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, 1999
                         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-K. [ ]

     Registrant's  revenues for its most recent fiscal year were $99,544.

     As of August 26, 1999, the Registrant had 7,563,575 shares of Common Stock,
$.001 par value, outstanding,  and the aggregate market value of the shares held
by  non-affiliates  on that date was $5,537,011  based upon the bid price of the
Issuer's  Common  Stock  reported on the Over the  Counter  Bulletin  Board,  an
electronic stock listing service provided by The Nasdaq Stock Market, Inc.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions  of Item 9 and  Items 10  through  12 of Part III  incorporate  by
reference  information  from the  Registrant's  Proxy  Statement  for the Annual
Meeting of Stockholders to be held on November 11, 1999.


<PAGE>

ITEM 1. BUSINESS

     Statements in this  Business  section and other parts of this Annual Report
on Form 10-KSB that are not  historical are  forward-looking  statements and 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 set forth under "Risks Associated with Product Development," "Management's
Discussion and Analysis of Financial  Condition and Results of Operations,"  and
elsewhere in this Form 10-KSB.


OVERVIEW

     Neurobiological  Technologies,  Inc. or NTI- ("NTI" or the "Company") is an
emerging  drug  development  company  focused on the  clinical  development  and
regulatory approval of neuroscience drugs. NTI is developing neuroprotective and
neuromodulatory   agents   to   treat   progressive   neurological   impairments
characteristic   of  various  nervous  system  disorders,   including   diabetic
neuropathy, brain cancer and AIDS dementia syndrome.

     The  Company's  strategy  is to  in-license  and develop  early-stage  drug
candidates   that  target   major   medical   needs  and  that  may  be  rapidly
commercialized.  The Company's  experienced  management  team oversees the human
clinical  trials  necessary  to establish  preliminary  evidence of efficacy and
seeks partnerships with  pharmaceutical and biotechnology  companies to complete
development of and market its product candidates.

     NTI  currently  has two  product  candidates  in Phase  II  human  clinical
testing.  One of these,  the  orally-available  compound  Memantine,  appears to
restore the function of impaired neurons by modulating the  N-methyl-D-aspartate
("NMDA") receptor,  integral to the membranes of such cells. Such restoration of
function  inhibits  injured  or  damaged  neurons  from  firing  abnormally,   a
pathological  process  associated with many neurological  conditions,  including
dementia,  Alzheimer's disease, neuropathic pain (persistent pain resulting from
abnormal signals to the brain) and AIDS dementia.  Memantine may be an effective
and  marketable  treatment for such  conditions due to its favorable side effect
profile  and  oral  dosage   formulation.   There  are   currently  no  approved
neuroprotective  treatments for any of the pathologies  associated with abnormal
NMDA-receptor activity.

     Memantine has been marketed by Merz + Co. GmbH & Co. of Frankfurt,  Germany
("Merz") in Germany since 1989 with the labeling  "dementia  syndrome." In April
1998, NTI entered into a strategic research and marketing  cooperation agreement
with Merz and a revenue  sharing  partnership  with  Children's  Medical  Center
Corporation  of  Boston,   Massachusetts,   to  further  the   development   and
commercialization of Memantine.  Pursuant to this agreement,  Children's Medical
Center Corporation  terminated NTI's existing license for AIDS-related  dementia
and  neuropathic  pain and granted  exclusive  rights to Merz. In exchange,  NTI
received an  up-front  payment of $2.1  million  from Merz.  NTI and  Children's
Medical Center  Corporation will share in future revenue from sales of Memantine
by Merz or its marketing  partners.  NTI and Merz are currently  assisting  each
other to advance their respective clinical development programs by sharing their
scientific  information  and  clinical  trial  data.  They  are also  seeking  a
marketing agreement for Memantine with a large pharmaceutical company.

     The Company's Memantine clinical program is being supported in part through
loans from Merz. In January 1999,  the Company  received a loan of $200,000 from
Merz.  Subsequent to fiscal 1999 year end, the Company entered into an agreement
with Merz pursuant to which the Company can borrow up to $1.5 million to support
the Phase IIB trial of Memantine for neuropathic pain. As of September 15, 1999,
the Company has borrowed $500,000 pursuant to this agreement.  The principal and
interest of the Merz loans are  convertible  into common stock of the Company at
Merz' option.

     In April 1999,  the Company  announced  completion  of a private  placement
resulting  in net  proceeds  in excess  of $1.1  million  to fund the  Company's
continued  operations and clinical programs.  Subsequent to fiscal year end, the
Company has raised over $90,000 as of  September  1, 1999 in an ongoing  private
placement of common stock and warrants to purchase common stock.

     In the second quarter of fiscal 1999,  the Company  initiated a 375-patient
Phase IIB human clinical to evaluate the ability of Memantine to relieve chronic
pain due to diabetic peripheral neuropathy or nerve


                                        1
<PAGE>

damage,  particularly  nocturnal  pain that  frequently  interferes  with sleep.
Quintiles  CNS  Therapeutics,  a leading  contract  research  organization  with
experience  in  neurology,  is  jointly  managing  the trial  with the  Company.
Subsequent to fiscal year end, the Company expanded and completed  enrollment in
this trial at 421  patients.  The Company  expects to report  results  from this
trial by the end of calendar year 1999.

     Merz is  currently  conducting  a series  of Phase III  clinical  trials of
Memantine  for the  treatment  of moderate to severe  dementia  and  Alzheimer's
disease.  In March 1999, the Company  announced  positive results from one Phase
III human  clinical  trial of Memantine  sponsored by Merz.  In this Merz trial,
severely demented subjects treated with Memantine had statistically  significant
improvement  compared  to  placebo  in  internationally   accepted  measures  of
functional independence,  including bathing, dressing and self-care. The results
of this  trial  were  published  in the  March  1999  issue  of the  peer-review
International  Journal  of  Geriatric  Psychiatry.  Merz has  completed  patient
enrollment  in two  additional  pivotal  Phase III trials of  Memantine  for the
treatment  of dementia in Europe.  In addition,  Merz is  conducting a Phase III
trial in the United States.

     Memantine is also currently being evaluated as a treatment for AIDS-related
dementia in a Phase II human clinical trial funded by the National Institutes of
Health  ("NIH").  The trial is being  conducted  by AIDS  Clinical  Trials Group
("ACTG"),  and is designed to evaluate Memantine's ability to reduce symptoms of
dementia  and  neuropathic  pain in  patients  with  AIDS.  The  ACTG  has  also
implemented a protocol permitting open-label dosing for up to 60 weeks following
the double blinded phase of the trial.  This open-label  phase will provide data
on the long-term safety of Memantine.  NTI is supplying  Memantine for the trial
and will have the right to use the resulting data for the commercial development
of Memantine for that indication.

     The Company is also developing XERECEPT-,  its synthetic preparation of the
natural human peptide Corticotropin-Releasing Factor ("CRF"), as a treatment for
brain  swelling due to brain tumors  (peritumoral  brain edema).  The Company is
currently  analyzing data from a randomized,  double-blind,  positive-controlled
Phase II human  clinical  trial to evaluate the ability of XERECEPT to stabilize
or improve  neurological  symptoms resulting from brain swelling.  Subsequent to
fiscal year end 1999,  enrollment  in this trial was closed at 30 patients  (one
third of projected  enrollment)  in order to provide  expedited but  abbreviated
analysis of the data.

     During  fiscal 1999,  the Company was awarded a Small  Business  Innovative
Research  (SBIR)  grant of  approximately  $100,000  from  the NIH for  clinical
development of XERECEPT for  peritumoral  brain edema.  In April 1998,  XERECEPT
received orphan drug  designation for this  indication.  Orphan drug designation
provides NTI with seven years market  exclusivity and makes the Company eligible
to receive Orphan Drug Grants to fund clinical research.

     Previously the Company  sought to out-license  Dynorphin A, a human peptide
previously  tested as an analgesic  agent.  During the fourth  quarter of fiscal
1999, the Company abandoned its rights to Dynorphin A.


                                        2
<PAGE>

PRODUCT CANDIDATES

<TABLE>
<CAPTION>
Product/Indication          Development Status                     Primary Benefit Sought
--------------------------- ------------------------------------   --------------------------------------
<S>                         <C>                                    <C>
MEMANTINE
Diabetic Neuropathic Pain   Phase IIA trial completed.             Analgesia

                            Phase IIB trial initiated              Analgesia
                            November 1998. Patient
                            enrollment completed
                            September 1999. Data expected
                            by end of calendar year 1999.

AIDS-related Dementia       Phase II trial in progress.            Improvement in neurological function
and Neuropathic Pain        Enrollment expected to be              and peripheral neuropathy
                            completed in second quarter of
                            fiscal 2000.

Moderate to Severe          Phase III trial initiated in 1998.     Improvement in functional and
Dementia and Alzheimer's                                           Alzheimer's Disease* independence
Disease*                                                           and reduction in required level of
                                                                   care
*Merz + Co. GmbH & Co. trial in the United States.

XERECEPT(TM) (CORTICOTROPIN-RELEASING FACTOR)

Peritumoral Brain Edema     Multiple  Phase I/II trials            Improvement in neurological function
                            completed.

                            Phase II trial enrollment closed       Stabilization or improvement of
                            at 30 patients. Data being             neurological function
                            analyzed.
</TABLE>

SCIENTIFIC BACKGROUND

     The Company's therapeutic focus is neuroprotection and neuromodulation: the
prevention and treatment of  neurological  impairment by preserving or restoring
neurological   function  of  damaged   neurons.   The   Company  is   developing
neuroprotective  and  neuromodulatory  agents  which  may  slow or  reverse  the
progressive  neurological  impairment  associated  with multiple  nervous system
disorders,  including  diabetic  neuropathy,  brain  cancer,  and  AIDS-dementia
complex.

     Because neuronal injury contributes  significantly to functional impairment
in many  nervous  system  disorders,  scientists  believe  that  neuroprotective
compounds   are   potentially   powerful   and  flexible   therapeutic   agents.
Neuroprotective  compounds are currently  being tested in human clinical  trials
conducted  by  multiple  third  parties  for  their  ability  to  slow  or  halt
progressive functional neurologic impairment.

