDS

NTI's  common  stock is traded on the Nasdaq  National  Market  under the symbol
"NTII."
 
As of June 30,  1997  there  were  approximately  250  holders  of record of the
Company's  common stock and  6,540,314  shares of common stock  outstanding.  No
dividends have been paid on the common stock since the Company's inception,  and
the Company does not anticipate paying any dividends in the foreseeable future.

The price range of the  Company's  common stock during the past two fiscal years
is shown below.

Fiscal 1996                              High            Low     
--------------------------------------------------------------------------------
        First Quarter                   $5.75           $4.00
        Second Quarter                  $5.38           $3.12
        Third Quarter                   $5.25           $3.25
        Fourth Quarter                  $8.50           $4.25
                                                       
Fiscal 1997                              High            Low             
--------------------------------------------------------------------------------
        First Quarter                   $7.00           $3.62
        Second Quarter                  $5.12           $3.37   
        Third Quarter                   $3.62           $1.62
        Fourth Quarter                  $2.75           $1.56   
                                                       

<PAGE>

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Neurobiological Technologies,  Inc. ("NTI" or the "Company") is an emerging drug
development  company focused on the clinical testing and regulatory  approval of
neuroscience drugs. NTI's strategy is to in-license and develop early stage drug
candidates   that  target  major   medical   needs  and  which  can  be  rapidly
commercialized.  Drawing upon the experience of the Company's management in drug
discovery,  development,  and  clinical  testing,  NTI's  efforts are focused on
developing its licensed drug candidates for commercialization.

The  Company  currently  has two  products  in  human  clinical  trials.  NTI is
developing  Memantine,  an orally available NMDA receptor antagonist,  which has
potential  as a  neuroprotective  agent for a broad  range of  neurodegenerative
conditions.  Memantine  is  initially  being  developed  for AIDS  dementia  and
neuropathic  pain.  The  Company  is  also  developing   Xerecept,  a  synthetic
preparation  of the  human  peptide  Corticotropin-Releasing  Factor,  which the
Company  believes  has  novel  anti-edema  properties.   Significant  additional
preclinical testing and clinical testing will be required prior to submission of
any regulatory  application for the commercial use of these products.  There can
be no assurance that future clinical  trials will  demonstrate an adequate level
of safety or efficacy for commercialization.

Since 1987 when the Company was founded,  NTI has applied  substantially  all of
its  resources  to its  research  and  development  programs.  The  Company is a
development  stage  company,  has not  received  any  revenue  from  the sale of
products, and does not anticipate receiving revenue from the sale of products in
the near future. The Company has incurred losses since its inception and expects
to incur  substantial,  increasing losses over the next several years due to the
ongoing and planned research and development efforts.

RESULTS OF OPERATIONS

The Company's  research and  development  expenses  decreased from $4,452,000 in
fiscal 1995 to  $4,321,000  in fiscal 1996 and increased to $5,478,000 in fiscal
1997.  The  increase  in  fiscal  1997 was  primarily  due to  expansion  of the
Company's  preclinical  studies and clinical trials as well as increased funding
of the Company's  neuroprotection  research program. The decrease in fiscal 1996
was  due  to  lower  non-clinical  development  activity,  including  toxicology
studies, as compared to the prior year.

General and administrative  expenses decreased from $1,512,000 in fiscal 1995 to
$1,397,000  in fiscal 1996 and  increased  to  $2,298,000  in fiscal  1997.  The
increase in fiscal 1997 was due to additional business  development  expenses as
well as increased  professional  fees. The decrease in fiscal 1996 was primarily
due to changes in legal and other professional services received by the Company.

Interest  income  decreased  from  $633,000 in fiscal 1995 to $506,000 in fiscal
1996, and decreased  further to $407,000 in fiscal 1997 primarily due to changes
in cash balances.

The Company  expects to incur  substantial  costs in fiscal 1998  primarily  for
Phase II clinical trials for its development programs and related administrative
support.  The Company expects that its expenditures will continue to increase as
its products move through Phase II and potentially, Phase III clinical trials.
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company  expects its cash  requirements to be significant in future periods.
Future  cash  requirements  will  depend on  numerous  factors,  including:  the
progress on research and clinical  development  programs;  the  in-licensing  of
potential drug candidates;  the time and costs involved in obtaining  regulatory
approvals;  the ability of the Company to establish collaborative  arrangements;
product  commercialization  activities;  and the acquisition of manufacturing or
laboratory  facilities.  Since NTI uses  qualified  third-party  contractors  to
conduct  preclinical  studies and clinical trials,  and to manufacture  clinical
quantities  of  its  products,   the  Company  does  not  anticipate   incurring
significant  capital  expenditures during fiscal 1998. Over the same period, the
number of employees is not expected to grow significantly from current levels.

From  inception  through June 30, 1997,  the Company has raised a total of $29.4
million in net proceeds from the sale of common and preferred stock.

