10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-18311

NEUROGEN CORPORATION

(Exact name of registrant as specified in its charter) 

Delaware (State or other jurisdiction of incorporation or organization)	22-2845714 (I.R.S. Employer Identification No.)
35 Northeast Industrial Road Branford, Connecticut (Address of principal executive offices)	06405 (Zip Code)

(203) 488-8201

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]Accelerated filer [X]Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of May 9, 2007 the registrant had 41,858,932 shares of Common Stock outstanding.

FORM 10-Q

For the First Quarter Ended

March 31, 2007

Table of Contents

	PAGE
PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets at March 31, 2007 and December 31, 2006	3
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2007 and 2006	4
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2007 and 2006	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures about Market Risk	16
Item 4. Controls and Procedures	16
PART II - OTHER INFORMATION	17
Item 1. Legal Proceedings	17
Item 1A. Risk Factors	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3. Defaults upon Senior Securities	17
Item 4. Submission of Matters to a Vote of Security Holders	17
Item 5. Other Information	17
Item 6. Exhibits	17
Signatures	18

Page 2

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

NEUROGEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(unaudited)
	March 31,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	53,006		$	56,170
Marketable securities		36,758			51,401
Receivables from corporate partners		111			209
Other current assets, net		3,024			2,813
Total current assets		92,899			110,593
Property, plant and equipment:
Land, building and improvements		31,688			31,682
Equipment and furniture		18,578			18,509
Construction in progress		85			85
		50,351			50,276
Less accumulated depreciation and amortization		23,553			23,191
Property, plant and equipment, net		26,798			27,085
Other assets, net		58			61
Total assets	$	119,755		$	137,739
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	10,353		$	8,481
Unearned revenue from corporate partners, current portion		7,520			7,520
Loans payable, current portion		1,460			1,454
Total current liabilities		19,333			17,455
Unearned revenue from corporate partners, net of current portion		5,063			6,768
Loans payable, net of current portion		8,609			8,976
Total liabilities		33,005			33,199
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred stock, par value $0.025 per share
Authorized 2,000 shares; none issued		-			-
Common stock, par value $0.025 per share
Authorized 50,000 shares; issued and outstanding 41,807 and 41,774
shares at March 31, 2007 and December 31, 2006, respectively		1,045			1,044
Additional paid-in capital		338,061			336,795
Accumulated deficit		(251,722	)		(232,442	)
Accumulated other comprehensive income		(634	)		(857	)
Total stockholders' equity		86,750			104,540
Total liabilities and stockholders' equity	$	119,755		$	137,739
See accompanying notes to condensed consolidated financial statements

Page 3

NEUROGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(unaudited)
	Three Months Ended March 31, 2007			Three Months Ended March 31, 2006
Operating revenues:
License fees	$1,365			$1,115
Research and development		1,040			2,700
Total operating revenues		2,405			3,815
Operating expenses:
Research and development		18,923			15,829
General and administrative		3,757			3,018
Total operating expenses		22,680			18,847
Operating loss		(20,275	)		(15,032	)
Other income (expense):
Investment and other income		1,081			898
Interest expense		(197	)		(209	)
Total other income, net		884			689
Loss before income taxes		(19,391	)		(14,343	)
Income tax benefit		111			-
Net loss	$	(19,280	)	$	(14,343	)
Basic and diluted loss per share	$	(0.46	)	$	(0.42	)
Shares used in calculation of loss per share:
Basic and diluted		41,741			34,449
See accompanying notes to condensed consolidated financial statements.

Page 4

NEUROGEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
	Three Months Ended March 31, 2007			Three Months Ended March 31, 2006
Cash flows from operating activities:
Net loss	$	(19,280	)	$	(14,343	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		609			586
Amortization of investment premium/discount		55			166
Non-cash compensation expense		1,073			1,474
401(k) match expense		175			172
Changes in operating assets and liabilities:
Decrease (increase) in receivables from corporate partners		98			(27	)
(Increase) decrease in other assets, net		(208	)		512
Increase in accounts payable and accrued expenses		1,872			986
Decrease in unearned revenue from corporate partners		(1,705	)		(1,815	)
Net cash used in operating activities		(17,311	)		(12,289	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(322	)		(363	)
Maturities and sales of marketable securities		14,811			19,245
Net cash provided by investing activities		14,489			18,882
Cash flows from financing activities:
Principal payments under loans payable		(361	)		(356	)
Proceeds from employee stock options		19			11
Net cash used in financing activities		(342	)		(345	)
Net (decrease) increase in cash and cash equivalents		(3,164	)		6,248
Cash and cash equivalents at beginning of year		56,170			11,241
Cash and cash equivalents at end of period	$	53,006		$	17,489
See accompanying notes to condensed consolidated financial statements

Page 5

NEUROGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(UNAUDITED)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements have been prepared from the books and records of Neurogen Corporation (“Neurogen” or the “Company”) in accordance with generally accepted accounting principles for interim financial information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company's financial position and operations have been included. The condensed consolidated balance sheet at December 31, 2006 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the significant accounting policies described in Note 1, for the year ended December 31, 2006, included in the Company's Annual Report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for the full fiscal year.

