This discussion is intended to further the reader's understanding of the consolidated financial condition and results of operations of Neurogen Corporation ("Neurogen," "the Company," "we," "us," "our"). It should be read in conjunction with the financial statements in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2008.

Note Regarding Forward-looking Statements

Statements that are not historical facts, including statements about the our confidence and strategies, the status of various product development programs, the opportunities to sell assets or the Company, including the Merger, the sufficiency of cash to fund future operations and our expectations concerning our development compounds, drug development technologies and opportunities in the pharmaceutical marketplace are "forward-looking statements" within the meaning of the Private Securities Litigations Reform Act of 1995 that involve risks and uncertainties and are not guarantees of future performance. These risks include, but are not limited to, the risk that the Merger may not close, including the risk that the required Neurogen stockholder approval for the Merger and related transactions may not be obtained, the possibility that expected synergies and cost savings will not be obtained or that litigation may delay the Merger, difficulties or delays in development, testing, regulatory approval, production and marketing of any of our drug candidates, collaborations and alliances, acquisitions or business combinations, the failure to attract or retain key personnel, any unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates which could slow or prevent product development efforts, competition within our anticipated product markets, our dependence on corporate partners with respect to research and development funding, regulatory filings and manufacturing and marketing expertise, the uncertainty of product development in the pharmaceutical industry, inability to obtain sufficient funds through future collaborative arrangements, equity or debt financings or other sources to continue the operation of our business, risk that patents and confidentiality agreements will not adequately protect our intellectual property or trade secrets, dependence upon third parties for the manufacture of potential products, inexperience in manufacturing and lack of internal manufacturing capabilities, dependence on third parties to market potential products, lack of sales and marketing capabilities, potential unavailability or inadequacy of medical insurance or other third-party reimbursement for the cost of purchases of our products our recent operational restructuring and other risks detailed our Securities and

Exchange Commission filings, including our Annual Report on Form 10-K for the year ended December 31, 2008, each of which could adversely affect our business and the accuracy of the forward-looking statements contained herein. Any new material changes in risk factors since the Annual Report on Form 10-K for the year ended December 31, 2008 are discussed further in Part II, Item 1A.

Overview

On August 23, 2009, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Ligand Pharmaceuticals Incorporated ("Ligand") and a special purpose subsidiary of Ligand ("Merger Sub"), as amended by Amendment to the Merger Agreement dated September 18, 2009 and Amendment No. 2 to the Merger Agreement dated November 2, 2009. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Neurogen, with Neurogen continuing as the surviving entity (the "Merger"). We will no longer be a standalone entity at that time but will be a wholly-owned subsidiary of Ligand. We currently expect the merger transaction to close in the fourth quarter of 2009, subject to approval by our stockholders, certain regulatory clearances and satisfaction of other customary closing conditions (see Borrowings and Contractual Obligations and Footnote 3 to our condensed consolidated financial statements).

Since our inception in September 1987, we historically have been engaged in the discovery and development of drugs. In May 2009, we announced that we were pursuing strategic options, including a sale of the Company or its major assets, and that we were taking additional steps to conserve capital while we pursue these options. In connection with this announcement, we suspended the enrollment of patients in the only two drug development programs that were active at that time. We have not derived any revenue from product sales. If we resumed the development of our drug candidates, we expect to continue to incur significant losses prior to deriving any such product revenues or earnings. Operating revenues historically have come from multiple prior collaborations and license agreements under which we shared our technology and rights to our drug candidates with large pharmaceutical companies. However, proceeds of prior collaborations were not sufficient to sustain the drug research capabilities that were the source of these collaborations and we discontinued our research operations in 2008. The Company has considered and will continue to consider a liquidation of the Company if a suitable sale of the Company or its assets is not achieved. In the first nine months of 2009, we have also recorded operating income for the sales of certain non-core patent estates.

In the fourth quarter, Neurogen announced its analysis of results from the previously suspended Phase 2 study of aplindore in Restless Legs Syndrome (RLS). The Phase 2 RLS study was a randomized, placebo-controlled, double-blind, multi-center, parallel-group study designed to assess the efficacy, safety and tolerability of multiple doses of aplindore compared to placebo. The 5 treatment groups in the study were aplindore 0.05 mg, 0.1 mg, 0.25 mg, 0.5 mg and placebo, and subjects received a total of 4 weeks of treatment. The lowest doses (0.05 mg and 0.1 mg) were not titrated, while the higher doses were titrated over 4 days (0.25 mg) and 7 days (0.5 mg). The 0.5 mg treatment group was discontinued after approximately 2 months of enrollment. Enrollment of patients in the study was suspended after randomization of 60% of the planned 195 subjects. The primary efficacy endpoint was the mean change in the International Restless Legs Syndrome Rating Scale (IRLS) from baseline. In this study, aplindore achieved statistically significant results versus placebo overall and at the 0.05 mg and 0.25 mg doses, but not at the 0.1 mg dose. In this study, aplindore was well tolerated at the lower doses.