The Company  believes that its available cash,  cash  equivalents and short-term
investments  of $3.8  million  as of June  30,  1997  are  adequate  to fund its
operations  through the second  quarter of fiscal  1998.  NTI will need to raise
substantial  additional  capital  to fund  subsequent  operations.  The  Company
intends to seek such funding through public or private financings,  arrangements
with corporate  partners,  or from other sources.  The Company may seek to raise
additional funds whenever market  conditions  permit.  However,  there can be no
assurance  that funding  will be available on favorable  terms from any of these
sources, if at all.

<PAGE>

ITEM 7. 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, 1997 and 1996, and the related
statements  of  operations,  stockholders'  equity and cash flow for each of the
three years in the period  ended June 30,  1997,  and for the period from August
27, 1987 (inception)  through June 30, 1997. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Neurobiological  Technologies,
Inc. at June 30, 1997 and 1996,  and the result of its  operations  and its cash
flows for each of the three years in the period ended June 30, 1997, and for the
period from August 27, 1987  (inception)  through June 30, 1997,  in  conformity
with generally accepted accounting principles.

The   accompanying    financial   statements   have   been   prepared   assuming
Neurobiological  Technologies,  Inc. will continue as a going  concern.  As more
fully described in Note 1 to the financial statements,  the Company has incurred
recurring losses during the development stage. In order to complete the research
and development and other activities  necessary to  commercialize  its products,
additional financing will be required.  These conditions raise substantial doubt
about the  Company's  ability to  continue  as a going  concern.  The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.
                

                                              /s/ ERNST & YOUNG LLP

                                              ERNST & YOUNG LLP



San Francisco, California
July 25, 1997
<PAGE>
<TABLE>

Neurobiological Technologies, Inc. (A development stage company)

BALANCE SHEETS
<CAPTION>

                                                                June 30,        June 30,
                                                                    1997            1996
-------------------------------------------------------------------------------------------
<S>                                                          <C>             <C>         
ASSETS

Current assets:
        Cash and cash equivalents                            $  1,278,402    $  4,602,815
        Short-term investments                                  2,559,911       4,642,153
        Prepaid expenses and other                                171,436         337,422
                                                             ------------------------------

             Total current assets                               4,009,749       9,582,390

Long-term investments                                                --         1,515,490

Property and equipment, net                                       197,355         229,267

Patents and licenses, net                                            --            65,216
                                                             ------------------------------

                                                             $  4,207,104    $ 11,392,363
                                                             ==============================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
        Accounts payable                                     $    258,673    $    198,205
        Accrued expenses                                          737,883         694,947
                                                             ------------------------------

             Total current liabilities                            996,556         893,152

Stockholders equity:
        Preferred stock, $.001 par value,
             5,000,000 shares authorized,
             none outstanding                                        --              --

        Common stock, $.001 par value, 25,000,000 shares
             authorized, 6,540,314 outstanding at June 30,
             1997 and 6,512,485 at June 30, 1996               29,382,471      29,302,546

        Deficit accumulated during development stage          (26,171,923)    (18,803,335)
                                                             ------------------------------

Total stockholders' equity                                      3,210,548      10,499,211
                                                             ------------------------------

                                                             $  4,207,104    $ 11,392,363
<FN>
                                                             ==============================
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>

Neurobiological Technologies, Inc. (A development stage company)

STATEMENTS OF OPERATIONS
<CAPTION>
                                                                                            Period from
                                                                                        August 27, 1987
                                                  Year ended June 30,               (inception) through
                                     --------------------------------------------          June 30,1997
                                           1997           1996             1995        
--------------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>             <C>                  <C>          
REVENUES

        Interest income              $    407,307    $    506,242    $    632,715         $  2,032,170 
                                                                                          
        Grant income                         --              --            49,900               49,900
                                     -------------------------------------------------------------------

                Total revenues            407,307         506,242         682,615            2,082,070
                                                                                          
EXPENSES                                                                                  
                                                                                          
        Research and development        5,477,504       4,321,059       4,452,482           20,262,735
                                                                                          
        General and administrative      2,298,391       1,396,626       1,511,787            7,991,258
                                     -------------------------------------------------------------------

                Total expenses          7,775,895       5,717,685       5,964,269           28,253,993
                                     -------------------------------------------------------------------

NET LOSS                             $ (7,368,588)   $ (5,211,443)   $ (5,281,654)        $(26,171,923)
                                     ===================================================================

NET LOSS PER SHARE                   $      (1.13)   $      (1.05)   $      (1.35)        
                                     ===================================================================
                                                                                          
Shares used in net                                                                        
loss per share calculation              6,527,392       4,985,229       3,913,028         
                                     ===================================================================
<FN>
                                                                              
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>

Neurobiological Technologies, Inc. (A development stage company)

STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>

                                                                              Common Stock                    Deficit        Total
                                                         Preferred      -------------------------  Accumulated During  Stockholder
                                                             Stock         Shares        Amount     Development Stage       Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>        <C>             <C>            <C>         
Period from August 27, 1987
        (inception) through June 30, 1994

Issuance of common stock                               $      --           740,863    $ 1,616,706     $      --      $  1,616,706