The Company is subject to risks similar to other companies in the industry, including, but not limited to, the uncertainty of discovery and development of new drugs, the need for additional funding, dependence on key personnel, limited operating history, risks related to biotechnology, uncertainty of regulatory approval, and protection of proprietary technology.  The Company expects to incur substantial expenditures in the foreseeable future for the research, development and commercialization of its potential products.  As a result, the Company, may, from time to time, as warranted by its operating and strategic requirements, augment its cash balance through financing transactions, including the issuance of debt or equity securities and further corporate alliances.

(2) COMPREHENSIVE LOSS

Comprehensive loss for the three-month periods ended March 31, 2007 and 2006 was $19,057,000 and $14,386,000, respectively. The differences between net loss and comprehensive loss are due to changes in the net unrealized gain or loss on marketable securities.

(3) MARKETABLE SECURITIES

The following tables summarize the Company’s marketable securities (in thousands):

	March 31, 2007
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
U.S. government notes	$	6,497	$	-	$	(100	)	$	6,397
Corporate notes and bonds		30,895		-		(534	)		30,361
Total	$	37,392	$	-	$	(634	)	$	36,758

	December 31, 2006
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
U.S. government notes	$	11,997	$	-	$	(152	)	$	11,845
Corporate notes and bonds		40,261		-		(705	)		39,556
Total	$	52,258	$	-	$	(857	)	$	51,401

Page 6

The following table summarizes investment maturities at March 31, 2007 (in thousands):

	Amortized Cost		Fair Value
Less than one year	$	15,575	$	15,391
Due in 1 to 2 years		21,817		21,367
Total	$	37,392	$	36,758

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2007 (in thousands):

	Less than 12 Months				12 Months or More					Total
Descriptions of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
US Government Obligations and Direct Obligations of U.S.	$	-	$	-	$	6,397	$	(100	)	$	6,397	$	(100	)
Asset Backed Securities		-		-		2,773		(51	)		2,773		(51	)
Corporate Bonds		-		-		27,588		(483	)		27,588		(483	)
Total	$	-	$	-	$	36,758	$	(634	)	$	36,758	$	(634	)

 For the investments in all three categories shown in the above table (comprising 22 securities in aggregate), the unrealized losses were caused primarily by interest rate increases.

Based on the contractual terms and credit quality of these securities, and current market conditions, the Company does not consider it probable that any of them will be settled by the issuer at a price less than the amortized cost of the investments. Since the Company believes it has the ability and intends to hold these investments until a recovery of fair value, which may be at maturity, and because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

(4) STOCK-BASED COMPENSATION

The Company has certain stock incentive plans under which it has awarded incentive and non-qualified stock options and restricted stock. Stock options are generally granted at fair market value at the date of grant, with vesting schedules that range from immediate vesting (typically in the case of grants to consultants) to four or five years (typically in the case of grants to employees), and expire up to ten years after grant. Under all plans at March 31, 2007, there were 6,691,321 shares reserved for future issuance (of which 6,395,071 are reserved for options outstanding and 296,250 are available for future grant as options or restricted stock). In addition, 57,500 shares of unvested restricted stock issued from the plans remain outstanding as of March 31, 2007.

Stock Options

The following table presents the combined activity of the Company’s stock option plans (excluding unvested restricted stock of 57,500 shares) for the three month period ended March 31, 2007:

Page 7

	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1	5,442,845	$11.96
Granted	993,500	6.20
Exercised	(4,991)	3.87
Canceled	(36,283)	10.21
Outstanding at March 31	6,395,071	$11.08	5.1	$1,768,589
Options exercisable at March 31	3,777,620	$13.95	3.6	$1,003,422

For the three months ended March 31, 2007 and 2006, the Company recorded $1,046,000 and $1,306,000, respectively, of expense for employee options as a result of SFAS No. 123R. The Company adopted SFAS No. 123R in the first quarter of 2006. No income tax benefit has been recorded as the Company has recorded a full valuation allowance, and management has concluded that it is not likely that the net deferred tax asset will be realized.

Option grants to employees that allow for immediate vesting due to retirement are expensed over the period from grant date to retirement eligibility date. Options granted to Directors which allow for immediate vesting upon termination of service are expensed immediately.

The estimated weighted average fair value at the date of grant for options granted in the three months ended March 31, 2007 and 2006 was $4.08 and $4.27, respectively, using the Black-Scholes method with the following weighted average assumptions:

	Three Months Ended March 31, 2007	Three Months Ended March 31, 2006
Expected life	5.5-6.5 years	5.1 years
Risk-free interest rate	4.5%-4.8%	4.7%
Volatility	72%-73%	75%
Expected dividend yield	0%	0%

The compensation cost related to unvested options at March 31, 2007 to be recognized in the future is approximately $6,913,000, which will be recognized as expense over the remaining vesting period of 1.3 years at March 31, 2007.