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

PRODUCTS IN DEVELOPMENT

Memantine

     Memantine  is an  orally-available  neuromodulatory  agent  that  has  been
marketed in Germany since 1989 with the labeling "dementia  syndrome." It is one
of a class of agents referred to as NMDA-receptor


                                        3
<PAGE>

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

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

     Nerve  cells in the  brain  communicate  by  sending  signals  to excite or
inhibit  each  other.   These  signals  are  initiated  by  compounds  known  as
neurotransmitters.  The principal excitatory neurotransmitter,  glutamate, binds
to the NMDA receptor embedded in the cell membrane of the neuron. When glutamate
binds to the  receptor,  a channel in the neuron  opens  which  enables  charged
calcium  molecules  to flow  freely  into the  neuron.  Normally,  the influx of
calcium  triggers  chemical  reactions  that  cause the  neuron  to  change  its
electrical charge and fire a message to neighboring neurons. This basic function
of the NMDA receptor is essential for normal movement,  sensation,  memory,  and
cognition.  In certain medical conditions,  glutamate levels surrounding neurons
are elevated,  which results in overstimulation  of the NMDA receptor.  In these
situations,  excessive amounts of calcium enter the neuron,  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 injury and/or death throughout the area, referred to as
excitotoxicity.

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

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

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


Product Development Status

   The Neuropathic Pain of Diabetes

     Diabetes  mellitus  is a chronic  disorder  that  affects an  estimated  16
million  Americans.  One of its  most  common  complications  is  nerve  damage,
particularly  damage to  peripheral  nerves that send  sensory  signals from the
extremities to the central nervous system ("CNS").  This condition,  referred to
as peripheral  diabetic neuropathy ("PDN"), is a large, unmet medical need. This
condition most frequently damages nerves in the feet, making walking or standing
painful and difficult. The Company estimates that approximately 800,000 patients
in the United  States  currently  receive  treatments  for the  symptoms of PDN,
including severe, chronic pain known as neuropathic pain (persistent pain in the
absence of an


                                        4
<PAGE>

obvious  stimulus).  As the  neuropathy  progresses,  the  sensation of pain may
become more intense,  encompass more areas, and become increasingly difficult to
treat with available therapeutic agents.

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

     Memantine has been shown to inhibit abnormal pain signals by modulating the
NMDA receptor in several animal models of neuropathic pain. Based on the results
of  these   studies,   the  Company   sponsored   and  completed  a  122-patient
placebo-controlled  Phase IIA human clinical trial of Memantine in patients with
neuropathic pain due to diabetes or  post-herpetic  neuralgia (a complication of
shingles).  No  treatment  benefit was observed in patients  with  post-herpetic
neuralgia.  Trends  indicating  efficacy of Memantine  were observed in patients
with PDN, however.  The strongest  efficacy trend was the reduction of nocturnal
pain associated with PDN.  Nocturnal pain is a major problem for these patients,
frequently  leading to insomnia and other  associated  health and  psychological
problems.  After eight  weeks of  treatment  in the  Company's  clinical  trial,
subjects  dosing with  Memantine  reported a mean  nocturnal pain rating of 31.2
millimeters (on a visual analogue scale of 1-100 millimeters) compared to a mean
of 44.4 millimeters for those who received placebo. The difference between these
means indicates that the Memantine-treated  subjects had 42% less nocturnal pain
than those treated with placebo.  The results for the other primary variables of
daytime pain and pain relief, although not statistically significant,  exhibited
consistent trends representative of analgesic benefit with Memantine compared to
placebo.

     Based on the results  from the  Company's  Phase IIA trial of  Memantine in
patients  with  neuropathic  pain,  the  Company  initiated a Phase IIB trial of
Memantine in the second  quarter of fiscal 1999,  exclusively  in patients  with
PDN. This randomized,  double-blind,  placebo-controlled  dose-ranging  trial is
evaluating the ability of Memantine to relieve  chronic pain due to nerve damage
in patients with PDN (particularly nocturnal pain). The trial protocol specifies
that Memantine subjects will receive a 10 mg daily dose,  escalating by 10 mg at
weekly intervals to either 20 mg or 40 mg daily.  Quintiles CNS Therapeutics,  a
leading contract research organization with experience in neurology,  is jointly
managing the trial with the Company.  In September  1999, the Company  completed
patient  enrollment in this trial.  Enrollment  was closed at 421 patients.  The
Company  expects to report  results from this trial by the end of calendar  year
1999.  Results will determine  whether the Company will initiate a pivotal Phase
III trial for this indication in collaboration with a corporate partner.

   AIDS: Dementia and Neuropathic Pain

     Recent  research  indicates  that  infection of the CNS 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  complex.  Approximately  one-half of
children  and  one-third  of adults  with AIDS are  expected  to  develop  these
symptoms.  There  are  currently  no  therapies  specifically  directed  towards
HIV-associated  neuronal  damage.  Current AIDS therapies,  even if effective at
reducing  the  circulating  virus  level,  do  not  appear  to be  effective  at
eliminating AIDS-induced damage to the CNS.

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

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

     In  December  1996,  the Company  announced  the  initiation  of a Phase II
clinical  trial of  Memantine  as a  treatment  for  AIDS-related  dementia  and
neuropathic pain. This study is funded by the NIH and is


                                        5
<PAGE>

being  conducted by the ACTG, a clinical trials  consortium  associated with the
Division of AIDS of the NIH. The trial  protocol  submitted  under the Company's
Investigational  New Drug ("IND")  application  calls for the  enrollment of 140
AIDS patients with symptoms of dementia, all of whom will have been treated with
an  FDA-approved  anti-retroviral  drug for at least  six  weeks  prior to study
entry. The ACTG has also implemented a protocol permitting open-label dosing for
up to 60 weeks following the blinded phase of the trial.  This open-label  phase
will provide data on the long-term safety of Memantine. 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 for that indication. If positive
trial  results  are  reported,  the Company  intends to discuss  the  additional
regulatory  requirements  for this indication  including  future clinical trials
with the Food and Drug Administration ("FDA").

   Agreement with Merz and Additional Indications

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

     Pursuant to the agreement with Merz, NTI will share in future revenues from
sales of Memantine for treatment of moderate to severe  dementia and Alzheimer's
disease, indications which Merz is developing.  Severe dementia is characterized
by progressive  decline in motor and cognitive  skills  associated with multiple
central nervous system disorders,  chiefly neurodegenerative  conditions such as
Alzheimer's  disease.  According to the NIH,  approximately 4 million people are
affected by  Alzheimer's  disease in the U.S.  There are  currently  no approved
treatments indicating clinical benefits in patients with severe dementia.

     Merz is  currently  conducting  a series of  advanced  clinical  trials for
moderate  to severe  dementia  and  Alzheimer's  disease.  Merz has  completed a
positive  pivotal  Phase III trial of  Memantine  for  dementia  in Europe;  has
completed patient enrollment in two additional European Phase III trials; and is
currently  conducting  a Phase III trial in the U.S.  managed by  Quintiles  CNS
Therapeutics.

     In the  March  1999  issue  of the  peer-review  International  Journal  of
Geriatric  Psychiatry,  positive  results were reported from the first Phase III
human  clinical  trial of  Memantine  sponsored  by Merz.  In this  double-blind
placebo-controlled  trial,  166 elderly,  care-dependent  and severely  demented
patients  were  randomized  to receive a 10 mg oral dose of Memantine or placebo
for 12 weeks.  All  patients  were  diagnosed  with primary  dementia:  49% with
Alzheimer's  disease and 51% with  vascular or  mixed-type  dementia.  Subjects'
motor performance and functional independence were assessed after 4 and 12 weeks
of treatment using two standard scales. The effect of Memantine, as evaluated on
both  scales,  resulted in  statistically  significant  improvement  compared to
placebo.  Functional  evaluations  performed  by  physicians  and nursing  staff
included  ability  to move,  wash,  bathe and dress,  as well as the  ability to
recognize  persons  and  participate  in group  activities.  Memantine  was well
tolerated and no significant side effects were reported.


XERECEPT(TM) (Human Corticotropin-Releasing Factor)

     XERECEPT(TM)  is the Company's  synthetic  preparation of the human peptide
Corticotropin-Releasing  Factor which the Company is  developing  as a treatment
for brain  swelling  due to brain tumors  (peritumoral  brain  edema).  There is
clinical evidence that XERECEPT may be demonstrated to be a safer treatment than
synthetic  corticosteroids,  which are  associated  with  serious  adverse  side
effects including muscle wasting, osteoporosis,  hyperglycemia, vision problems,
and psychosis.  Results from preclinical studies and pilot human clinical trials
previously  sponsored by the Company have demonstrated the compound's  potential
to reduce swelling of brain tissue and to be well-tolerated and apparently safe.
Thus,  XERECEPT has the potential to  significantly  improve the quality of life
for brain cancer patients with dysfunction due to brain swelling.


                                       6
<PAGE>

     In the United States,  approximately  30,000  patients are diagnosed  every
year with  brain  tumors.  Patients  with this  condition  are in need of a safe
alternative to corticosteroids,  which have serious adverse effects at the high,
chronic  doses  required  for  efficacy.  The FDA  has  approved  the  Company's
application for orphan drug designation for XERECEPT to treat this unmet medical
need. Orphan drug designation  provides NTI with seven years market  exclusivity
and makes the Company  eligible to receive federal monies for clinical  research
under the Orphan Drug Grant Program. During fiscal 1999, the Company was awarded
a Small Business  Innovative  Research grant of approximately  $100,000 from the
NIH for clinical development of XERECEPT for peritumoral brain edema.

     CRF is a  natural  neuroendocrine  peptide  hormone  found in  humans  both
centrally (within the brain) and peripherally  (outside the brain).  Researchers
discovered anti-edema affects of CRF through systemic  administration.  Research
by scientific  collaborators  of NTI has revealed  that  XERECEPT  significantly
reduces  edema or  swelling  of  damaged  tissue  in animal  models.  Edema is a
condition  characterized  by swelling  after  tissue  injury when fluid,  plasma
proteins,  and  white  blood  cells  flow  from  small  blood  vessels  into the
surrounding  tissues,  further contributing to the destruction of these tissues.
Preclinical  studies  sponsored by the Company have shown that XERECEPT  reduces
the flow of fluid  through blood  vessels at sites of traumatic  tissue  injury.
Specifically,  these studies have shown that XERECEPT injected systemically into
animals can reduce brain edema after injury,  brain edema associated with cancer
tumors, and swelling in muscle tissue following surgical trauma.


Product Development Status

   Peritumoral Brain Edema

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

     Although  endogenous CRF 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 cortisol release when administered
systemically.

     Based on the pharmacologic profile of XERECEPT,  there is evidence that the
compound may be  efficacious  without the adverse side effects  associated  with
current  therapies.  XERECEPT has been safely  administered  to several  hundred
healthy volunteers and patients according to numerous studies published by third
parties.  In human clinical trials  sponsored by the Company,  XERECEPT was well
tolerated and appeared to be safe in more than 230 courses of treatment.