Issuance of common stock for services                         --            72,428         84,500            --            84,500

Issuance of common stock for license rights                   --            10,820         12,625            --            12,625

Issuance of warrants to purchase
        179,786 shares of common stock                        --              --            2,790            --             2,790

Exercise of warrants                                          --           137,143         64,000            --            64,000

Exercise of options                                           --            42,092        138,763            --           138,763

Issuance of common stock under
        employee stock purchase plan                          --             3,980         16,915            --            16,915

Issuance of 5,691,000 shares of Series A
        preferred stock, net of issuance costs           5,573,194            --             --              --         5,573,194

Issuance of 2,657,881 shares of Series B
        preferred stock, net of issuance costs           1,653,888            --             --              --         1,653,888

Conversion of preferred stock in
        connection with the initial public offering     (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            --        12,817,000 
Net loss                                                      --                --            --       (8,310,238)     (8,310,238)
                                                         -------------------------------------------------------------------------

Balances at June 30, 1994                                     --         3,894,238     21,980,381      (8,310,238)     13,670,143

        Exercise of warrants                                  --             5,357          6,252            --             6,252
        Exercise of options                                   --            31,435         36,791            --            36,791
        Issuance of common stock under
           employee stock purchase plan                       --            17,102         41,736            --            41,736
        Net loss                                              --              --             --        (5,281,654)     (5,281,654)
                                                         -------------------------------------------------------------------------

Balances at June 30, 1995                                     --         3,948,132     22,065,160     (13,591,892)      8,473,268

        Exercise of options                                   --            13,093         40,284            --            40,284
        Issuance of common stock under
        employee stock purchase plan                          --            21,260         53,823            --            53,823
        Issuance of common stock at $3.25 per
                share in connection with public
                offering, net of issuance costs               --         2,530,000      7,143,279            --         7,143,279
        Net loss                                              --              --             --        (5,211,443)     (5,211,443)
                                                         -------------------------------------------------------------------------

Balances at June 30, 1996                                     --         6,512,485     29,302,546     (18,803,335)     10,499,211

        Issuance of common stock for services                 --             5,000         23,750            --            23,750
        Exercise of options                                   --             2,999         10,331            --            10,331
        Issuance of common stock under
                employee stock purchase plan                  --            19,830         45,844            --            45,844
        Net loss                                              --              --             --        (7,368,588)     (7,368,588)
                                                         -------------------------------------------------------------------------

Balances at June 30, 1997                                $    --         6,540,314    $29,382,471    $(26,171,923)   $  3,210,548
                                                         =========================================================================
<FN>

See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>

Neurobiological Technologies, Inc. (A development stage company)

STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                               
                                                                                                       Period from    
                                                                Year ended June 30,                August 27, 1987    
                                                  -------------------------------------------- (inception) through   
                                                        1997           1996            1995           June 30,1997    
-------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>               <C>           
OPERATING ACTIVITIES

  Net loss                                        $ (7,368,588)   $ (5,211,443)   $ (5,281,654)     $(26,171,923) 
                                                                                                  
  Adjustments to reconcile net loss to                                                            
      net cash used in operating activities:                                                      
                                                                                                  
  Depreciation and amortization                        122,773         123,095          95,697           468,012
          Issuance of common stock and warrants                                                   
             for license rights and services              --              --              --              99,275
                                                                                                  
  Changes in assets and liabilities:                                                              
          Prepaid expenses and other                   165,986        (152,594)       (162,832)         (171,436)
          Accounts payable and                                                                    
             accrued expenses                          103,404         102,338         430,791           996,556
                                                   ----------------------------------------------------------------
Net cash used in                                                                                  
        operating activities                        (6,976,425)     (5,138,604)     (4,917,998)      (24,779,516)
                                                                                                  
INVESTING ACTIVITIES                                                                              
                                                                                                  
  Purchase of short-term                                                                          
          investments                               (1,462,723)    (11,263,339)     (5,950,413)      (33,839,678)
                                                                                                  
  Maturity of short-term investments                 5,060,455      11,675,531      10,848,225        31,279,767
                                                                                                  
  Purchases of property                                                                           
          and equipment                                (25,645)        (90,039)       (147,620)         (382,305)
                                                                                                  
  Additions to patents and licenses                                                                     (283,062)  
                                                   ----------------------------------------------------------------
Net cash provided by (used in)                                                                    
  investing activities                               3,572,087         322,153       4,750,192        (3,225,278)
                                                                                                  
FINANCING ACTIVITIES                                                                              
                                                                                                  
  Proceeds of short-term borrowings                                                                      235,000   
  Issuance of common stock                              79,925       7,237,386          84,780        22,056,114
  Issuance of preferred stock                                                                          6,992,082   
                                                                                                  
                                                   ----------------------------------------------------------------

Net cash provided by financing activities               79,925       7,237,386          84,780        29,283,196
                                                                                                  
Increase (decrease) in cash and                                                                   
   cash equivalents                                 (3,324,413)      2,420,935         (83,026)        1,278,402
                                                                                                  