Non-Cash Stock Compensation Expense

The composition of non-cash stock compensation expense for the three month periods ended March 31 is summarized as follows (in thousands):

	2007		2006
Restricted stock (net of cancellations)	$	27	$	147
FAS 123R expense		1,046		1,306
Total non-cash stock compensation expense	$	1,073	$	1,453

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(5) NET LOSS PER COMMON SHARE

The Company computes and presents net loss per common share in accordance with SFAS No. 128, “Earnings Per Share.” Basic loss per share reflects no dilution for common equivalent shares and is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and unvested restricted stock and are calculated using the treasury stock method. Since the Company is in a loss position for all periods presented, the effect of potential common equivalent shares would have been anti-dilutive; therefore, the calculation of diluted loss per share does not consider the effect of stock options and unvested restricted stock.

Options and unvested restricted stock outstanding as of March 31, 2007 and 2006 of 6,452,571 and 5,472,386, respectively, represented all potentially dilutive securities that were excluded for the calculation of diluted loss per share.

(6) COMMITMENTS AND CONTINGENCIES

In the second quarter of 2004, the Company was informed that the Connecticut Department of Environmental Protection (the "DEP") is considering taking action against the Company as a result of incidents where the Company's wastewater monitoring systems indicated that the wastewater pH limits of the Company's wastewater discharge permit had been exceeded. However, no formal communication has been received from the DEP as of the date of this filing. The actions the DEP could take include, but are not limited to, fines, penalties, remedial action and future additional monitoring activities. At this time, the Company does not have enough information to enable it to estimate the cost, if any, of the DEP's actions and, accordingly, no amounts have been recorded in the accompanying financial statements for this matter. The Company is not aware of any negative environmental impacts resulting from these incidents but continues to carefully monitor its wastewater neutralization systems in an effort to prevent any further incidents and maintain compliance with its permit conditions.

(7) INCOME TAXES

As of January 1, 2007, the Company adopted Financial Interpretation Number (FIN) 48, an interpretation of SFAS No. 9, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements.

The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Neurogen has never paid federal or state income taxes due to its history of net operating losses. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of January 1 and March 31, 2007, the Company had no accruals for interest or penalties related to income tax matters.

The Company believes that only one tax matter has uncertainty and it relates to an anticipated refund from the state of Connecticut. Connecticut tax law provisions allow certain companies to obtain cash refunds at an exchange rate of 65% of their research and development credits, in exchange for foregoing the carryforward of these credits into future tax years.

The Company believes that it is entitled to a larger cash refund from the state for prior years. In the second quarter of 2006, the Company filed five complaints in Superior Court (for the tax years 2000-2004) seeking cash refunds of certain unused research and development tax credits that the Company alleges were wrongfully disallowed by the State of Connecticut. All five cases are entitled Neurogen Corporation v. Pam Law, Commissioner of Revenue Services of the State of Connecticut and are filed in Superior Court, Tax Session, for the State of Connecticut sitting in the Judicial District of New Britain and have case numbers HHB-CV-06-4010825S HAS, HHB-CV-06-4010826S HAS, HHB-CV-06-4010827S HAS, HHB-CV-06-4010828S HAS, and HHB-CV-06-4010882S HAS. Other Connecticut biotechnology companies also filed similar complaints. The plaintiffs and the state have filed cross-motions for Partial Summary Judgment, and a decision on those motions is expected later this year.

Although the Company is confident it will ultimately prevail in its claims, because of the uncertainties of litigation, at this time, the Company has not recognized this potential tax benefit in the Statement of Operations and has no liabilities related to it.

Page 9

As of March 31, 2007, the Company is subject to U.S. federal and state income tax in Connecticut. Years subject to audit are years in which unused net operating losses were generated that remain open by the statute of limitation for examinations. Tax years from 1992 forward remain open to examination by U.S. federal authorities, and tax years from 1998 forward remain open to examination by state authorities.

(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that its adoption in the first quarter of 2008 will have a material impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which includes an amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that its adoption in the first quarter of 2008 will have a material impact on the Company’s financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception in September 1987, Neurogen has been engaged in the discovery and development of drugs. The Company has not derived any revenue from product sales and has incurred, and expects to continue to incur, significant losses in most years prior to deriving any such product revenues or earnings. Revenues to date have come from six collaborative research agreements, one license agreement and one technology transfer agreement.

During the first quarter of 2007, the Company incurred significant expenses in conducting clinical trials and other development activities, such as formulation testing, and toxicology studies, for NG2-73, the Company’s lead compound in its insomnia program, and NGD-4715, the Company’s lead compound in its obesity program. NG2-73, currently in Phase 2 testing, is the Company’s most advanced drug candidate. If NG2-73 continues to progress in further Phase 2 and Phase 3 studies without the Company partnering the program, clinical trial and other development expenses related to NG2-73 will continue to increase. Development costs for the insomnia program, as well as costs for the Company’s other unpartnered programs, may continue to increase in 2007. The actual amount of these development expenses will derive from the level of development activities being conducted and the level of these activities is contingent on the results of ongoing studies. Research and development expenses accounted for 83% of total expenses in the three month period ended March 31, 2007 compared to 84% for the same period ended March 31, 2006.