     Results  from pilot  human  clinical  trials  previously  sponsored  by the
Company  demonstrated  the  potential  of XERECEPT  to reduce  swelling of brain
tissue and to be well-tolerated and apparently safe. Based on these results, the
Company  initiated  a Phase II human  clinical  trial  in 1997 to  evaluate  the
efficacy of XERECEPT to stabilize  or improve  neurological  symptoms  caused by
peritumoral  brain edema.  Patients  enrolled in this randomized,  double-blind,
positive-controlled  trial  must have  neurological  symptoms  requiring  stable
dosing of synthetic corticosteroids, the current standard treatment. The Company
is  currently  analyzing  data from  this  trial.  Subsequent  to year end 1999,
enrollment  in this  trial was closed at 30  patients  (one-third  of  projected
enrollment) in order to provide expedited but abbreviated analysis of the data.


PATENTS AND PROPRIETARY TECHNOLOGY

Memantine

     In April 1998, in connection  with the Company's  agreement  with Merz, the
Company's  exclusive  license from  Children's  Medical Center  Corporation to a
series of patents and patent  applications  relating  to certain  non-ophthalmic
uses of Memantine was terminated.

                                        7
<PAGE>

XERECEPT(TM)

     The  Company  holds  non-exclusive  worldwide  licenses to four issued U.S.
patents  covering the  composition of matter of XERECEPT and various  analogues,
together with certain foreign patents and patent applications.  The Company also
has exclusive rights to four issued patents and one patent application  covering
uses of XERECEPT  and  analogues.  The Company is  responsible  for the costs of
prosecuting  the  patent  applications  related  to  XERECEPT  for  which it has
exclusive  rights.  In addition to the  patents  and  pending  applications  the
Company has licensed from others,  the Company holds U.S.  Patent No.  5,870,430
which covers certain liquid formulations of CRF and CRF-related peptides.

     In addition to patent  protection,  the  Company  relies upon trade  secret
protection for its confidential and proprietary information. 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.  However,  it is possible  that these
agreements  could be breached.  In addition,  others may  independently  develop
substantially  equivalent  proprietary  information  and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology.


MANUFACTURING

     Memantine currently is being supplied to NTI by its corporate collaborator,
Merz. NTI also contracts with external vendors to manufacture  compounds for the
Company's other 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 its contractors who supply XERECEPT from time to
time to assess compliance with the cGMP regulations. XERECEPT is 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

     Regulatory  review by  governmental  authorities  in the United  States and
other  countries  will be a significant  factor in the approval and marketing of
any potential products that may be developed by the Company.  The nature and the
extent of regulatory  requirements applicable to the development and approval of
the Company's product candidates may be variable.  All of the Company's products
will require regulatory approval prior to  commercialization  in any country. 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,  clinical trials 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 be able to
first  submit an  application  for  approval of any products to the FDA or other
regulatory re-view agency.

     In order to clinically  test,  produce and market  products for therapeutic
use, a company  must  comply  with  mandatory  procedures  and safety  standards
established  by the FDA and  comparable  agencies in foreign  countries.  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 includes a summary of the preclinical studies which were carried out
to  characterize  the drug,  including  toxicity  and  safety,  and 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

                                        8
<PAGE>

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.
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 to establish  statistical and clinical  verification of efficacy and
safety required by the FDA and non-U.S. regulatory agencies.

     The FDA  closely  monitors  the  progress  of each of the  three  phases of
clinical  testing and may  reevaluate,  alter,  suspend or terminate the testing
based on the data which have 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  clinical  testing vary between two and ten years.  The rate of
completion  of the  Company's  clinical  trials is dependent  upon,  among other
factors,  the rate of patient  enrollment.  Patient  enrollment is a function of
many factors,  including the size of the patient  population,  the nature of the
protocol,  the  proximity  of  patients to  clinical  sites and the  eligibility
criteria for the study.  Delays in planned patient enrollment in clinical trials
may result in increased  costs and delays,  which could have a material  adverse
effect on the Company.

     Upon completion of clinical testing, a company typically submits a New Drug
Application  ("NDA") to the FDA.  This  document  includes  the  analyses of and
describes  the results and  observations  of the clinical  trials.  The NDA also
provides detailed manufacturing and preclinical information. Based on its review
of the  NDA,  the FDA  will  decide  whether  or not to  approve  the  drug  for
marketing. This review process can be quite lengthy, and approval may be denied.
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.  Compliance  with the cGMP  regulations
requires  that  manufacturers  continue to expend time,  money and effort in the
area of production and quality control to ensure full technical compliance.

     Once the sale of a product is approved,  FDA regulations continue to govern
the manufacturing process and marketing activities. A post-marketing testing and
surveillance  program may be required to continuously  monitor a product's usage
and effects in  patients.  Product  approvals  may be  suspended or withdrawn if
compliance with regulatory standards is not maintained. Other countries impose a
similar  regulatory  process on any  products  marketed  by the  Company in that
country. 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 therapies
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 both exclusive
and  non-exclusive  licenses to patent rights covering certain uses of XERECEPT.
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 competing drugs. 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 obtain funding,  create and maintain  scientifically  advanced
technology, develop proprietary products, attract and

                                        9
<PAGE>

retain scientific personnel, obtain patent or other protection for its products,
obtain required  regulatory  approvals and manufacture and  successfully  market
products  either  alone  or  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,  1999,  the Company had reduced its  workforce to 11 people,
several of whom are employed part time,  compared to 13 employees as of June 30,
1998. Three salaried managers left the Company,  while one part-time manager and
one  administrative  employee  were  retained.  The Company  believes  that this
reduction in the workforce has not impaired its ability to manage  ongoing human
clinical trials.


RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT

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.

     Since 1987 when NTI was founded,  the Company has applied a majority of its
resources to its research and  development  programs.  As part of the  strategic
planning  process,  the  Company  has  limited  expenditures  to only  two  drug
candidates, Memantine and XERECEPT.

     The Company will need to obtain additional financing to continue operations
beyond October 31, 1999. The Company intends to seek such funding through public
or  private  financings,  collaborative  or other  arrangements  with  corporate
partners,  or from other  sources.  There is a risk that the  Company may not be
able to  obtain  the  additional  financing  from any of these  sources,  or, if
financing  is  available,  that it will be  available on  acceptable  terms.  In
addition,  the  Company  may  seek to raise  additional  funds  whenever  market
conditions  permit.  Raising  additional funds through issuing equity securities
may result in significant dilution to the Company's existing stockholders.

     Although  Merz has agreed to lend the Company up to $1.5 million to support
its Phase IIB  clinical  trials of Memantine  for  neuropathic  pain,  the funds
received from Merz cannot be used to fund the Company's continuing operations or
for any other purpose.  In addition,  covenants and other terms of the Merz loan
agreement,  including  adjustment of the  conversion  price,  could make it more
difficult  for the Company to raise funds and cause  additional  dilution to the
Company's  existing  stockholders.  The  terms of the Merz loan  agreement  also
require that future license fees, royalties and other consideration  received by
the Company from the licensing of its products and technologies be used to repay
the loan,  which will have an adverse  effect on the  ability of the  Company to
fund its continuing operations.

     If the Company is not able to raise adequate  funds,  it may be required to
delay,  scale back, or terminate its clinical trials, or to obtain funds through
entering  into  arrangements  with  collaborative   partners  or  others.   Such
arrangements  may  require  the  Company  to give up  additional  rights  to its
technology, product candidates or products.

     The  Company's  future  capital  requirements  will  depend  on a number of
factors, including:

       *  obtaining the remainder of the funds from Merz;

       *  the  amount  of  royalties  received  from  Merz for  future  sales of
          Memantine;

       *  the progress of the Company's 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;

       *  the ability of the Company to establish collaborative relationships;

       *  the development of commercialization activities and arrangements; and

       *  the purchase of additional capital equipment.

                                       10


<PAGE>


The  Company's  continuing  losses raise a going  concern issue in the auditor's
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 paragraph
indicating  that,  as more fully  described  in the  financial  statements,  the
Company's  recurring  losses during the development  stage and a working capital
deficit and net capital  deficiency  at June 30,  1999 raise  substantial  doubt
about the Company's ability to continue as a going concern.

Because all of the  Company's  potential  products are in clinical  development,
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.

     NTI is still in a development stage and currently has no marketed products.
As a result,  NTI has no revenues from product sales,  and most of the Company's
resources are dedicated to the development of selected candidate  pharmaceutical
products.

     The Company is  currently  evaluating  two  potential  products in Phase II
clinical  trials.  The results of the  Company's  preclinical  studies and early
stage  clinical  trials  are not  necessarily  indicative  of those that will be
obtained  upon further  human  clinical  testing  later stage  clinical  trials.
Although a trial of  Memantine  completed in January  1998  indicated  potential
effectiveness  in treating PDN, a larger  clinical trial is currently  underway.
This clinical trial may not be successful in confirming Memantine's efficacy for
this indication.

     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 possibility that the potential products may:

       *  be found to be unsafe, ineffective or toxic;

       *  fail to receive necessary regulatory clearances; and

       *  if  approved,  be  difficult  to  manufacture  on  a  large  scale  or
          uneconomical to market;

       *  be  precluded  from  marketing  by the Company due to the  proprietary
          rights of third parties; and

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

     The Company's  development  activities  may not 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.

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.

     With respect to Memantine, the Company is dependent on Merz for:

       *  the funding of its Phase IIB clinical trials;

       *  the  manufacturing  and supply of drug for these and any future  human
          clinical trials; and

       *  the successful  commercialization  of the product to treat neuropathic
          pain and AIDS-related dementia.

     The only revenues that the Company will receive in the future for Memantine
are  royalties  received on product  sales by Merz or its  marketing  partner or
partners.  Any  failure by Merz or its  partners to  successfully  commercialize
Memantine  after its  development  will have a  material  adverse  effect on the
Company's business, financial condition and results of operations.

     The Company has also entered into various contractual arrangements (many of
which are non-exclusive) with consultants,  academic  collaborators,  licensors,
licensees  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 significant  responsibility
for  preclinical  testing  and  human  clinical  trials  and for  preparing  and
submitting  submissions  for regulatory  approval for potential  products on the
collaborator,   licensor  or  contractor.  If  the  collaborator,   licensor  or
contractor fails to perform, the Company's business may be adversely affected.


                                       11
<PAGE>

     The Company has also relied on scientific,  technical, clinical, commercial
and  other  data  supplied  and  disclosed  by  others in  entering  into  these
agreements.  The Company has relied on this 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,
it is  possible  that there are 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.

     A number of the  Company's  agreements  and  licenses  with  third  parties
require the Company to pay  royalties  and make other  payments to such parties.
Failure by the  Company to make such  payments  could  cause the Company to lose
rights to technology or data under these agreements.

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  and
clinical  testing  procedures,  sampling  activities  and other  costly and time
consuming procedures.