The study enrolled 118 subjects with moderate-to-severe RLS. The Modified Intent to Treat (mITT) population was 116 subjects with 14 early terminations, of which 6 were due to aplindore-related adverse events. Eighteen subjects received the discontinued 0.5 mg dose. These subjects were not included in the efficacy analysis, but were included in the safety population. The primary outcome (IRLS) showed a statistically significant improvement overall (ANCOVA p=0.0355) with statistically significant pairwise comparisons to placebo for the 0.05 mg dose (-5.8; p=0.0168) and the 0.25 mg dose (-6.3; p=0.0097). The 0.1 mg dose showed a lower numeric improvement over placebo (-3.1; p=0.2025), which did not reach statistical significance, resulting in a "V"-shaped dose-response curve. The most common adverse events included nausea, somnolence, headache, and fatigue. The incidence of these events in the non-titrated doses was considered comparable to or higher than those reported with the dopamine full agonists currently on the market. In a single subject there were two Serious Adverse Events ("SAE's"). Neither SAE was considered to be drug-related.

The Company has concluded that while it saw indications of efficacy in the RLS study of aplindore, analysis of both efficacy and tolerability - when considered in the context of observations from similar clinical studies with drugs currently on the market - suggest the partial agonist profile of aplindore would not be differentiated from the full agonists which either are or will be generic by the time aplindore could be launched.

With respect to the Phase 2 study of aplindore in Parkinson's disease suspended in the second quarter of 2009, due to the fact that at the time of suspending enrollment in that study only nine of an expected 169 Parkinson's patients were enrolled, no analysis of that partial study will be performed.

We have not derived any revenue from product sales to date. If we were to resume development of our drug candidates, we would expect to incur substantial and increasing losses for at least the next several years and would need substantial additional financing to obtain regulatory approvals, fund operating losses, and if deemed appropriate, establish manufacturing and sales and marketing capabilities, which we would seek to raise through equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing. In such scenario, there could be no assurance that such funds will be available on terms favorable to us, if at all. There could be no assurance that we would successfully complete our research and development, obtain adequate patent protection for our technology, obtain necessary government regulatory approval for drug candidates we develop or that any approved drug candidates would be commercially viable. In addition, we may not be profitable even if we succeed in developing and commercializing any of our drug candidates. These circumstances raise substantial doubt about our ability to continue as a going concern. Additionally, the Report of the Independent Registered Public Accounting Firm to our audited financial statements for the period ended December 31, 2008 filed in the Annual Report on Form 10-K indicates that there are a number of factors that raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we became unable to continue as a going concern or were unable to complete a strategic transaction, we would have to liquidate our assets and might receive less than the value at which those assets are carried on the consolidated financial statements.

As mentioned above, we announced during the second quarter of 2009 that we had suspended the enrollment of patients in ongoing Phase 2 studies for Parkinson's disease and RLS. The costs incurred since this announcement have been associated with the continuation of previously enrolled subjects in the clinical studies. During the first nine months of 2009, we further reduced our development and administrative staff by 21 employees down to six full-time employees while we focus on strategic options.

Results of Operations

Results of operations may vary from period to period depending on numerous factors, including the timing of income earned under existing or future collaborative agreements, the progress of our independent and partnered research and development projects, the size of our staff and the level of preclinical and clinical development spending on drug candidates in unpartnered programs.

Three Months Ended September 30, 2009 and 2008

Operating revenues. We had no operating revenues for the three months ended September 30, 2009 and 2008.

We do not anticipate any future revenues at this time other than potential income upon the sale or partnership, if any, of additional assets; however, we are eligible to receive potential future milestone payments and royalties under our agreement with Merck upon Merck's achievement of certain development milestones.

Research and development expenses. We ceased research and development activities in the second quarter of 2009; all remaining costs are a result of wrapping up our prior activities. Research and development expenses were $1.0 million and $6.3 million for the three months ended September 30, 2009 and 2008, respectively. The $5.3 million decrease in research and development costs was primarily due to a $2.4 million reduction in outsourced clinical trials. The reduction is attributable to a $0.9 million decrease in the insomnia program that we are no longer pursuing as well as a $1.5 million decrease for the Parkinson's disease and RLS programs as a result of the suspension of enrollment of patients in May 2009. Additionally, we had an overall decrease of $1.3 million in outsourced non-clinical development expenses, such as toxicology studies, chemical manufacturing, formulations and stability studies for all of our unpartnered programs. The reduction of internal research and development expenses of $1.7 million is primarily associated with a decrease in salary and benefits expenses of $0.9 million and facilities and utilities expenses of $0.4 million due to the restructuring plans that occurred in 2009 and 2008. Salary and benefits expenses associated with the 2009 and 2008 restructurings are excluded from the table below and discussed further in Restructuring of workforce. (See also Footnote 5 to our condensed consolidated financial

statements.)