Collaborative agreements have been and are expected to continue to be a source of funding for the Company. Such arrangements not only drive current revenue (through the recognition of upfront and subsequent license fees, research funding and potential milestone payments), but over the longer term these arrangements may have a significant impact on potential future product revenue and earnings in the form of royalties if the agreements result in successful drug development and commercialization.

The initiation, expiration and specific terms of such agreements have contributed to, and will continue to cause, significant fluctuations in the Company’s recognized revenues and losses. The Company will continue to seek early stage partnerships for some research and development programs, while it selectively retains the rights to other drug programs to more advanced stages before considering partnership arrangements. The decision of whether and when to partner a program is based on an analysis of development risk, resources required to complete each regulatory stage, and the amount of immediate versus long term return that could be extracted at each stage of development.

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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 research agreements, the progress of the Company's independent and partnered research and development projects, the size of the Company's staff and the level of preclinical and clinical development spending on drug candidates in unpartnered programs. Neurogen believes its research and development costs may continue to increase over the next several years as its drug development programs progress. In addition, general and administrative expenses would be expected to increase to support any expanded research and development activities.

Three Months Ended March 31, 2007 and 2006

The Company's operating revenues for the three months ended March 31, 2007 decreased $1.4 million to $2.4 million from $3.8 million for the same period in 2006. The three months ended March 31, 2006 include a $2.0 million substantive milestone from Merck received and recognized in February 2006. The three months ended March 31, 2007 include $0.3 million of a $3.0 million nonsubstantive milestone and $0.3 million of an anniversary license payment received from Merck in October and December 2006, respectively. The nonsubstantive milestone and the license payment are being recognized over the remaining contract period.

Research and development expenses for the three months ended March 31, 2007 were $18.9 million compared to $15.8 million for the same period in 2006. The $3.1 million or 20% increase was due primarily to a $3.8 million increase in the Company’s outsourced clinical expenses. In the Company’s insomnia program, outsourced clinical expenses increased in 2007 by $3.2 million from $3.9 million to $7.1 million. In addition, outsourced clinical expenses in the Company’s obesity program increased by $0.6 million in 2007 for a Phase 1 clinical trial on the Company’s lead compound, NGD-4715. The increase in outsourced clinical expenses was offset by a decrease of $0.3 million from $3.0 million in 2006 to $2.7 million in 2007 for outsourced development expenses such as toxicology studies, chemical manufacturing and formulations for all of the Company’s unpartnered programs. Finally, salary and benefits expense decreased by $0.4 million to $5.4 million, which included a $0.3 million decrease in non-cash stock compensation.

The Company expenses all research and development costs as incurred. While the Company maintains a system to record the level of staff time spent on each of its research and development projects, it does not maintain a historical cost accounting system with sufficient accuracy to reliably estimate its research and development costs on a specific project-by-project basis. A significant portion of the Company's research and development expenses (such as laboratory supplies, travel, information systems and services and facilities costs) benefit multiple projects and are not individually tracked to a specific project. Further, the Company's staff timekeeping system does not account for differences in compensation costs between lower level technicians and more senior scientists.

General and administrative expenses for the three months ended March 31, 2007 were $3.8 million compared to $3.0 million for the same period in 2006. The $0.8 million or 27% increase in expenses was due primarily to increases in patent, legal, market research, consulting and general supplies.

Other income, net of interest expense, was $0.9 million for the three months ended March 31, 2007 compared to $0.7 million for the same period in 2006. The $0.2 million or 28% increase in 2007 was primarily due to an increase in interest income, lower bank fees and the amortization of premiums and discounts on investments resulting from a lower average balance of marketable securities in 2007 compared to 2006.

For the three months ended March 31, 2007, the Company recorded an income tax benefit of $0.1 million for the sale of R&D credits generated during this period to the State of Connecticut for cash. Prior to the fourth quarter of 2006, the Company had recorded the sale of the credits for the prior year at the time of filing the previous year’s tax return, typically in September of the following year. However, in the fourth quarter of 2006, the Company determined that it is more likely than not that it will continue to sell the credits to the state for cash, and as a result of this change in estimate, the Company recorded the sale of credits generated for 2006 in the fourth quarter of 2006 as well as the sale of credits generated for 2005.  Since this change in estimate did not occur until the fourth quarter of 2006, no such recognition of estimated credits was made during the three months ending March 31, 2006.

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The Company recognized a net loss of $19.3 million for the three months ended March 31, 2007 compared to $14.3 million for the same period in 2006. The $5.0 million increase in net loss was a result of the increase in research and development and general and administrative expenses as well as the decrease in revenue discussed above. 

LIQUIDITY AND CAPITAL RESOURCES

Cash and Marketable Securities

At March 31, 2007 and December 31, 2006, cash, cash equivalents and marketable securities in the aggregate were $89.8 million and $107.6 million, respectively. Marketable securities of $21.4 million at March 31, 2007 had maturities beyond one year. However, the Company can and may liquidate such investments prior to maturity to meet its operating, strategic and/or investment objectives.