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

       *  delay for a  considerable  period of time or prevent  marketing of any
          product that the Company may develop; and/or

       *  impose costly procedures upon the Company's activities.

     Either of these effects of government  regulation  may provide an advantage
to the Company's 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 delay in obtaining, or failure to obtain, required 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 instituted which could delay regulatory
approval of the Company's potential products.  Additional government regulations
that might result from future  legislation  or  administrative  action cannot be
predicted.

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.

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

       *  patents  involve  complex legal and factual  issues that have recently
          been the subject of much litigation;

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

       *  others may independently  develop similar  products,  duplicate any of
          the Company's potential  products,  or design around the claims of any
          potential patented products of the Company.

     In addition,  because of the time delay in patent  approval and the secrecy
afforded United States patent  applications,  the Company does not know if other
applications,  that might have priority over the  Company's  applications,  have
been filed.

     As a result of all of these factors,  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.

                                       12
<PAGE>

     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 which the Company has
licenses.  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,  or at a reasonable  cost, or
be able to develop alternative technology.

The Company's  potential products will need to be manufactured under the current
Good Manufacturing  Practices requirements prescribed by the FDA and the Company
does not have its own manufacturing facilities.

     The Company has established  arrangements with its corporate  collaborator,
Merz,  and  with  contract   manufacturers  to  supply  potential  products  for
preclinical  and  clinical  trials.  The Company  intends to  establish  similar
arrangements  for the manufacture,  packaging,  labeling and distribution of its
products if they are approved for marketing.

     The Company faces certain risks by outsourcing manufacturing, including:

       *  the delay of the Company's  preclinical and human clinical  testing if
          the Company's  contractors are unable to supply sufficient  quantities
          of  product  candidates   manufactured  in  accordance  with  cGMP  on
          acceptable terms;

       *  the delay of market introduction and subsequent sales of such products
          if  the  Company  should   encounter   difficulties   in  establishing
          relationships  with  manufacturers to produce,  package and distribute
          its products;

       *  adverse effects on the FDA pre-market  approval of the products if the
          Company's  collaborators  and contract  manufacturers do not adhere to
          cGMP regulations enforced by the FDA through its facilities inspection
          program  and if these  facilities  cannot  pass a  pre-approval  plant
          inspection.

     Therefore, 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.

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  which the
Company's insurance may not cover.

     The Company has a limited  amount of product  liability  insurance to cover
liabilities  arising from  clinical  trials.  It is possible  that the Company's
current insurance may not be adequate to cover any liabilities  arising from the
Company's clinical trials.

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

Further  reductions  in  the  Company's  staff  might  significantly  delay  the
achievement of planned development objectives.

     Each person currently employed by the Company serves an essential function.
During fiscal year 1998, the Company reduced its workforce from 22 to 13 persons
and,  during fiscal year 1999, the Company further reduced its workforce from 13
to 11 persons.  Three  salaried  managers left the Company,  while one part-time
manager and one administrative employee were retained. The Company believes that
this  reduction in the workforce has not impaired its ability to manage  ongoing
human  clinical  trials.  Further  reductions  may be  required  because  of the
financial  situation  confronted by the Company.  Any further reduction in force
could impair the Company's  ability to manage ongoing human clinical  trials and
have a material adverse effect on the Company's operations.


                                       13
<PAGE>

The market price of the shares of the Company's  common stock,  like that of the
common stock of many other biopharmaceutical  companies,  has been and is likely
to continue to be, highly volatile.

     The average  daily  trading  volume of the  Company's  common  stock during
fiscal 1999 has been low compared to that of other biopharmaceutical  companies.
The Company's common stock was delisted from The Nasdaq Stock Market in February
1998 because the Company  failed to meet the financial  conditions  necessary to
remain listed. The delisting has adversely affected, and is expected to continue
to adversely  affect,  the trading volume and price  volatility of the Company's
stock. The Company's common stock is now quoted on the OTC-Bulletin Board- under
the symbol NTII.

     Other factors causing volatility in the Company's stock price include:

       *  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;

       *  developments in patent or other  proprietary  rights of the Company or
          its competitors including litigation;

       *  fluctuations in the Company's operating results;

       *  government regulation, health care legislation; and

       *  market conditions for life sciences' stocks in general.


ITEM 2. PROPERTIES

     The Company's  executive offices are located in Richmond,  California.  The
Company entered into a sublease dated March 31, 1999 that decreased its occupied
space from  approximately  6,900 square feet to 5,750  square  feet.  The master
lease, which commenced in April 1995, will expire in April 2000.


ITEM 3. LEGAL PROCEEDINGS

     The Company is not a party to any legal proceedings.


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

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended June 30, 1999.


                                       14
<PAGE>

                                   PART II.


ITEM 5. MARKET PRICE OF NTI COMMON STOCK; DIVIDENDS

     Since  February  1998,  the  Company's  common stock has been quoted on the
Over-the-Counter  ("OTC") Bulletin  Board-,  an electronic stock listing service
provided by The Nasdaq Stock Market, Inc., under the symbol NTII.

     As of June 30, 1999 there were  approximately  235 holders of record of the
Company's  common stock and  7,563,575  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.  Except as otherwise noted, high and low prices given here
refer  to the  high  and  low  bid  quoted  on the OTC  Bulletin  Board-.  These
quotations reflect  inter-dealer  prices,  without retail mark-up,  mark-down or
commission, and may not represent actual transactions.

             Fiscal 1998                     High      Low
             -----------                     ----      ---
             First Quarter* .............    $3.63     $1.56
             Second Quarter* ............    $3.56     $0.44
             Third Quarter ..............    $1.28     $0.47
             Fourth Quarter .............    $1.50     $0.69

             Fiscal 1999                     High      Low
             -----------                     ----      ---
             First Quarter ..............    $1.06     $0.38
             Second Quarter .............    $0.69     $0.41
             Third Quarter...............    $0.66     $0.47
             Fourth Quarter..............    $1.44     $0.50

------------
* Prices shown during these  quarters  reflect the high and low closing price of
  the Company's Common Stock on the Nasdaq SmallCap Market.


Recent Sales of Unregistered Securities

     In August 1999, the Company entered into a convertible  loan agreement with
Merz pursuant to which the Company can borrow up to $1,500,000.  As of September
15, 1999, the Company has borrowed $500,000 under this agreement. At its option,
Merz may convert any amounts  borrowed under the loan  agreement,  plus interest
into common  stock of NTI.  If Merz  converted  all  outstanding  principal  and
interest  under the loan,  NTI would be  obligated  to issue Merz  approximately
482,540  shares of common  stock.  The Company  relied upon  Section 4(2) of the
Securities  Act of 1933,  as amended (the  "Securities  Act") to exempt the sale
from registration under the Securities Act.

     In April 1999, NTI raised  $1,166,000  through the sale of 466,400 units of
the Company's  securities in a private  placement.  The purchase price was $2.50
per unit.  Each unit  consisted of 5 shares of Series A preferred  stock and one
warrant to purchase 2 shares of common  stock at an exercise  price of $1.00 per
share  (exercisable  for 5 years).  The Series A preferred  stock is convertible
into common stock on a one-for-one  basis,  subject to antidilution  adjustment,
votes  together  with  the  common  stock  on  an  as-converted  basis  and  has
preferences  with respect to  dividends  and  liquidation.  The Company sold the
units to 31  accredited  investors  and  relied on Rule 506 of  Regulation  D to
exempt the sale from registration under the Securities Act.

     In January  1999,  the Company  entered  into a $200,000  convertible  loan
agreement with Merz. At its option, Merz may convert  outstanding  principal and
interest  into shares of NTI common  stock at a price of $1.20 per share.  As of
June 30, 1999, if Merz exercises this option to convert,  NTI would be obligated
to issue Merz  approximately  173,333 shares of common stock. The Company relied
on Section 4(2) of the Securities Act to exempt the sale from registration under
the Securities Act.


                                       15
<PAGE>

     In March 1998, NTI raised  $555,725  through the sale of 1,010,410 units of
the Company's  securities in a private  placement.  The purchase price was $0.55
per unit.  Each unit consisted of one share of the Company's  common stock,  one
Class A warrant to purchase common stock at an exercise price of $0.75 per share
(exercisable  for 18 months) and one Class B warrant to purchase common stock at
an exercisable price of $1.50 per share  (exercisable for 3 years).  The Company
sold the units to 16 accredited investors and relied on Rule 506 of Regulation D
to exempt the sale from registration under the Securities Act.


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


OVERVIEW

     NTI is an  emerging  drug  development  company  focused  on  the  clinical
development  and regulatory  approval of neuroscience  drugs.  NTI is developing
neuroprotective  and  neuromodulatory  agents to treat progressive  neurological
impairments  characteristic  of  various  nervous  system  disorders,  including
diabetic  neuropathy,  brain cancer and AIDS  dementia  syndrome.  The Company's
strategy is to in-license and develop  early-stage  drug  candidates that target
major medical needs and that may be rapidly commercialized.

     NTI  currently  has two  product  candidates  in Phase  II  human  clinical
testing. One of these, the orally-dosed  compound Memantine,  appears to restore
the function of impaired  neurons by modulating the NMDA  receptor,  integral to
the membranes of such cells.  In the second  quarter of fiscal 1999, the Company
initiated a 375-patient  placebo-controlled Phase IIB human clinical to evaluate
the ability of  Memantine  to relieve  chronic  pain due to diabetic  peripheral
neuropathy  or  nerve  damage,   particularly  nocturnal  pain  that  frequently
interferes  with  sleep.  Additionally,  in March 1999,  the  Company  announced
positive  results of a Phase III human  clinical trial of Memantine for dementia
sponsored  by Merz.  In this trial,  severely  demented  subjects  treated  with
Memantine  had  statistically  significant  improvement  compared  to placebo in
internationally accepted measures of functional independence, including bathing,
dressing and self-care.  The ability of Memantine to reduce symptoms of dementia
and neuropathic pain in AIDS patients is currently being evaluated in a Phase II
human clinical trial sponsored by the AIDS Clinical Trials Group of the NIH. NTI
is  supplying  Memantine  for the  trial  and  will  have  the  right to use the
resulting data for the commercial development of Memantine for that indication.

     In January 1999,  the Company  received a loan of $200,000  from Merz.  The
loan,  which bears  interest at a rate of 8% per year,  will be repaid upon Merz
signing an agreement with a third party  regarding the development and marketing
of Memantine. If no such agreement is completed,  the loan is due and payable on
December 31, 2000.  In lieu of NTI's  repayment of the principal and interest on
the loan,  Merz has the right to  exercise  an option at its own  discretion  to
receive shares of NTI common stock at the stock price of $1.20 per share.  As of
June 30, 1999, if Merz  exercises  this option,  NTI would be obligated to issue
Merz 173,333 shares of common stock.