                                               Three Months Ended September 30,
                                                   2009                2008          Change
                                                        (in thousands)
Outsourced clinical expenses
Insomnia and anxiety                           $          -         $       879     $    (879 )
Parkinson's disease and RLS                             486               1,982        (1,496 )
Total outsourced clinical expenses                      486               2,861        (2,375 )
Outsourced non-clinical development expenses             15               1,289        (1,274 )
Internal expenses
Salary and benefits                                     225               1,145          (920 )
Supplies and research                                    42                 232          (190 )
Computer and office supplies                             27                 100           (73 )
Facilities and utilities                                 47                 456          (409 )
Travel and other costs                                  117                 194           (77 )
Total internal expenses                                 458               2,127        (1,669 )

Total research and development expenses        $        959         $     6,277     $  (5,318 )

Unless currently unpartnered programs are partnered, we retain all rights to our programs, and we expect that development costs would increase as each program progresses if we were to resume any research and development efforts.

General and administrative expenses. General and administrative expenses were $1.6 million and $2.0 million for the three months ended September 30, 2009 and 2008, respectively. The decrease was primarily a result of a reduction in salaries and benefits expense due to a smaller staff in 2009 compared to 2008.

                                                   Three Months Ended September 30,
                                                     2009                     2008             Change
                                                            (in thousands)
Salary and benefits                            $            430         $            873     $     (443 )
Patents                                                      95                      228           (133 )
Facilities and utilities                                    154                      128             26
Administrative                                              794                      612            182
Travel, supplies and other costs                             94                      146            (52 )

Total general and administrative expenses      $          1,567         $          1,987     $     (420 )

Asset impairment charges. There was an asset impairment credit of $0.4 million for the three months ended September 30, 2009 compared to asset impairment charges of $3.2 million for the three months ended September 30, 2008. The 2009 impairment credit was a result of the signed agreement to sell the three properties held for sale for an estimated net sales price of $3.1 million. The 2008 impairment charge was the initial impairment based on market conditions and realtor guidance when only two of our three properties were listed for sale.

Gain on warrants to purchase common stock. In the third quarter of 2008, we recorded a non-recurring gain on warrants to purchase common stock of $4.7 million in connection with our April 2008 financing. There was no related gain in the same period of 2009. The financing is discussed further in Liquidity and Capital Resources.

Other income, net of interest expense. Other income, net of interest expense, was approximately $0.2 million for the three months ended September 30, 2009, compared to $0.1 million for the same period in 2008. The increase is due to a reduction in interest payments on debt obligations after the August 2009 payoff of our Webster mortgage.

Net loss attributable to common stockholders. The Company recognized a net loss attributable to common stockholders of $1.9 million for the three months ended September 30, 2009 compared to $31.7 million for the same period in 2008. The $29.8 million decrease in net loss was primarily a result of the recognition of deemed preferred dividends offset by a gain on warrants to purchase common stock, both of which were included in the three months ended September 30, 2008; there was no similar gain or dividends in the same period in 2009. Additionally, there was a significant decrease in operating expenses for the 2009 period.

Nine Months Ended September 30, 2009 and 2008

Operating revenues. We had $2.7 million in operating revenues for the nine months ended September 30, 2009 compared to no operating revenues for the same period in 2008. The increase is a result of two patent sales in the second quarter of 2009. The first was the sale of a non-core patent estate for $0.4 million to a global pharmaceutical company. The second was the sale of our C5a patent estate to a large pharmaceutical company for $2.3 million. Payments of the proceeds from these sales were subject to customary conditions relating to delivery of the compounds and related information. Neurogen satisfied all obligations under the sales, received all proceeds, and recognized income in the second quarter of 2009.

We have no future revenues anticipated at this time other than potential revenues upon the sale or partnership, if any, of additional assets; however, we are eligible to receive potential future milestone payments and royalties from the Merck Collaboration upon their achievement of certain development milestones.