The levels of cash, cash equivalents and marketable securities have fluctuated significantly in the past and are expected to do so in the future as a result of operating needs and financing events. The Company intends to use its cash to pursue the further development of compounds in human clinical trials, the capabilities of its drug discovery platform and to enhance its capacity to pursue new drug targets, as well as fund general and corporate overhead. Neurogen believes this may allow it to retain a greater portion of commercial rights, potentially establish more valuable partnerships, and retain greater control over the drug development process.

Evaluation of Investments for Other-Than-Temporary Impairment

In accordance with FASB Staff Position (“FSP”) SFAS No. 115-1 and SFAS No. 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” the Company reviewed its marketable securities portfolio, which consists of U.S. Treasury obligations, direct obligations of U.S. Government agencies, investment-grade asset-backed securities and corporate debt obligations, for potential other-than-temporary impairment. Gross unrealized losses related to the Company’s investments totaled $0.6 million (based on an aggregate fair value of $36.8 million for all investments in unrealized loss positions) as of March 31, 2007. All marketable securities held at March 31, 2007 have been in a continuous loss position for twelve months or more, and the related unrealized loss was $0.6 million. The Company believes that the decline in market values of these investments resulted primarily from rising interest rates and not credit quality.

The Company believes it has the ability and intends to hold investments that mature in the next twelve months until maturity and thereby recover the fair market value. Unrealized losses related to securities that mature beyond the next twelve months, and that have been in a continuous unrealized loss position for twelve months or more, amounted to $0.4 million, or 2.1%, of the total market value of such marketable securities as of March 31, 2007. The Company has not recorded any losses for other-than-temporary impairment at this time; however, if interest rates rise and such unrealized losses become more significant, the Company may record impairment losses. In evaluating the unrealized losses, the Company considered the nature of the investments, current credit ratings, maturity dates and the Company’s projected cash requirements.

Debt Arrangements

The debt agreements entered into by the Company to date include a commercial term mortgage loan financing in December 2001 with Webster Bank, and a construction loan entered into in October 1999 with Connecticut Innovations, Inc. (“CII”). Total proceeds received under these agreements were $22.5 million, which are repayable through monthly installments over a maximum term of 15 years. Interest rates on these loans ranged from 6.9% to 7.9% in 2006 and through March 31, 2007. Of the amounts borrowed, $6.4 million and $3.7 million remained outstanding as of March 31, 2007 under the Webster Bank facility and the CII facility, respectively. An approximate aggregate amount of $1.5 million is due and payable in each of the next four years and $2.1 million is due and payable in the fifth year, including a balloon payment of $1.0 million on the mortgage loan upon maturity in December 2011. Thereafter, the remaining aggregate balance of approximately $2.0 million is payable in regular installments until the scheduled maturity dates. The Company made $0.4 million in principal repayments on outstanding loans during each of the three month periods ended March 31, 2007 and 2006.

As of March 31, 2007, Neurogen does not have any significant lease or capital expenditure commitments.

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Financing Activities and Liquidity

Neurogen's cash requirements to date have been met primarily by the proceeds of its equity financing activities, amounts received pursuant to collaborative research, licensing or technology transfer arrangements, certain debt arrangements and interest earned on invested funds. The Company's equity financing activities have included underwritten public offerings of common stock, private placement offerings of common stock and private sales of common stock in connection with collaborative research and licensing agreements. The Company's expenditures have funded research and development, general and administrative expenses, and the construction and outfitting of its research and development facilities.

The Company may from time to time, as warranted by its operating and strategic requirements, augment its cash balance through financing transactions, including the issuance of debt or equity securities and further corporate alliances. The Company filed an S-3 registration statement that became effective in February 2003, under which the Company may issue debt, common or preferred stock or warrants of up to $75.0 million in total financing. To date, the Company has issued approximately $55.0 million in common stock pursuant to this S-3 registration statement. In January 2004, the Company received $15.0 million from Merck for the purchase of 1,783,252 shares. In December 2006, the Company received approximately $40.0 million (before transaction costs) in a public offering of 6,993,000 shares. No assurances can be given that adequate levels of additional funding can be obtained on favorable terms if at all.

In May 2004 the Company filed with the Securities and Exchange Commission a registration statement on Form S-3 to enable the resale of 14,285,760 newly issued shares of Neurogen common stock acquired in a private placement transaction by Warburg Pincus Private Equity VIII, L.P., entities affiliated with Baker Brothers Investments and entities affiliated with the Tisch family. The registration statement became effective in November 2004.

The Company is in the early stage of product development. The Company has not derived any product revenues from product sales and does not expect to derive any product revenues for at least the next several years, if at all. Prior to deriving any such product revenues, the Company expects to incur significant losses and negative cash flows that in the aggregate could exceed the Company's existing cash resources. To provide cash to fund its operations until such time as it achieves sustainable revenues, the Company relies extensively on its ability to develop drug discovery programs of sufficient value to either partner the programs with pharmaceutical companies or raise capital through debt or equity financings.