     Subsequent  to fiscal 1999 year end, the Company  entered into an agreement
with Merz pursuant to which the Company can borrow up to $1.5 million to support
the Phase IIB trial of Memantine for neuropathic pain. As of September 15, 1999,
the Company had borrowed $500,000 pursuant to this agreement.

     In April 1999,  the Company  announced  completion  of a private  financing
resulting  in net  proceeds  in excess  of $1.1  million  to fund the  Company's
continued  operations and clinical programs.  Subsequent to fiscal year end, the
Company has raised over $90,000 as of  September  1, 1999 in an ongoing  private
placement of common stock and warrants to purchase common stock.

     NTI is also developing a second product,  XERECEPT, a synthetic preparation
of the natural human peptide CRF. The Company is currently analyzing data from a
randomized,  double-blind,  positive-controlled Phase II human clinical trial of
XERECEPT for  peritumoral  brain edema ("PBE").  During fiscal 1999, the Company
was awarded a SBIR grant of  approximately  $100,000  from the NIH for  clinical
development of XERECEPT for PBE.


                                       16
<PAGE>

     Significant  additional  preclinical  testing and clinical  testing will be
required  prior to submission of any regulatory  application  for the commercial
use of the Company's  products.  There can be no assurance that the Company will
have the financial resources necessary to conduct future clinical trials or that
such trials,  if  conducted,  will  demonstrate  an adequate  level of safety or
efficacy for commercialization of these products.

     Since 1987 when NTI was founded,  the Company has applied a majority 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  any  revenue  from the sales of products in the near
future. The Company has incurred losses since its inception and expects to incur
substantial,   increasing  losses  due  to  ongoing  and  planned  research  and
development  efforts. As part of the strategic planning process, the Company has
limited  expenditures  to only two drug  candidates.  The  Company  will need to
obtain additional financing to continue operations.


RESULTS OF OPERATIONS

     The Company's research and development  expenses increased to $2,780,000 in
fiscal 1999 from  $2,026,000  in fiscal  1998.  The  increase in fiscal 1999 was
primarily due to the  initiation of a Phase IIB human clinical trial to evaluate
Memantine as a treatment for peripheral diabetic neuropathy.

     Research and development  expenses decreased from $5,478,000 in fiscal 1997
to $2,026,000 in fiscal 1998.  This decrease in fiscal 1998 was primarily due to
the Company's narrowing its clinical focus to the development of its two product
candidates in clinical trials.

     General and administrative  expenses decreased to $1,058,000 in fiscal 1999
from $2,347,000 in fiscal 1998. The decrease in fiscal 1999 was primarily due to
lower salaries, facility costs and professional fees.

     General and  administrative  expenses increased slightly from $2,298,000 in
fiscal 1997 to  $2,347,000  in fiscal 1998.  The increase was  primarily  due to
expenditures relating to seeking financing and corporate  partnerships in fiscal
1998.

     In  fiscal  1999 the  Company's  revenues  of  $99,544  were due to a Small
Business Innovative Research grant awarded from the NIH.

     In fiscal 1998, the Company  received  $2,100,000 due to a one-time payment
from Merz pursuant to a strategic research and marketing  cooperation  agreement
between NTI and Merz.

     Interest income decreased from $407,000 in fiscal 1997 to $99,000 in fiscal
1998 and to $47,000 in fiscal  1999,  primarily  due to changes in average  cash
balances.

     The Company expects to incur substantial costs in fiscal 2000 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, if the Phase II trials are  successful,
Phase III clinical trials.


LIQUIDITY AND CAPITAL RESOURCES

     Since 1987 when NTI was founded,  the Company has applied a majority of its
resources to its research and development programs. The Company is a development
stage  company and has not received  any revenue from the sale of products.  The
Company  has  incurred   losses  since  its   inception  and  expects  to  incur
substantial,   increasing  losses  due  to  ongoing  and  planned  research  and
development efforts.

     The Company's  available cash and cash equivalents as of June 30, 1999 were
$201,000. In the course of its development activities,  the Company has incurred
significant  losses and  expects  additional  losses in the year ending June 30,
2000.  At June 30,  1999,  the Company has a working  capital  deficit and a net
capital deficiency. In order to continue operations through the year ending June
30, 2000 and beyond, additional financing will be required. The Company believes
that its available  cash and cash  equivalents as of June 30, 1999 combined with
funds from the Merz loan agreement and a private placement, subsequent to fiscal
year end, are adequate to fund its operations through October 31, 1999. NTI will
need to raise substantial additional capital to fund subsequent operations.  The
Company  intends to seek such  funding  through  public or  private  financings,
collaborative or other arrangements with corporate partners,


                                       17
<PAGE>

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  from any of these  sources,  or,  if  available,  that it will be
available  on  acceptable  terms.  If the Company is not able to raise  adequate
funds, it may be required to delay, scale back, or terminate its clinical trials
or to  obtain  funds  through  entering  into  arrangements  with  collaborative
partners or others that may require the Company to give up additional  rights to
its  technology,  product  candidates or products.  The  accompanying  financial
statements  have been  prepared  assuming the Company  will  continue as a going
concern,  and do not include any adjustments  that might result from the outcome
of this uncertainty.

     Further,  the Company will require substantial  additional funds to conduct
clinical  testing  of its  potential  products.  The  Company's  future  capital
requirements  will  depend  on a number of  factors,  including:  the  amount of
royalties received from Merz for future sales of Memantine;  the progress of the
Company's 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;  the ability of the Company to establish  collaborative
relationships; the development of commercialization activities and arrangements;
and the purchase of additional capital equipment.

     From  inception  through June 30,  1999,  the Company has raised a total of
$31.2  million  in net  proceeds  from the sale of common and  preferred  stock.
Subsequent  to the fiscal year end,  the  Company has raised over  $90,000 as of
September 1, 1999 in an ongoing  private  placement of common stock and warrants
to purchase  common  stock.  In  addition,  subsequent  to fiscal year end,  the
Company  entered into a loan  agreement  with Merz pursuant to which the Company
can  borrow up to $1.5  million  to  support  its Phase IIB  clinical  trials of
Memantine for neuropathic pain.

IMPACT OF YEAR 2000 ISSUE

     Many currently  installed  computer systems and software products are coded
to accept only two digit  entries in the date code field and cannot  distinguish
century  dates prior to January 1, 2000 from dates on and after  January 1, 2000
("Y2K").  These date code fields will need to distinguish dates prior to January
1, 2000 from dates on and after January 1, 2000 ("Year 2000 Compliance") and, as
a result,  many companies' software and computer systems may need to be upgraded
or replaced in order to reach Year 2000 Compliance.

     The Company's  internal business systems and workstation  applications will
be a primary area of focus.  The Company  replaced such computers  prior to 1999
with Y2K  compliant  units.  The Company  utilizes  only  commercially  produced
software  applications and these have been upgraded to versions that the vendors
advertise to be Y2K  compliant.  The Company has contacted  selected NTI vendors
and is in the process of speaking to  additional  vendors  with regards to their
Y2K status. Based upon vendors' representations to date, the Company understands
that they will be able to supply NTI with its needs in the year 2000.

     Certain single function systems at NTI have not been upgraded as yet. These
upgrades  will  be  performed  by  the  Company's  internal  staff  and  outside
specialized  vendors and  contractors as needed.  The Company  believes that NTI
will be Y2K compliant by December  1999. The cost of effecting the remaining Y2K
upgrades is estimated to be less than $5,000.

     The  worst-case  scenario  for Y2K problems for NTI would be to cease using
the affected systems for an indefinite period of time while the Company attempts
to correct  the  problems.  In the event that Y2K issues are not  resolved  in a
timely manner, the Company will implement alternative methods to carry out these
tasks and services until the affected systems are upgraded.  However, this would
not be expected to have a material  effect on NTI's  operations,  liquidity  and
financial condition.

     NTI has made forward-looking statements regarding its Y2K compliance. These
statements include the expected completion schedule for system upgrades, and the
costs to the company of such  upgrades.  There are many factors that could cause
actual  events  or  results  to  differ  materially  from  those  stated  in the
forward-looking statements. These factors include difficulties in identifying or
upgrading  software or hardware systems that are not currently Y2K compliant and
in  coordinating  these efforts  through NTI's  internal  staff and  specialized
contractors. The Company expects to be able to complete these upgrades


                                       18
<PAGE>

before any Y2K problem  could  arise.  Unanticipated  problems  such as material
costs  caused by  undetected  errors or  defects in the  technology  used in the
Company's internal systems could delay the Company's completion of the upgrades.


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, 1999, and 1998,
and the related  statements of operations,  stockholders'  equity  (deficit) and
cash flows for each of the three years in the period  ended June 30,  1999,  and
for the period from August 27, 1987  (inception)  through June 30,  1999.  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, 1999 and 1998, and the results of its operations
and its cash  flows for each of the three  years in the  period  ended  June 30,
1999, and for the period from August 27, 1987 (inception) through June 30, 1999,
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
experienced  recurring losses during the development  stage and at June 30, 1999
has a working capital  deficit and a net capital  deficiency.  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
August 6, 1999

                                       19

<PAGE>
<TABLE>

       Neurobiological Technologies, Inc. (A development stage company)

                                 BALANCE SHEETS
<CAPTION>
                                                                                    June 30,
                                                                        --------------------------------
                                                                             1999               1998
                                                                        -------------      -------------
<S>                                                                    <C>                <C>
ASSETS
Current assets:
 Cash and cash equivalents   .......................................    $     201,202      $   2,020,886
 Prepaid expenses and other current assets  ........................           43,833             59,016
                                                                        -------------      -------------
   Total current assets   ..........................................          245,035          2,079,902
 Property and equipment, net    ....................................            3,796             53,447
                                                                        -------------      -------------
                                                                        $     248,831      $   2,133,349
                                                                        =============      =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Accounts payable   ................................................    $     447,124      $      44,998
 Accrued expenses   ................................................          487,715            452,580
 Note payable to shareholder    ....................................          200,000                --
                                                                        -------------      -------------
   Total current liabilities    ....................................        1,134,839            497,578
Commitments:
Stockholders' equity (deficit):
 Convertible preferred stock, $.001 par value, 5,000,000 shares
   authorized, 2,332,000 issued and outstanding at June 30, 1999 ...        1,166,000                --
 Common stock, $.001 par value, 25,000,000 shares authorized,
   7,563,575 outstanding at June 30, 1999 and 7,553,699 at June
   30, 1998   ......................................................       29,985,352         29,980,898
 Deficit accumulated during development stage  .....................      (32,037,360)       (28,345,127)
                                                                        -------------      -------------
Total stockholders' equity (deficit)  ..............................         (886,008)         1,635,771
                                                                        -------------      -------------
                                                                        $     248,831      $   2,133,349
                                                                        =============      =============
<FN>