Cash and equivalents at                                                                           
   beginning of period                               4,602,815       2,181,880       2,264,906              --
                                                                                                  
                                                   ----------------------------------------------------------------
Cash and equivalents at                                                                           
    end of period                                  $ 1,278,402    $  4,602,815    $  2,181,880      $  1,278,402
                                                   ================================================================

SUPPLEMENTAL DISCLOSURES:                                                                         
                                                                                                  
  Conversion of short-term borrowings                                                             
          to Series A preferred stock              $      --      $       --      $       --        $    235,000
                                                   ================================================================

  Conversion of preferred stock                                                                   
        to common stock                            $      --      $       --      $       --        $  7,227,082
                                                   ================================================================
<FN>

See accompanying notes                                                                            
</FN>
</TABLE>
<PAGE>
                                                                             
NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company)

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Neurobiological   Technologies,   Inc.   ("NTI"   or   the   "Company")   is   a
biopharmaceutical  company  developing  potential  products based on advances in
neuroscience  research.  NTI's  strategy  is  to  in-license  and  develop  drug
candidates   that  target  major   medical   needs  and  which  can  be  rapidly
commercialized.  Drawing upon the experience of the Company's management in drug
discovery,  development,  and  clinical  testing,  NTI's  efforts are focused on
developing its licensed drug candidates for commercialization.

Basis of presentation

In  the  course  of  its  development  activities,   the  Company  has  incurred
significant  losses and expects additional losses in the fiscal year ending June
30,  1998.  The Company  plans to finance its  operations  with  available  cash
resources,  and through  the  issuance of equity  and/or  debt  securities.  The
Company's  ability to continue as a going  concern is dependent  upon  obtaining
additional  financing.  The  Company  believes  that its  available  cash,  cash
equivalents  and short-term  investments of $3.8 million as of June 30, 1997 are
adequate to fund its  operations  through the second quarter of fiscal 1998. NTI
will need to raise substantial additional capital to fund subsequent operations.
The Company intends to seek such funding  through public or private  financings,
arrangements  with corporate  partners,  or from other sources.  The Company may
seek to raise additional funds whenever market conditions permit. However, there
can be no assurance  that funding  will be available on favorable  terms,  if at
all. The  accompanying  financial  statements  have been  prepared  assuming the
Company is a going concern, and do not include any adjustments that might result
from the outcome of this uncertainty.

Use of estimates

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

Cash and investments    

Cash and cash equivalents  include  investments  with original  maturities of 90
days or less.  Short-term  investments  consist  of  investments  with  original
maturities  of  greater  than 90 days but less  than one year,  while  long-term
investments  are those that mature  greater than one year from the balance sheet
date.  The Company has not  realized  any losses on its  investments,  which are
highly liquid and subject to little risk.  Furthermore,  the Company reduces its
credit  risk by  limiting  the amount of credit  exposure  to any one  financial
institution.
<PAGE>

The Company  accounts  for its  investments  in  accordance  with  Statement  of
Financial  Accounting  Standards No. 115, "Accounting for Certain Investments in
Debt and  Equity  Securities"  ("SFAS  115").  All of the  Company's  investment
securities  are  classified  as available for sale and are stated at fair market
value which  approximates  amortized cost. 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  following  is a summary of  available  for sale  securities  at fair market
value, which approximates amortized cost, at June 30, 1997 and 1996:

                                                      1997               1996
                                                 -----------         -----------
Corporate obligations                            $ 2,501,705         $ 8,041,959
Commercial paper                                   1,197,836           2,346,545
US Government obligations                             39,241             233,862
        Accrued interest                              58,480             115,684
                                                 -----------         -----------
        Total                                    $ 3,797,262         $10,738,050
                                                 ===========         ===========

Included in cash and cash  equivalents  at June 30, 1997 and 1996 are  available
for sale  securities of $1,237,351  and  $4,580,407,  respectively.  Included in
short-term  investments  at June  30,  1997  and  1996  are  available  for sale
securities of $2,559,911  and  $4,642,153,  respectively.  Included in long-term
investments at June 30, 1996 are available for sale securities of $1,515,490. By
policy,  the Company does not invest in  securities  that mature in more than 18
months.  At June 30,  1997,  all  securities  in the  investment  portfolio  are
expected to mature in less than 12 months.

Property and equipment

Property and equipment is stated at cost.  Depreciation is calculated  using the
straight  line  method  based on  estimated  useful  lives of 2 to 7 years.  The
balances at June 30, 1997 and 1996 consisted of the following:

                                                        1997             1996
                                                     ---------        ---------
Machinery and equipment                              $ 216,527        $ 190,882
Furniture and fixtures                                 165,778          165,778
                                                     ---------        ---------
                                                       382,305          356,660

Less accumulated depreciation                         (184,950)        (127,393)
                                                     ---------        ---------
                                                     $ 197,355        $ 229,267
                                                     =========        =========

Patents and licenses

Patents  and  licenses  consist  of the costs  relating  to  license  agreements
covering  certain  patent  rights  to the  Company's  products.  The  costs  are
amortized  using the  straight  line  method over the shorter of the life of the
patent or its economic  useful life.  Accumulated  amortization at June 30, 1997
and 1996 was $283,062 and $217,846, respectively.