To the extent that drug candidates progress in the Company's currently unpartnered programs, such as its proprietary insomnia program, its program for the treatment of depression and anxiety, its program to treat obesity, or earlier stage programs, such progress could lead to the opportunity to partner on terms which provide capital, revenues and cash flows to the Company or the opportunity to raise capital through equity offerings. If unpartnered programs do not progress or do not progress on schedule, such opportunities would be delayed or may not materialize at all.

To the extent that drug candidates progress in the Company's VR1 program partnered with Merck, such progress could result in milestone payments and additional research and development funding to the Company under the Merck collaboration agreement. Such progress could also provide the opportunity to raise capital through equity offerings. If the VR1 program does not progress or does not progress on schedule, such opportunities would be delayed or may not materialize at all. The Company does not have control over the progress of the VR1 program.

Lack of progress, scheduling delays or failures in any of the Company's major programs could significantly reduce the Company's levels of revenues, cash flows and cash available to fund its business. These factors could also significantly increase the Company's cost of capital and limit its ability to raise equity capital. All of the Company's compounds in development, whether in human clinical trials or not, will require significant additional research, development and testing before they can be commercialized. Furthermore, the scope, magnitude and timing of future research and development expenses, as well as anticipated project completion dates, are a series of steps, ranging from preclinical testing to clinical studies in humans. Each step in the process is typically more expensive than the previous step, but actual timing and cost for completion depends on the specific progress of each product being tested.

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While the Company cannot accurately predict the time required or the cost involved in commercializing any one of its candidates, new drug development typically takes many years and tens or hundreds of millions of dollars. In addition, developing new drugs is an extremely uncertain process where most candidates fail and uncertain developments such as clinical or regulatory delays, side effects, undesirable drug properties or ineffectiveness of a drug candidate would slow or prevent the development of a product. If Neurogen or its partners are unable to commercialize one or more of the drugs that may result from its development programs, the Company may never achieve product revenues and may eventually be unable to continue operations. This result would cause its stockholders to lose all or a substantial portion of their investment.

Neurogen anticipates that its current cash and marketable securities amounts, as supplemented by research funding and annual license payments pursuant to its collaborative research agreement with Merck, will be sufficient to fund its current and planned operations into at least mid-2008. However, Neurogen's funding requirements may change and will depend upon numerous factors, including but not limited to: the progress of the Company's research and development programs; the timing and results of preclinical testing and clinical studies; the timing of regulatory approvals; determinations as to the commercial potential of its proposed products; the status of competitive products and the ability of the Company to establish and maintain collaborative arrangements with others for the purpose of funding certain research and development programs; conducting clinical studies; obtaining regulatory approvals and, if such approvals are obtained, manufacturing and marketing products. Many of these factors could significantly increase the Company's expenses and use of cash.

Tax Benefits

As of December 31, 2006, the Company had approximately $210.3 million of net operating loss carryforwards and $11.8 million of research and development credit carryforwards available for federal income tax purposes, which expire in the years 2007 through 2026. When the Company filed its 2005 federal tax return in September 2006, it capitalized research and development expenditures for federal tax purposes of $38.5 million, which reduced its federal net operating loss carryover. The Company also has approximately $173.2 million in Connecticut state tax net operating loss carryforwards, which expire in the years 2020 through 2026, and $7.3 million of Connecticut non-incremental research and development credit carryforwards with an unlimited carryforward period. The Company has provided a valuation allowance for the full amount of its net deferred tax asset.

Due to “change in ownership” provisions of the Tax Reform Act of 1986, the Company's utilization of its net operating loss and research and development credit carryforwards may be subject to an annual limitation in future periods. In 2006, the Company reviewed its changes in ownership through a testing date of December 31, 2005 and determined that an ownership change occurred in 2005. The change of ownership did not have the effect of reducing the amount of net operating loss carryforwards but has limited approximately $1.1 million of the tax credits existing at the date of the ownership change that the Company may utilize in the taxable years following the change.

RESEARCH COLLABORATIONS

Merck

In December 2003, Neurogen entered into a collaboration agreement with Merck to research, develop, and commercialize small molecule medicines which work by targeting the vanilloid receptor (“VR1”), a key integrator of pain signals in the nervous system. In January 2004, under the terms of the Merck Agreement, the Company received a payment of $15.0 million for license fees and sold to Merck 1,783,252 shares of newly issued Neurogen common stock for an additional $15.0 million. Merck has agreed, among other things, to fund a specified level of discovery and research resources for an initial three year period and to pay additional license fees (totaling $7.0 million) on the first three anniversary dates of the collaboration. Under the Merck Agreement, Merck is responsible for funding the cost of development, including clinical trials, manufacturing and marketing of collaboration products, if any. Merck will pay Neurogen royalties based upon net sales levels, if any, for collaboration products.

The agreement provided Merck the option to extend the discovery and research effort for up to an additional two years. On September 29, 2006, Neurogen and Merck agreed to amend the Research Collaboration and License Agreement to extend the research program component of their VR1 collaboration for one year until December 28, 2007. Neurogen expects the companies will conclude the research program once a sufficient number of candidates have been advanced. Under the amended collaboration agreement, Merck has the option to end the research program component of the collaboration and the remainder of any associated funding by providing 90 days advance written notice to Neurogen. No other changes were made to the terms of the original agreement. Merck has not exercised the right to terminate as of the date of this filing. Merck retains the option to extend the discovery and research effort for up to an additional year beyond December 28, 2007.