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

                                       F-1
<PAGE>

<TABLE>
                          Neurobiological Technologies, Inc. (A development stage company)

                                              STATEMENTS OF OPERATIONS

<CAPTION>

                                                                                                  Period from
                                                      Year ended June 30,                       August 27, 1987
                                      -----------------------------------------------------   (inception) through
                                          1999               1998               1997             June 30, 1999
                                      ---------------   -----------------   ---------------   ---------------------
<S>                                   <C>               <C>                 <C>               <C>
REVENUES
 License  ........................... $        --        $   2,100,000      $        --          $    2,100,000
 Grant    ...........................       99,544                 --                --                 149,444
                                      -------------      -------------      -------------        --------------
   Total revenue   ..................       99,544           2,100,000               --               2,249,444
EXPENSES
 Research and development   .........    2,780,305           2,025,646         5,477,504             25,068,686
 General and administrative    ......    1,058,421           2,346,893         2,298,391             11,396,572
                                      -------------      -------------      -------------        --------------
   Total expenses  ..................    3,838,726           4,372,539         7,775,895             36,465,258
                                      -------------      -------------      -------------        --------------
Operating loss  .....................   (3,739,182)         (2,272,539)       (7,775,895)           (34,215,814)
Interest income    ..................       46,949              99,335           407,307              2,178,454
                                      -------------      -------------      -------------        --------------
NET LOSS  ........................... $ (3,692,233)      $  (2,173,204)     $ (7,368,588)        $  (32,037,360)
                                      =============      =============      =============        ==============
BASIC AND DILUTED NET LOSS
 PER SHARE   ........................ $      (0.49)      $       (0.32)     $      (1.13)
                                      =============      =============      =============
Shares used in basic and diluted net
 loss per share calculation    ......    7,554,522           6,862,186         6,527,392
                                      =============      =============      =============
<FN>

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

                                                        F-2
<PAGE>
<TABLE>

       Neurobiological Technologies, Inc. (A development stage company)

                      STATEMENTS OF STOCKHOLDERS' EQUITY

<CAPTION>
                                                                   Common Stock             Deficit             Total
                                               Preferred    --------------------------   Accumulated in      Stockholders'
                                                 Stock        Shares        Amount      Development Stage   Equity (Deficit)
                                            --------------- ----------- -------------- ------------------- ------------------
<S>                                         <C>             <C>         <C>            <C>                 <C>
Period from August 27, 1987
 (inception) through June 30, 1996   ......
 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    ..................           --       142,500         70,252               --              70,252
 Exercise of options  .....................           --        86,620        215,838               --             215,838
 Issuance of common stock under
  employee stock purchase plan    .........           --        42,342        112,474               --             112,474
 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
 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 and comprehensive loss  .........           --           --             --        (18,803,335)       (18,803,335)
                                             ------------    ----------  -------------   --------------      -------------
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 and comprehensive loss  .........           --           --             --         (7,368,588)        (7,368,588)
                                             ------------    ----------  -------------   --------------      -------------
Balances at June 30, 1997   ...............           --     6,540,314     29,382,471       (26,171,923)         3,210,548
 Issuance of warrants to purchase
  125,000 shares of common stock  .........           --           --          40,500               --              40,500
 Issuance of common stock and
  warrants at $0.55 per unit   ............           --     1,010,410        555,725               --             555,725
 Issuance of common stock under
  employee stock purchase plan    .........           --         2,975          2,202               --               2,202
 Net loss and comprehensive loss  .........           --           --             --         (2,173,204)        (2,173,204)
                                             ------------    ----------  -------------   --------------      -------------
Balances at June 30, 1998   ...............           --     7,553,699     29,980,898       (28,345,127)         1,635,771
 Issuance of common stock under
  employee stock purchase plan    .........           --         9,876          4,454               --               4,454
 Issuance of 2,332,000 shares of Series
  A preferred stock and warrants at
  $2.50 per unit, net of issuance costs         1,166,000          --             --                --           1,166,000
 Net loss and comprehensive loss  .........           --           --             --         (3,692,233)        (3,692,233)
                                             ------------    ----------  -------------   --------------      -------------
Balances at June 30, 1999   ...............  $  1,166,000    7,563,575   $ 29,985,352    $  (32,037,360)     $    (886,008)
                                             ============    ==========  =============   ==============      =============

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

                                                        F-3

<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
                                                    1999                1998                1997              June 30, 1999
                                               -----------------   -----------------   -----------------   ---------------------
<S>                                            <C>                 <C>                 <C>                 <C>
OPERATING ACTIVITIES
Net loss  ....................................  $  (3,692,233)      $  (2,173,204)      $  (7,368,588)        $  (32,037,360)
Adjustments to reconcile net loss to net
 cash used in operating activities:
 Depreciation and amortization    ............         41,792             128,402             122,773                638,206
 Issuance of common stock and
   warrants for license rights and
   services  .................................            --               40,500                 --                 139,775
 Changes in assets and liabilities:
   Prepaid expenses and other  ...............         15,183             112,420             165,986                (43,833)
   Accounts payable and accrued
    expenses    ..............................        437,261            (498,978)            103,404                934,839
                                                -------------       -------------       -------------         --------------
Net cash used in operating activities   ......     (3,197,997)         (2,390,860)         (6,976,425)           (30,368,373)
INVESTING ACTIVITIES
 Purchase of investments    ..................            --                  --           (1,462,723)           (33,839,678)
 Sale of investments  ........................            --            2,559,911           5,060,455             33,839,678
 Purchases of property and equipment,
   net    ....................................          7,859              15,506             (25,645)              (358,940)
 Additions to patents and licenses   .........            --                  --                  --                (283,062)
                                                -------------       -------------       -------------         --------------
Net cash provided by (used in) investing
 activities  .................................          7,859           2,575,417           3,572,087               (642,002)

FINANCING ACTIVITIES
 Proceeds of short-term borrowings   .........        200,000                 --                  --                 435,000
 Issuance of common stock, net    ............          4,454             557,927              79,925             22,618,495
 Issuance of preferred stock, net    .........      1,166,000                 --                  --               8,158,082
                                                -------------       -------------       -------------         --------------
Net cash provided by financing activities           1,370,454             557,927              79,925             31,211,577
Increase (decrease) in cash and cash
 equivalents .................................     (1,819,684)            742,484          (3,324,413)               201,202
Cash and equivalents at beginning of
 period   ....................................      2,020,886           1,278,402           4,602,815                    --
                                                -------------       -------------       -------------         --------------
Cash and equivalents at end of period   ......  $     201,202       $   2,020,886       $   1,278,402         $      201,202
                                                =============       =============       =============         ==============
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>

                                                        F-4
<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 an emerging
drug  development  company  focused on the clinical  evaluation  and  regulatory
approval of  neuroscience  drugs.  The Com-pany's  strategy is to in-license and
develop  early-stage  drug  candidates that target major medical needs and which
can  be  rapidly  commercialized.  The  Company's  experienced  management  team
oversees the human clinical trials necessary to establish  preliminary  evidence
of  efficacy  and  seeks  partnerships  with  pharmaceutical  and  biotechnology
companies to complete development and marketing of its product candidates.


Basis of Presentation

     In the course of its  development  activities,  the  Company  has  incurred
significant  losses and  expects  additional  losses in the year ending June 30,
2000.  At June 30,  1999,  the Company has a working  capital  deficit and a net
capital deficiency. In order to continue operations through the year ending June
30, 2000 and beyond, additional financing will be required. The Company believes
that its  available  cash and cash  equivalents  of $201,000 as of June 30, 1999
combined with funds from Merz loan agreement and a private placement, subsequent
to fiscal year end,  are  adequate to fund its  operations  through  October 31,
1999. NTI will need to raise substantial  additional  capital to fund subsequent
operations.  The Company  intends to seek such funding through public or private
financings, collaborative or other 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 from any of these sources, or, if available, that it will be available
on acceptable  terms. If the Company is not able to raise adequate funds, it may
be required to delay,  scale back, or terminate its clinical trials or to obtain
funds through entering into arrangements with  collaborative  partners or others
that may  require the Company to give up  additional  rights to its  technology,
product candidates or products.  The accompanying financial statements have been
prepared  assuming  the Company  will  continue as 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.


Key Supplier

     The Company is dependent on one party for the  manufacturing  and supply of
one of its drugs for the Company's  human clinical trials and for the successful
commercialization  of the  related  product.  Any  failure  on the  part of this
company in this regard could adversely affect the Company's business and results
of operations.

Cash and Cash Equivalents

     Cash  and  cash  equivalents,  which  consist  of cash  and  highly  liquid
short-term  investments  with  insignificant  interest  rate  risk and  original
maturities  of three  months or less at date of  purchase,  are  stated at cost,
which approximates fair value.


                                       F-5

<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

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, 1999 and 1998 consisted of the following:

                                                     1999            1998
                                                  ----------      ----------
         Machinery and equipment   ............   $ 176,756       $  185,820
         Furniture and fixtures    ............     115,426          114,221
                                                  ----------      ----------
                                                    292,182          300,041
         Less accumulated depreciation   ......    (288,386)        (246,594)
                                                  ----------      ----------
                                                  $   3,796       $   53,447
                                                  ==========      ==========

Net Loss per Share

     Net loss per share is  presented  under the  requirements  of FAS No.  128,
"Earnings per Share" ("FAS 128").  Basic earnings per share computed is based on
the average shares of common stock outstanding and excludes any dilutive effects
of  options,   warrants,  and  convertible   securities.   Potentially  dilutive
securities such as options, warrants, and convertible preferred stock, have also
been excluded from the computation of diluted net loss per share as their effect
is antidilutive.


Stock-Based Compensation

     The  Company  has  adopted  SFAS  No.  123,   "Accounting  for  Stock-Based
Compensation"  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.


Comprehensive Income (Loss)

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying  comprehensive  income (loss) and its components in the financial
statements.  The  Company  has no  items  of other  comprehensive  income,  and,
accordingly, its net loss is equal to its comprehensive loss.


Enterprise Segments

     In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS  131"),  "Disclosure  about  Segments  of an  Enterprise  and Related
Information,"   which   establishes   standards  for  the  way  public  business
enterprises  report  information  in annual  statements  and  interim  financial
reports regarding operating segments,  products and services,  geographic areas,
and major customers. The Company operates in one business segment.