Net loss per share

Net loss per share is computed  using the weighted  average  number of shares of
common  stock  outstanding.  Common  equivalent  shares  from stock  options and
warrants are excluded from the computation as their effect is anti-dilutive.
<PAGE>

Effective  December 31, 1997, the Company will adopt SFAS No. 128, "Earnings per
Share." The new  requirements  will include a calculation  of basic earnings per
share,  from which the dilutive  effect of stock  options and  warrants  will be
excluded.  The  calculation of basic earnings per share will not differ from the
net loss per share amounts previously  reported by the Company. A calculation of
diluted earnings per share will also be required;  however, this is not expected
to differ from the Company's reported net loss per share.

Stock-Based  compensation The Company has adopted SFAS No. 123,  "Accounting for
Stock-Based  Compensation"  ("SFAS 123") which establishes the fair value method
of  accounting  for stock based  compensation  plans.  The Company  accounts for
employee stock options in accordance  with Accounting  Principles  Board Opinion
No. 25, "Accounting for Stock Issued to Employees ("APB 25") and has adopted the
"disclosure only" alternative described in SFAS 123.

NOTE 2. LEASE

The Company's  lease for its premises in Richmond,  California  expires in April
2000.  Rent  expense for the years  ending  June 30,  1997,  1996,  and 1995 was
$157,000, $143,000, and $81,000,  respectively.  Future minimum payments at June
30, 1997 consisted of the following:

                    Fiscal year ended June 30,
                    --------------------------
                       1998         $132,000
                       1999          132,000
                       2000          110,000
     
NOTE 3. STOCKHOLDERS EQUITY

Warrants to purchase common stock

At June 30,  1997,  warrants to  purchase  417,286  shares of common  stock were
outstanding at a weighted  average  exercise price of $6.24 per share. Of these,
37,286  shares of common  stock at a price of $5.60 were  issued  for  licensing
rights and consulting  services and have expiration dates through June 30, 2001;
warrants to purchase  160,000 and 220,000 shares were issued to the underwriters
of the initial public  offering and the 1996 public  offering at prices of $9.60
and $3.90, respectively, and expire on February 15, 1999 and 2001, respectively.
The  weighted  average fair value of warrants  issued  during 1996 was $2.19 per
share.

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,  "Accounting  for
Stock-Based Compensation," 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
under which 1,500,000 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. 
<PAGE>


A summary of the Company's stock option  activity,  and related  information for
the three years ended June 30, 1997 follows:

                                    Number of Shares        Weighted Average
                                  Subject to Options          Exercise Price
                                  -------------------------------------------
Balance at June 30, 1994                     776,059                   $4.09
        Options granted                      182,668                    3.38
        Options canceled                     (19,906)                   4.52
        Options exercised                    (31,435)                   1.17
                                  ------------------------
Balance at June 30, 1995                     907,386                    4.04
        Options granted                       73,760                    5.59
        Options canceled                     (34,225)                   3.52  
        Options exercised                    (21,376)                   3.68
                                  ------------------------
Balance at June 30, 1996                     925,545                    4.19
        Options granted                      338,304                    2.58
        Options canceled                     (28,591)                   5.61
        Options exercised                     (2,999)                   3.44
                                  ------------------------
Balance at June 30, 1997                   1,232,259                    3.72
                                  ========================

At June 30, 1997,  options to purchase  211,803  shares of common stock remained
available for grant, and options to purchase 851,671 shares of common stock were
exercisable at exercise prices ranging from $1.75 to $8.00. The weighted average
exercise price of options  exercisable at June 30, 1997 was $4.18.  The weighted
average fair value of options  granted during 1997 and 1996 was $1.48 and $4.26,
respectively.
<TABLE>

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

                              Options Outstanding               Options Exercisable
                  -----------------------------------------  ------------------------------
                                    Weighted        
                                     Average       Weighted                       Weighted
        Range of                   Remaining        Average                        Average
        Exercise       Shares    Contractual       Exercise         Shares        Exercise
          Prices  Outstanding    Life (years)         Price    Exercisable           Price
-------------------------------------------------------------------------------------------
<S>                   <C>             <C>            <C>            <C>            <C>   
   $ 0.01 - 1.99      120,000         9.85           $ 1.75         20,000         $ 1.75
     2.00 - 3.99      807,122         6.59             3.32        579,932           3.61
     4.00 - 5.99      130,637         8.01             4.48         85,052           4.46
     6.00 - 8.00      174,500         7.37             6.34        166,688           6.32
</TABLE>

Pro forma  information  regarding net loss and net 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 fiscal years 1996
and 1997: Expected volatility calculations based on historical data (.846), risk
free interest rates based on U.S.  government bonds with maturities equal to the
expected option lives of 6 percent,  expected option lives of five years, and no
dividend yield.