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As of March 31, 2007, the Company has received $12.6 million of research funding from Merck, and, two $2.5 million license payments on the first and second anniversary dates of the collaboration in December 2004 and 2005 and one $2.0 million license payment on the third anniversary date of the collaboration in December 2006. The Company is eligible to receive milestone payments if certain compound discovery, product development or regulatory objectives are achieved through the collaboration. Milestones received to date include a preclinical milestone of $3.0 million in the second quarter of 2004, a clinical milestone of $2.0 million received in the first quarter of 2006 and a second clinical milestone of $3.0 million received in late October 2006. 

CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES

The discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The presentation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Management makes estimates in the areas of revenue recognition, accrued expenses, income taxes, stock-based compensation, and marketable securities, and bases the estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. For a complete description of the Company’s accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” and “Notes to Consolidated Financial Statements” in Neurogen Corporation’s Form 10-K for the year ended December 31, 2006.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company does not believe that its adoption in the first quarter of 2008 will have a material impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which includes an amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company does not believe that its adoption in the first quarter of 2008 will have a material impact on the Company’s financial statements.

FORWARD-LOOKING STATEMENTS

Statements that are not historical facts, including statements about the Company’s confidence and strategies, the status of various product development programs, the sufficiency of cash to fund planned operations and the Company’s expectations concerning its development compounds, drug discovery 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, difficulties or delays in development, testing, regulatory approval, production and marketing of any of the Company’s drug candidates, the failure to attract or retain key personnel, any unexpected adverse side effects or inadequate therapeutic efficacy of the Company’s drug candidates which could slow or prevent product development efforts, competition within the Company’s anticipated product markets, the Company’s 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 the Company’s business, risk that patents and confidentiality agreements will not adequately protect the Company’s 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 the Company’s products, and other risks detailed in the Company’s Securities and Exchange Commission filings, including its Annual Report on Form 10-K for the year ended December 31, 2006, each of which could adversely affect the Company’s business and the accuracy of the forward-looking statements contained herein. New material changes in risk factors since the Annual Report on Form 10-K for the year ended December 31, 2006 are discussed further in Part II, Item 1A.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk. The Company's investment portfolio includes investment grade debt instruments. These securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Increasing interest rates have led to a decline in market values of fixed-rate investments held as of March 31, 2007. The Company considers such impairment as temporary because of its ability and intent to hold these investments until a recovery of fair value, which may be at maturity.

The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates:

Fair value of investments with expected maturities in the following years (in thousands):
	2007			2008			2009			Total
Fixed Rate Investments	$	8,919		$	19,353		$	8,486		$	36,758
Weighted Average Interest		3.7	%		4.2	%		3.8	%		4.0	%

Capital market risk. The Company currently has no product revenues and is dependent on funds raised through other sources. One source of funding is through collaborative partnerships with large pharmaceutical companies, which sometimes include an equity purchase by Neurogen’s partner. Another source of funding is further equity offerings to financial investors. The ability of the Company to raise funds in both of these cases, and the desirability of raising such funds, is dependent upon capital markets forcesaffecting the price of the Company’s stock. These market forces, which fluctuate widely and frequently in the biotechnology capital markets, include both general market conditions and specific conditions, such as the stock performance of peer companies, rotation of funds from various market sectors, including sectors defined by market capitalization, stage of development or therapeutic focus and the activities of large holders of individual stocks. Because a significant majority of Neurogen’s stock is held by only a few institutions and the average trading volume of the stock is relatively low, changes in general or specific market conditions can significantly impact the stock price of the Company.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Operating Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2007. Based on this evaluation, the Company's Chief Executive Officer and Chief Operating Officer concluded that, as of March 31, 2007, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Operating Officer, as appropriate to allow timely decisions regarding required disclosure, and ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

Changes in Internal Control over Financial Reporting.

There has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes for the first quarter ended March 31, 2007 from legal proceedings as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 1A. RISK FACTORS

There have been no material changes for the first quarter ended March 31, 2007 from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable for the first quarter ended March 31, 2007.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable for the first quarter ended March 31, 2007.

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

Not applicable for the first quarter ended March 31, 2007.

ITEM 5. OTHER INFORMATION

In May 2007, the Company amended and restated its employment agreements with Stephen Davis, Executive Vice President and Chief Operating Officer, Stephen Uden, Executive Vice President and Head of R&D, and Alan Hutchison, Executive Vice President Discovery Research. Mr. Davis’ and Mr. Hutchison’s agreements were effective on December 1, 1997 for a term of two years and renew automatically for successive two year terms. Mr. Uden’s agreement was effective on June 27, 2005 for a one year term and renews automatically for successive one year terms. The agreements can be terminated by the employees or the Company in accordance with terms set forth in the agreements. No changes were made in the amended and restated agreements to existing salaries. Mr. Davis’ and Mr. Uden’s amended and restated agreements provide for a target annual bonus of 35%, and Mr. Hutchison’s for a target annual bonus of 30%. Copies of the amended and restated agreements are filed as Exhibits 10.1, 10.2 and 10.3 to this Quarterly Report on Form 10-Q.