Note 2. Operating Lease Commitments

     The  Company's  lease for its premises in Richmond,  California  expires in
April 2000. Rent expense for the years ending June 30, 1999,  1998, and 1997 was
$39,000,  $147,000, and $157,000,  respectively.  The future minimum payment has
been  prepaid  through  the end of the lease  period and is  included in prepaid
expenses and other current assets.


Note 3. Stockholders' Equity


Preferred Stock

     At June 30, 1999, the Company has 2,332,000  shares of Series A convertible
preferred stock issued and outstanding.  The holders of the Series A convertible
preferred stock are entitled to receive annual


                                       F-6
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

noncumulative  dividends of 8% per share per annum,  when and if declared by the
Board of Directors.  These  dividends are in  preference to any  declaration  or
payment of any dividend on the common stock of the Company. As of June 30, 1999,
no dividends had been declared.

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

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

Warrants to Purchase Common Stock

     At June 30, 1999,  warrants to purchase an aggregate of 3,335,906 shares of
common stock are outstanding at a weighted  average  exercise price of $1.34 per
share.  Warrants to  purchase  932,800  shares of common  stock were issued at a
price of $1.00 in connection with a private equity financing  completed in April
1999 and expire in April 2004.  Warrants to purchase  2,020,820 shares of common
stock were issued in  connection  with a private  financing  completed  in March
1998:  1,010,410  of these shares at a price of $0.75  expired in September  and
October  1999;  and 1,010,410 of these shares at a price of $1.50 will expire in
March 2001.  Warrants to purchase 100,000 and 25,000 shares of common stock were
issued in April 1998 at a price per share of $1.25 and $3.00,  respectively,  in
connection  with the  termination  of a licensing  agreement and expire in April
2001.  Warrants to purchase  37,286  shares of common stock were issued  between
April 1990 and July 1991 at a price of $5.60 for licensing rights and consulting
services and have expiration  dates through June 30, 2001.  Warrants to purchase
220,000 shares were issued to the  underwriters of the 1996 public offering at a
price of $3.90 and expire on February 15, 2001. The weighted  average fair value
of warrants issued during fiscal 1999 was $0.38 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 requires use of option
valuation  models  that were not  developed  for use in valuing  employee  stock
options.  Under APB 25, when the exercise price of the Company's  employee stock
option equals the market price of the underlying  stock on the date of grant, no
compensation expense is recognized.

     The Board of Directors  adopted the  Company's  first stock option plans in
1989. In November  1993, the Board combined the plans and adopted the 1993 Stock
Plan.  The 1993  Stock Plan was  subject  to  amendment  and/or  restatement  in
February  1994,  November  1994,  October 1996,  and November  1997. Two million
shares of common  stock have been  reserved  for  issuance  under the 1993 Stock
Plan.  In general,  options are granted at fair market  value on the date of the
grant, have a term of 10 years and become  exercisable over a period of up to 48
months.


                                       F-7
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

     A summary of the Company's stock option activity,  and related  information
for the three years  ended June 30,  1999  follows  (all  repricing  activity is
reflected as cancellations and subsequent grants):

                                                            Weighted Average
                                      Number of Shares          Exercise
                                     Subject to Options          Price
                                     --------------------   ------------------
 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
  Options granted  ...............          844,454                 1.66
  Options canceled    ............         (501,632)                4.11
                                          ---------
 Balance at June 30, 1998   ......        1,575,081                 2.42
  Options granted  ...............          488,500                 0.65
  Options canceled    ............         (259,783)                2.51
                                          ---------
 Balance at June 30, 1999   ......        1,803,798                 1.93
                                          =========


     At June 30,  1999,  options  to  purchase  140,392  shares of common  stock
remained available for grant, and options to purchase 1,203,430 shares of common
stock  were  exercisable.   The  weighted  average  exercise  price  of  options
exercisable  at June 30,  1999 was $2.21.  The  weighted  average  fair value of
options  granted  during  1999,  1998 and 1997 were  $0.37,  $1.09,  and  $1.48,
respectively.
<TABLE>

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

<CAPTION>
                      Options Outstanding                            Options Exercisable
---------------------------------------------------------------   --------------------------
                                      Weighted
                                      Average        Weighted                     Weighted
                                     Remaining        Average                      Average
   Range of           Shares         Contractual     Exercise       Shares        Exercise
Exercise Prices     Outstanding     Life (years)      Price       Exercisable      Price
-----------------   -------------   --------------   ----------   -------------   ----------
<S>                 <C>             <C>              <C>          <C>             <C>
$ 0.01 - 1.99           964,721         8.85           $  0.78        527,097       $  0.90
  2.00 - 3.99           826,559         5.62              3.22        665,828          3.20
  4.00 - 5.99             7,768         4.79              4.21          7,755          4.21
  6.00 - 8.00             4,750         5.62              7.42          2,750          8.00
                      ----------                                    ----------
                      1,803,798                                     1,203,430
                      ==========                                    ==========
</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 1997, 1998 and
1999:  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 6.5 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.


                                       F-8
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
<TABLE>

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

<CAPTION>
                                                                          Year ended June 30,
                                                             ----------------------------------------------
                                                                1999            1998             1997
                                                             -------------   -------------   --------------
<S>                                                          <C>             <C>             <C>
Net loss--as reported    .................................    $  (3,692)      $  (2,173)       $  (7,369)
Net loss--pro forma   ....................................       (3,940)         (2,695)          (7,845)
Basic and diluted net loss per share--as reported   ......        (0.49)          (0.32)           (1.13)
Basic and diluted net loss per share--pro forma  .........        (0.52)          (0.39)           (1.20)
</TABLE>

     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,  24,977 shares remain available for issuance
at June 30, 1999.


Note 4. Income Taxes

     The  Company  uses the  liability  method to account  for  income  taxes as
required by FASB  Statement No. 109,  "Accounting  for Income Taxes." Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
differences  between financial reporting and tax bases of assets and liabilities
and are  measured  using  enacted tax rules and laws that will be in effect when
the differences are expected to reverse.

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

                                                         June 30,
                                                 ---------------------------
                                                   1999           1998
                                                 -----------   -------------
Net operating loss carryforward   ............   $ 11,500       $  10,000
Research and development carryforward   ......      1,130           1,100
Capitalized research and development    ......        290             500
                                                 ---------      ---------
Gross deferred tax assets   ..................     12,920          11,600
Valuation allowance   ........................    (12,920)        (11,600)
                                                 ---------      ---------
Net deferred tax assets  .....................   $    --        $     --
                                                 ---------      ---------

     The  valuation  allowance  increased by  $1,320,000  and $790,000 in fiscal
years 1999 and 1998, respectively.

     At  June  30,  1999,   and  1998,   the  Company  had  net  operating  loss
carryforwards  for  federal  and state  income  tax  purposes  of  approximately
$32,000,000 and $12,000,000 respectively, which expire in tax years 1999 through
2018. The Company has federal tax credit carryforwards of approximately $800,000
which expire in tax years 2006 through 2018.

     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 an
annual  limitation.  If  additional  "changes in ownership"  should  occur,  the
availability of the Company's net


                                       F-9
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

operating loss and credit carryforwards  incurred subsequent to the 1994 "change
in ownership" may also be subject to an annual  limitation and may expire before
ultimately becoming available to reduce future income tax liabilities.


Note 5. Notes Payable

     In January 1999,  the Company  received a loan of $200,000  from Merz.  The
loan,  which bears  interest at a rate of 8% per year,  is required to be repaid
from any funds received by NTI upon Merz signing an agreement with a third party
regarding the  development  and marketing of Memantine.  If no such agreement is
completed,  the loan is due and payable on December 31,  2000.  In lieu of NTI's
repayment  of the  principal  and  interest  on the loan,  Merz has the right to
exercise an option at its sole  discretion to receive shares of NTI common stock
at the stock price of $1.20 per share.  As of June 30, 1999,  if Merz  exercises
this  option,  NTI would be  obligated  to issue Merz  173,333  shares of common
stock.

Note 6. Related Party Transaction

     The President and Chief Executive Officer of the Company is a member of the
board of  directors  of a company  that  provided  the Company  with  consulting
services.  Amounts paid to this company for such services  totaled  $409,000 and
$90,000 in the years ended June 30, 1998 and 1997, respectively (none in 1999).

Note 7. Subsequent Events (unaudited)

     In August  1999,  the Company  entered  into  another  agreement  with Merz
pursuant to which the Company can borrow up to $1.5 million to support the Phase
IIB trial of Memantine  for  neuropathic  pain.  As of September  15, 1999,  the
Company has borrowed  $500,000  pursuant to this  agreement.  The  principal and
interest of the Merz loans are  convertible  into common stock of the Company at
Merz'  option.  The terms of the Merz loan  agreement  also  require that future
license fees, royalties, and other consideration received by the Company for the
licensing of its products and technologies be used to repay the loan.

     Subsequent to year end, the Company has raised over $90,000 as of September
1, 1999 in an ongoing private placement of common stock and warrants to purchase
common stock.


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

   None.

                                      F-10
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

                                   PART III.


ITEM 9.  DIRECTORS AND EXECUTIVE  OFFICERS OF THE  REGISTRANT

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

<CAPTION>
Name                               Age     Position
----                               ---     --------
<S>                                <C>     <C>
Paul E. Freiman    ...............  65     President and Chief Executive Officer and Director
Calvert Y. Yee  ..................  47     Vice President, Operations and Administration
Lisa U. Carr, M.D., Ph.D.   ......  44     Vice President, Medical Affairs
Abraham E. Cohen   ...............  63     Chairman of the Board of Directors
Enoch Callaway, M.D.  ............  75     Director
Theodore L. Eliot, Jr.   .........  71     Director
Abraham D. Sofaer  ...............  61     Director
John B. Stuppin    ...............  66     Director
</TABLE>

     Paul E.  Freiman  joined the  Company  as a director  in April 1997 and was
elected  President  and Chief  Executive  Officer in May 1997.  He is the former
chairman and chief executive officer of Syntex Corporation ("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- and was  responsible  for moving the
product to over-the-counter  status, marketed by Proctor & Gamble as Aleve-. Mr.
Freiman currently serves as chairman of the boards of Digital  GeneTechnologies,
Inc., a private  genomics  company and SciGen Pte.  Ltd. Mr.  Freiman  currently
serves  on  the  boards  of  Penwest   Pharmaceutical  Co.,  Calypte  Biomedical
Corporation and Otsuka America Pharmaceuticals, Inc. He has been chairman of the
Pharmaceutical  Manufacturers  Association  of  America  (PhARMA)  and has  also
chaired a number of key  PhARMA  committees.  Mr.  Freiman is also an advisor to
Burrill & Co., a San Francisco  merchant bank.  Mr. Freiman holds a B.S.  degree
from  Fordham  University  and an  honorary  doctorate  from the  Arnold & Marie
Schwartz College of Pharmacy.