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.
<PAGE>


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

                                                  Year ended June 30, 
                                                 ---------------------
                                                    1997      1996
                                                 ---------   ---------
Net loss - as reported                           $(7,369)   $(5,211)
Net loss - pro forma                              (7,845)    (5,742)
Net loss per share - as reported                   (1.13)     (1.05)
Net loss per share - pro forma                     (1.20)     (1.15)

The effects on pro forma  disclosures  of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosures in future years.

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.  Under the plan,  37,822 shares remain available for issuance
at June 30, 1997.

NOTE 4. INCOME TAXES

The Company uses the liability method to account for income taxes as required by
SFAS 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.  

Significant  components of the  Company's  deferred tax assets are as follows at
June 30, 1997 and 1996 (in thousands):

                                                        1997            1996
                                                     --------------------------
Net operating loss carryforward                      $    9,210      $   6,500
Research and development carryforward                       900            700
Capitalized research and development                        700            450
                                                     --------------------------
Gross deferred tax assets                                10,810          7,650
Valuation allowance                                     (10,810)        (7,650)
                                                     --------------------------
Net deferred tax assets                              $       --      $      -- 
                                                     ==========================

The valuation  allowance  increased by $3,160,000 and $2,010,000 in fiscal years
1997 and 1996, respectively.

At June 30, 1997, the Company had net operating loss  carryforwards  for federal
and state  income tax  purposes  of  approximately  $25,000,000  and  $8,000,000
respectively,  which expire in calendar years 1997 through 2011. The Company has
federal tax credit  carryforwards  of  approximately  $600,000  which  expire in
calendar years 2006 through 2011.

During the years ended June 30, 1991 and 1994, the Company experienced a "change
in  ownership"  as defined by Section 382 of the  Internal  Revenue  Code.  As a
result, utilization of the Company's net operating loss and credit carryforwards
incurred prior to the "change in ownership" may be subject to annual limitation.
If  additional  "change in  ownership"  should occur,  the  availability  of the
Company's net operating loss and credit carryforwards incurred subsequent to the
1994 "change in ownership" may also be subject to an annual limitation.
<PAGE>

NOTE 5. POSSIBLE ENFORCEMENT PROCEEDINGS

In late  January  1996,  two  executive  officers  of the Company  purchased  an
aggregate of 1,600 shares of the  Company's  common stock prior to the Company's
proposed  public  offering of common stock.  After these  officers  informed the
Company's  outside legal counsel of such  purchases,  such counsel  advised that
such  purchases  constituted a violation of Rule 10b-6 under the  Securities and
Exchange  Act of 1934,  as amended.  The SEC  instituted  a  voluntary  informal
inquiry into this matter and may seek  enforcement  action  against the officers
who made the purchases,  both of whom have since left the employ of the Company.
The SEC has  indicated  that it has no  present  intention  to seek  enforcement
action  against the  Company.  Any action  taken by the SEC with  respect to the
matter may have a material  adverse effect on the Company's  financial  position
and results of operations.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.
<PAGE>

PART III.

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are as follows:

Name                          Position
---------------------------------------------------------------------------
Paul E. Freiman               President and CEO and Director
Ronald Goldblum, M.D.         Vice President, Medical Affairs
Jian L. Johnson               Vice President, Regulatory Affairs
Shawn K. Johnson              Director of Finance
Behzad Khosrovi, Ph.D.        Vice President, Pharmaceuticals Development
Calvert Yee                   Vice President, Operations and Administration
Abraham E. Cohen              Chairman of the Board of Directors
Enoch Callaway                Director
Theodore L. Eliot, Jr.        Director
Abraham D. Sofaer             Director
John B. Stuppin               Director

PAUL E. FREIMAN, age 63, 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 ("Syntex"),  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(R) and was responsible for moving the
product to  over-the-counter  status,  marketed by Procter & Gamble as Aleve(R).
Mr.  Freiman is  currently  serving on the board of Digital  Gene  Technologies,
Inc., a private  genomics  company,  and serves on the boards of Penwest  Corp.,
LifeScience Economics,  Inc., and several other biotechnology  companies. 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.

RONALD GOLDBLUM, M.D., age 54, has been Vice President, Medical Affairs since he
joined the  Company in January  1995.  Before  joining  NTI,  Dr.  Goldblum  was
Director of Clinical  Investigation at Syntex  Laboratories  where he supervised
all Phase IIIB and Phase IV studies. Before joining Syntex Laboratories, he held
various  managerial  positions as  department  head and  department  director at
Syntex  Research.  Prior to joining Syntex,  Dr.  Goldblum  practiced for twelve
years as a rheumatologist  in both hospital and private  settings.  Dr. Goldblum
holds A.B. and M.D. degrees from Case Western Reserve University.