Research and development expenses. We ceased research and development activities in the second quarter of 2009; all remaining costs are a result of wrapping up our prior activities. Research and development expenses were $7.0 million and $26.3 million for the nine months ended September 30, 2009 and 2008, respectively. The $19.3 million decrease in research and development costs was primarily due to a reduction in outsourced clinical trials. The reduction is attributable to a $3.3 million decrease in costs for the insomnia and anxiety program and a $0.1 million decrease in costs for the obesity program, both of which we are no longer pursuing, as well as a $3.5 million decrease for the Parkinson's disease and RLS programs as a result of our suspension of enrollment of patients in May 2009. Outsourced non-clinical development expenses, such as toxicology studies, chemical manufacturing, formulations and stability studies for all of our unpartnered programs decreased by $5.9 million in 2009 compared to the same period in 2008 primarily as a result of our elimination of the insomnia, anxiety and obesity programs referred to above. Finally, there was a reduction in internal research and development work as a result of the restructuring plans that occurred in 2008, which were of greater magnitude than restructurings completed in 2009. Salary and benefits expenses associated with the 2009 and 2008 restructurings are excluded from the table below and discussed further in Restructuring of workforce. Additionally, see the discussion below in General and administrative expenses for an explanation of how the allocation of facility expenses shifted from research and development expenses to general and administrative expenses once the facilities were classified as held for sale.

                                                 Nine Months Ended September 30,
                                                    2009                  2008          Change
                                                         (in thousands)
Outsourced clinical expenses
Insomnia and anxiety                           $             -         $     3,307     $  (3,307 )
Obesity                                                      -                 138          (138 )
Parkinson's disease and RLS                              3,057               6,566        (3,509 )
Total outsourced clinical expenses                       3,057              10,011        (6,954 )
Outsourced non-clinical development expenses               815               6,752        (5,937 )
Internal expenses
Salary and benefits                                      2,217               5,328        (3,111 )
Supplies and research                                      298               1,162          (864 )
Computer and office supplies                                97                 335          (238 )
Facilities and utilities                                   288               1,915        (1,627 )
Travel and other costs                                     238                 823          (585 )
Total internal expenses                                  3,138               9,563        (6,425 )

Total research and development expenses        $         7,010         $    26,326     $ (19,316 )

Unless currently unpartnered programs are partnered, we retain all rights to our programs, and we expect that development costs would increase as each program progresses if we were to resume any research and development efforts in the future.

                                                    Nine Months Ended September 30,
                                                     2009                     2008             Change
                                                            (in thousands)
Salary and benefits                            $          1,721         $          2,074     $     (353 )
Patents                                                     320                      469           (149 )
Facilities and utilities                                    591                      429            162
Administrative                                            1,771                    1,519            252
Travel, supplies and other costs                            478                      415             63

Total general and administrative expenses      $          4,881         $          4,906     $      (25 )

Asset impairment charges. Asset impairment charges were $8.8 million and $10.4 million for the nine months ended September 30, 2009 and 2008. In the first quarter of 2009, market developments caused us to change our business plan and assess our assets held for use for impairment. At the time of the assessment, the held for use long-lived assets consisted primarily of a building currently occupied by the Company, as well as certain laboratory and office equipment. As a result of such assessment, we determined that the carrying value of these long-lived assets exceeded the expected future undiscounted cash flows. Accordingly, we recognized a $4.8 million impairment loss in the first quarter of 2009, based on the difference between the carrying value of these long-lived assets and the estimated fair value of $2.1 million. Additionally, we recorded an impairment charge of $0.4 million and $0.1 million for buildings and equipment held for sale, respectively. In the second quarter of 2009, we placed substantially all of our remaining property, which had been previously considered held for use, up for sale and recorded a further impairment charge on all land and buildings of $3.9 million based on an offer of $3.1 million from a potential buyer of our property. In the third quarter of 2009, we recorded a credit of $0.4 million as a result of the signed agreement to sell the three properties held for sale. The $3.1 million net carrying value of the assets held for sale as of September 30, 2009, represents our expected selling price of $3.5 million less direct costs to sell. The 2008 impairment charge was based on the two impairment assessments of market conditions and realtor guidance conducted in connection with the listing of two of our three properties for sale.

Restructuring of workforce. Restructuring of workforce charges were $2.7 million and $5.1 million for the nine months ended September 30, 2009 and 2008. The restructuring charge in 2009 includes reductions in workforce in which we eliminated 21 employee positions inclusive of both administrative and research functions, representing approximately 71% of our total workforce at that time. Expenses associated with these workforce reductions were $1.3 million. These expenses related primarily to employee separation costs as well as outplacement and administrative fees, which will be paid prior to the conclusion of the first quarter of 2010. Additionally, we recognized $1.4 million in future severance payments, which are included in the total remaining $1.5 million future severance commitment, accrued for on the balance sheet as of September 30, 2009, since payout of these amounts became probable for the remaining six active, full-time employees. The restructuring charge in 2008 is associated with the reductions in workforce announced on February 5, 2008 and April 8, 2008. As part of these plans, we eliminated approximately 115 employee . . .