     Calvert  Y.  Yee  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 an A.B. degree in
bacteriology and an M.B.A. degree from the University of California, Berkeley.

     Lisa U. Carr M.D., Ph.D. was appointed Vice President of Medical Affairs in
September 1998. Prior to joining the company in June 1998 as Director of Medical
Affairs,  Dr. Carr was Associate  Medical  Director at the Institute of Clinical
Immunology and Infectious Diseases at Syntex Development  Research in Palo Alto,
California.  Dr. Carr has more than 8 years of international industry experience
in conducting clinical drug trials in immunosuppression,  nephrology, neurology,
gastroenterology  and cardiovascular  disorders.  She was Lead Clinical Research
Physician at Syntex, directing a pivotal clinical trial of mycophenolate mofetil
(IND and NDA  approved  for  solid  organ  transplantation).  As a member of the
Clinical  Dossier  Filing  Team,  Dr.  Carr was  instrumental  in  obtaining  an
accelerated drug approval from the FDA in 1995; Europe-wide approval was granted
in 1996. Dr. Carr holds a medical degree and a Ph.D. magna cum laude degree from
the University of Munich in Germany.

     Abraham E. Cohen has been a director  of the  Company  since March 1993 and
has been  Chairman of the Board of Directors  since  August  1993.  From 1982 to
1992,  Mr. Cohen served as Senior Vice  President of Merck & Co.  ("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


                                      F-11
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

Merck  and  MSDI  in January 1992, Mr. Cohen has been active as an international
business  consultant.  He  was a director of Agouron Pharmaceuticals, Inc. until
its  merger  with  Warner-Lambert  Company.  He  is  presently a director of six
public  companies:  Akzo  Nobel  N.V., Chugai Pharmaceutical Co., Pharmaceutical
Product  Development,  Smith  Barney,  Teva  Pharmaceutical Industries, Ltd. and
Vasomedical, Inc.

     Enoch  Callaway,  M.D. is a founder and former  employee of the Company and
has served as a director of the  Company  since  September  1987.  Dr.  Callaway
previously  served as Chairman  of the Board of  Directors  of the Company  from
September 1987 to November 1990, as Co-Chairman of the Board of the Company from
November 1990 until August 1993, as Vice President of the Company from September
1988 until August 1993 and as Secretary of the Company from September 1988 until
September  1991. Dr.  Callaway has been Emeritus  Professor of Psychiatry at the
University  of  California,  San Francisco  since 1986,  where he also served as
Director of Research at the Langley  Porter  Psychiatric  Institute from 1959 to
1988. Dr. Callaway is a director of Candide, Inc. He holds A.B. and M.D. degrees
from Columbia University.

     Theodore L. Eliot, Jr. has served as a director of the Company since August
1992.  Previously,  he served as a director of the Company from  September  1988
until April 1992,  and as a Vice  President of the Company from  September  1988
until  September  1991.  Mr. Eliot retired from the United States  Department of
State in 1978 with the rank of  Ambassador.  He  served as 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  Fiberstars,  Inc., a publicly held company.  Mr. Eliot holds B.A.
and M.P.A. degrees from Harvard University.

     Abraham D. Sofaer has served as a director of the Company since April 1997.
Mr. Sofaer is the first George P. Shultz  Distinguished  Scholar & Senior Fellow
at the Hoover Institution,  Stanford University, appointed in 1994. 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 a federal judge in the Southern  District of New
York.  Mr.  Sofaer is  registered  as a qualified  arbitrator  with the American
Arbitration  Association and is a member of the National Panel of the Center for
Public  Resolution  of Disputes  (CPR),  a leading  organization  in the area of
resolution of disputes outside  litigation.  He has mediated 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. Mr. Sofaer
holds a B.A. degree from Yeshiva College and a L.L.B. from New York University.

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

     The  information   required  by  Item  405  of  Regulation  S-B  is  hereby
incorporated by reference to the Section entitled "Compliance with Section 16(a)
of the  Securities and Exchange Act of 1934" in the Company's  definitive  Proxy
Statement to be filed with the Securities and Exchange  Commission in connection
with the Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement").


                                      F-12
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

ITEM 10. EXECUTIVE COMPENSATION

     The information  required by this item is hereby  incorporated by reference
to the section entitled "Executive Compensation" in 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 included in Item 7 under Part II:

         Report of Ernst & Young, LLP Independent Auditors

         Balance Sheets at June 30, 1999 and 1998

         Statements  of  Operations  for each of the three  years in the  period
         ended June 30, 1999 and for the period from August 27, 1987 (inception)
         through June 30, 1999

         Statements  of  Stockholders'  Equity  (Deficit)  for each of the three
         years in the period  ended June 30, 1999 and for the period from August
         27, 1987 (inception) through June 30, 1999

         Statements  of Cash  Flows  for each of the three  years in the  period
         ended June 30, 1999 and for the period for August 27, 1987  (inception)
         through June 30, 1999

         Notes to Financial Statements

     (b) Reports on Form 8-K None.


                                      F-13
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

     (c) Exhibits

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

<CAPTION>
Exhibit
 Number     Description
 ------     -----------
<S>         <C>
   3.1      Restated Certificate of Incorporation of Registrant. (1)
   3.2      Bylaws of Registrant. (1)
   3.3      Certificate of Designations, Preferences and Rights of Series A Preferred Stock of
            Registrant.
   4.1      Form of Common Stock Certificate. (1)
   4.2      Form of Warrant issued to Van Kasper & Co. (1)
   4.3      Form of Warrant issued to Van Kasper & Co. and Gerard Klauer Mattison & Co.,
            LLC. (1)
   4.4      Form of Class A Warrant to Purchase Common Stock. (6)
   4.5      Form of Class B Warrant to Purchase Common Stock. (6)
   4.6      Form of Warrant to Purchase 25,000 Shares of Common Stock. (6)
   4.7      Form of Warrant to Purchase 100,000 Shares of Common Stock. (6)
   4.8      Form of Warrant to Purchase Common Stock.
  10.2      1993 Stock Plan of Neurobiological Technologies, Inc. (5)*
  10.4      Form of Indemnity Agreement between the Registrant and its directors and officers. (1)*
  10.5      Series B Preferred Stock Purchase and Exchange Agreement dated as of December 6,
            1993. (1)
  10.6      License Agreement between the Registrant and Research Corporation Technologies, Inc.
            dated May 30, 1990. (1)+
  10.7      License Agreement among the Registrant, Dynorphin Partnership, Nancy M. Lee and
            Horace C. Loh dated April 1, 1989, as amended. (1)+
  10.8      License Agreement between the Registrant and Immuno-Dynorphin Partnership dated
            October 1, 1990. (1)+
  10.9      License Agreement between the Registrant and des-Tyr Dynorphin Partnership dated
            December 20, 1992. (1)+
  10.10     License Agreement between the Registrant and DUZ Partnership dated December 20,
            1992. (1)+
  10.11     License Agreement between the Registrant and The Salk Institute for Biological Studies
            dated March 31, 1989, as amended. (1)+
  10.12     License Agreement between the Registrant and the Regents of the University of California
            dated June 13, 1990, as amended. (1)+
  10.13     Option Agreement between the Registrant and the Regents of the University of California
            dated December 1, 1992. (1)+
  10.14     Lease dated August 22, 1994 between Registrant and Marina Westshore Partners, a Calif.
            limited partnership. (2)
  10.15     License Agreement between the Registrant and Children's Hospital effective September 11,
            1995, as amended on March 11, 1996. (3)+
  10.16     Amended and Restated Neurobiological Technologies, Inc. Employee Stock Purchase
            Plan. (4)+
  10.17     Second Amendment to Lease between Registrant and Marina Westshore Partners, dated
            May 15, 1998. (6)
  10.18     Cooperative Agreement among Registrant, Merz + Co. GmbH & Co. and Children's
            Medical Center Corp., effective as of April 16, 1998. (6)++
  10.19     Payment Agreement between the Registrant and Children's Medical Center Corp., effective
            as of April 16, 1998. (6)++
  10.20     Convertible Loan Agreement between the Registrant and Merz dated August 3, 1999.
  10.21     Retention Agreement between the Registrant & Dr. Lisa Carr dated February 1, 1999.*
</TABLE>

                                      F-14


<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)


Exhibit
 Number    Description
 ------    -----------
  23.1     Consent of Ernst & Young LLP, Independent Auditors.
  24.1     Power of Attorney. (See page F-16)
  27       Financial Data Schedule.

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

(2)  This exhibit is filed as an exhibit to the  Registrant's  Annual  Report on
     Form 10-KSB for the year ended June 30, 1995 and is incorporated  herein by
     reference.

(3)  This exhibit is filed as an exhibit to the  Registrant's  Annual  Report on
     Form 10-KSB for the year ended June 30, 1996 and is incorporated  herein by
     reference.

(4)  This exhibit is filed as an exhibit to Registrant's  Registration Statement
     on Form S-8 (Registration  Number 333-18519) filed December 20, 1996 and is
     incorporated herein by reference.

(5)  This exhibit filed as an exhibit to the Registrant's Registration Statement
     on Form S-8  (Registration  Number  333-44097) filed January 1, 1998 and is
     incorporated herein by reference.

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

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

++   Confidential  treatment has been requested with respect to certain portions
     of these agreements.

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


                                      F-15
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

Neurobiological Technologies, Inc. (a development stage company) -- (Continued)

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 28, 1999                   /s/ Paul E. Freiman
Neurobiological Technologies, Inc.          -----------------------------------
                                            President, Chief Executive Officer



                               POWER OF ATTORNEY
                                (Exhibit 24.1)
<TABLE>

     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below  constitutes and appoints Paul E. Freiman and Stephen C. Ferruolo his true
and lawful  attorneys-in-fact  and agents,  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  attorneys-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 each of
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     September 28, 1999
---------------------------       (Principal Executive Officer and
        Paul E. Freiman           Principal Financial Officer and
                                  Principal Accounting Officer) and
                                  Director

   /s/ Abraham E. Cohen           Chairman of the Board                  September 28, 1999
---------------------------
       Abraham E. Cohen

   /s/ Enoch Callaway             Director                               September 28, 1999
---------------------------
       Enoch Callaway

 /s/ Theodore L. Eliot, Jr.       Director                               September 28, 1999
---------------------------
     Theodore L. Eliot, Jr.

   /s/ Abraham D. Sofaer          Director                               September 28, 1999
---------------------------
       Abraham D. Sofaer

    /s/ John B. Stuppin           Director                               September 28, 1999
---------------------------
        John B. Stuppin
</TABLE>

                                      F-16