JIAN L.  JOHNSON,  age 60,  joined the  Company in October  1992 as  Director of
Clinical and  Regulatory  Affairs.  In August 1995,  Ms. Johnson was promoted to
Vice President, Regulatory Affairs. Prior to joining NTI, she spent twenty years
with the  Upjohn  Company.  Three of those  years were spent in the area of drug
discovery  followed  by  positions  of  increasing  responsibility  in  clinical
research and drug  registration.  Ms.  Johnson has extensive  experience in drug
development  strategy,  design of  clinical  protocols,  management  of clinical
trials, and preparation of regulatory submissions,  including INDs and NDAs. Ms.
Johnson holds a B.S.  degree from National  Taiwan  University and a M.S. degree
from the University of Minnesota.

SHAWN K. JOHNSON,  age 30, joined the Company in July 1995 as Controller and was
promoted to  Director  of Finance in January  1996.  Prior to joining  NTI,  Mr.
Johnson was a financial consultant from August 1992 until June 1995. From August
1989 to August 1992, Mr. Johnson was employed with  Cognitive  Systems,  Inc., a
software  company,  where  he  held  various

<PAGE>

accounting  positions,  including  Controller from April 1990 to August 1992. He
holds a B.A.  degree  from the  College  of  Wooster,  a B.S.  degree  from City
University, and a M.B.A. degree from the University of California at Berkeley.

BEHZAD  KHOSROVI,  Ph.D.,  age 53,  has  been  Vice  President,  Pharmaceuticals
Development  since he joined  the  Company in  January  1992.  From July 1990 to
December 1991,  Dr.  Khosrovi was a consultant to the  pharmaceutical  industry.
Prior to July 1990,  Dr.  Khosrovi was employed 14 years with Cetus  Corporation
("Cetus"),  where he held various senior  management  positions,  including Vice
President,  Development  from 1985 until June 1990. At Cetus,  Dr.  Khosrovi was
responsible  for  developing  and managing  Cetus'  capability in  manufacturing
sciences. His responsibilities included process development, formulation design,
product  characterization  and manufacture of products for clinical trials.  Dr.
Khosrovi  holds an M.A.  degree  in  Natural  Sciences  from the  University  of
Cambridge in England and M.Sc. and Ph.D.  degrees in Applied  Microbiology  from
the University of Manchester's Institute of Science and Technology.

CALVERT YEE, age 45, has been Vice President,  Operations and  Administration of
the Company since February 1991.  Prior to joining NTI, Mr. Yee was employed for
15 years with Cetus  Corporation,  where he held both  research  and  management
positions,  serving as Senior Director,  Research and Development Administration
and Operations  from 1987 until  September  1990. Mr. Yee holds a A.B. degree in
bacteriology and a M.B.A. degree from the University of California at Berkeley.

ABRAHAM E. COHEN,  age 61, 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.  ("Merck")  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 is a director
of six public companies:  Agouron Pharmaceuticals,  Inc., Akzo Nobel N.V., Smith
Barney, Teva Pharmaceutical  Industries,  Ltd., Vion  Pharmaceuticals,  Inc. and
Vasomedical, Inc.

ENOCH  CALLAWAY,  M.D.,  age 73, is a founder of the Company and has served as a
director of the Company since September 1987. Dr. Callaway  previously served as
Chairman  of the  Board of  Directors  of the  Company  from  September  1987 to
November 1990, as Co-Chairman of the Board from November 1990 until August 1993,
as Vice  President  from  September 1988 until August 1993 and as Secretary 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 1988. He holds A.B. and M.D. degrees from Columbia University.

THEODORE  L.  ELIOT,  Jr.,  age 69,  served as a director  of the  Company  from
September  1988 until April 1992 and as a Vice  President  from  September  1988
until September  1991. He  subsequently  has served as a director of the Company
since August 1992. Mr. Eliot retired from the United States  Department of State
in 1978  with the rank of  Ambassador.  He  served  as the Dean of the  Fletcher
School of Law and Diplomacy  from 1979 to 1985 and as Secretary  General for the
United States of the Bilderberg Meetings from 1981 to October 1993. Mr. Eliot is
a director of two other  publicly held  companies,  Raytheon  Company,  Inc. and
Fiberstars,   Inc.  Mr.  Eliot  holds  B.A.  and  M.P.A.  degrees  from  Harvard
University.
<PAGE>

ABRAHAM D. SOFAER,  age 59, 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. 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 key
international  disputes.  From 1979 to 1985,  he served as Federal Judge for 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),  the
leading  organization in the area of resolution of disputes outside  litigation.
He has mediated or is now mediating merger-acquisition arbitrations,  commercial
cases involving valuation of commercial  technology,  and major securities class
action  suits.  Mr.  Sofaer  is on the  International  Advisory  Board of Chugai
Biopharmaceuticals, Inc. and is a director of Inventech, Inc. Mr. Sofaer holds a
B.A. degree from Yeshiva College and a L.L.B. from New York University.

JOHN B. STUPPIN,  age 64, is a founder of the Company and has been a director of
the Company since  September  1988 and was Treasurer from April 1991 to December
1993. 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  and,  from  October 1990 until  September  1991,  as  Executive  Vice
President.  He also served as the 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 a director of Fiberstars,  Inc. Mr.
Stuppin holds a A.B. degree from Columbia College.
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated by reference to the
section  entitled  Executive  Compensation  in the  Company's  definitive  Proxy
Statement to be filed with the Securities and Exchange  Commission in connection
with the Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement").

ITEM 11. 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 the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is hereby incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Financial Statements

    The  following  are  incorporated  herein  by  reference  to  the  financial
    statements included under Part II:

    Report of Ernst & Young LLP, Independent Auditors

    Balance Sheets at June 30, 1997 and 1996

    Statements  of  Operations  for each of the three years in the period  ended
    June 30, 1997 and for the period from  August 27, 1987  (inception)  through
    June 30, 1997

    Statement of Stockholders'  Equity for each of the three years in the period
    ended June 30,  1997 and for the period  from  August 27,  1987  (inception)
    through June 30, 1997

    Statement of Cash Flows for each of the three years in the period ended

    June 30,  1997 and for the period for August 27,  1987  (inception)  through
    June 30, 1997

    Notes to Financial Statements

(b) Reports on Form 8-K

    None.
<PAGE>

(c) Exhibits

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

Exhibit
Number    Description
------    -----------

  3.5*       Restated Certificate of Incorporation of Registrant.

  3.2*       Bylaws of Registrant.

  4.1*       Form of Common Stock Certificate.

  4.2*       Form of Warrant issued to Van Kasper & Co.

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

  10.2*      1993 Stock Plan of Neurobiological Technologies, Inc.***

  10.4*      Form  of  Indemnity   Agreement  between  the  Registrant  and  its
             directors and officers.***

  10.5*      Series B Preferred  Stock Purchase and Exchange  Agreement dated as
             of December 6, 1993.

  10.6*      License Agreement  between the Registrant and Research  Corporation
             Technologies, Inc. dated May 30, 1990.**

  10.7*      License  Agreement  among the  Registrant,  Dynorphin  Partnership,
             Nancy M. Lee and Horace C. Loh dated April 1, 1989, as amended.**

  10.8*      License  Agreement  between  the  Registrant  and  Immuno-Dynorphin
             Partnership dated October 1, 1990.**

  10.9*      License  Agreement  between the  Registrant  and des-Tyr  Dynorphin
             Partnership dated December 20, 1992.**

  10.10*     License  Agreement between the Registrant and DUZ Partnership dated
             December 20, 1992.**

  10.11*     License Agreement between the Registrant and The Salk Institute for
             Biological Studies dated March 31, 1989, as amended.**

  10.12*     License  Agreement  between the  Registrant  and the Regents of the
             University of California dated June 13, 1990, as amended.**

  10.13*     Option  Agreement  between  the  Registrant  and the Regents of the
             University of California dated December 1, 1992.**

  10.14*     Lease dated August 22, 1994 between Registrant and Marina Westshore
             Partners, a California limited partnership.

  10.15*     License  Agreement  between the Registrant  and Childrens  Hospital
             effective September 11, 1995, as amended on March 11, 1996.

  10.16****  Amended and restated  Neurobiological  Technologies,  Inc. Employee
             Stock Purchase Plan***

  23.1       Consent of Ernst & Young LLP, independent auditors.

  24.1       Power of Attorney.

  27         Financial  Data  Schecule  for the  period  ended  June  30,  1997.

_____________

*     Previously filed as an exhibit to Issuers  Registration  Statement on Form
      SB-2 (Registration No. 33-74118-LA) and 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.

****  Previously filed as an exhibit to Issuer's Registration  Statement on Form
      S-8 (Registration Number 333-18519) and incorporated herein by reference.

<PAGE>

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.

Dated:  September 29, 1997                  /s/ Paul E. Freiman

Neurobiological Technologies, Inc.          President, Chief Executive Officer

POWER OF ATTORNEY
<TABLE>

KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature  appears below
constitutes  and appoints  Paul E. Freiman 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.
<CAPTION>

Signature                    Title                                  Date
                                                                    
<S>                          <C>                                    <C>
 /s/ Paul E. Freiman         President, Chief Executive Officer     
--------------------------   (Principal Executive Officer)          September 29, 1997
     Paul E. Freiman         and Director                                             
                                                                    
                                                                    
/s/ Shawn K. Johnson         Director of Finance,                   September 29, 1997
--------------------------   Principal Accounting Officer           
    Shawn K. Johnson                                                
                                                                    
/s/ Abraham E. Cohen         Chairman of the Board                  September 29, 1997
--------------------------                                          
    Abraham E. Cohen                                                
                                                                    
/s/ Enoch Callaway           Director                               September 29, 1997
-------------------------                                           
    Enoch Callaway                                                  
                                                                    
/s/ Theodore L. Eliot, Jr.   Director                               September 29, 1997
--------------------------                                          
    Theodore L. Eliot, Jr.                                          
                                                                    
/s/ Abraham D. Sofaer        Director                               September 29, 1997
--------------------------                                          
    Abraham D. Sofaer                                               
                                                                    
/s/ John B. Stuppin          Director                               September 29, 1997
--------------------------                                          
    John B. Stuppin
    
</TABLE>