The Company also entered into new employment agreements with James Krause and Bertrand Chenard dated as of May 8, 2007. The agreements are effective for a term of one year and automatically renew for successive one year terms unless terminated in accordance with the terms of the agreements. Mr. Krause’s agreement provides for a current base salary of $270,842 and Mr. Chenard’s for a current base salary of $262,650. Both agreements provide for a target annual bonus of 25%. Copies of the agreements are filed as Exhibits 10.4 and 10.5 to this Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS

Exhibit 10.1 Amended and Restated Employment Agreement between Neurogen Corporation and Stephen R. Davis dated as of May 8, 2007

Exhibit 10.2 Amended and Restated Employment Agreement between Neurogen Corporation and Stephen Uden dated as of May 8, 2007

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Exhibit 10.3 Amended and Restated Employment Agreement between Neurogen Corporation and Alan Hutchison dated as of May 8, 2007

Exhibit 10.4 Employment Agreement between Neurogen Corporation and James Krause dated as of May 8, 2007

Exhibit 10.5 Employment Agreement between Neurogen Corporation and Bertrand Chenard dated as of May 8, 2007

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NEUROGEN CORPORATION
By:	/s/ STEPHEN R. DAVIS
	Stephen R. Davis Executive Vice President and Chief Operating Officer (Duly Authorized Officer and Chief Accounting Officer) Date: May 10, 2007

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EX-10.1

  
    
      Exhibit 10.1






  
    

EX-10.2

EXHIBIT 10.2

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT, originally effective as of June 27, 2005 (the “Commencement Date”) and amended and restated as of May 8, 2007, is made by and between Neurogen Corporation, a Delaware corporation (the “Company”) with offices at 35 Northeast Industrial Road, Branford, Connecticut 06405, and Dr. Stephen Uden, who currently resides at 35 Sunset Hill Road, Salem, CT 06420 (the “Employee”).

WHEREAS, the Company and the Employee desire to maintain an employment relationship; and

WHEREAS, the Company and the Employee desire to enter into this Agreement to address, on the terms and conditions hereinafter set forth, certain matters relating to such employment.

NOW, THEREFORE, the Company and the Employee agree as follows:

1.   DEFINITIONS

(a)   Cause

For purposes of this Agreement “cause” means:

 (i)the Employee is convicted of a felony or entry of a plea of nolo contendere (or similar plea) in a criminal proceeding for commission of a felony or serious misdemeanor;

 (ii)any willful act or omission by the Employee which constitutes gross misconduct or gross negligence and which results in demonstrable material harm to the Company;

 (iii)the Employee’s habitual drug or alcohol abuse;

 (iv)the Employee’s willful and continuous failure to perform his duties with the Company after reasonable notice of such failure;

 (v)the Employee’s participation in any act of dishonesty intended to result in his material personal enrichment at the expense of the Company; or

 (vi)the Employee’s failure to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company.

No act, or failure to act, by the Employee shall be considered “willful” unless committed in bad faith and without a reasonable belief that the act or omission was in the Company’s best interest.

(b)   Good Reason

For purposes of this Agreement “good reason” means and shall be deemed to exist if, without the prior written consent of the Employee,

 (i)the Company relocates the primary place of performance of the duties specified in Section 3 of this Agreement to a location more than fifty (50) miles from its current offices located in Branford, Connecticut;

 (ii)as a result of any action or inaction on the part of the Company the Employee suffers a material reduction in Employee’s duties, responsibilities or effective authority typically associated with his title and position as set forth and described in Section 3 of this Agreement;

 (iii)the Employee’s rate of Base Salary (as hereinafter defined) is decreased by the Company (other than in connection with an across the board salary reduction agreed to by the Employee);

 (iv)the Company fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 12(b) of this Agreement; or

 (v)the Board of Directors of the Company (the “Board”) or the Company’s stockholders, either or both, as may be required to authorize the same, shall approve any liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company.

2.   TERM

The term of Employee’s employment under this Agreement shall, unless earlier terminated under Section 7 herein or extended as hereinafter provided, be for a period commencing as of (the “Commencement Date”) and terminating on June 26, 2006, subject to the terms and conditions contained in this Agreement (the “Employment Period”). The Employment Period shall automatically be extended commencing on June 27, 2006 and thereafter on the relevant anniversary of the Commencement Date, for successive one (1) year periods unless, not later than ninety (90) days prior to June 26, 2006 or any such anniversary, either party to this Agreement shall give written notice to the other that such party does not wish to extend or further extend the Employment Period beyond its then already automatically extended term, if any.

3.   DUTIES AND SERVICES

During the Employment Period, the Employee shall be employed as Executive Vice President, Head of R&D of the Company. In such position, the Employee shall have the duties, responsibilities and authority normally associated with, or otherwise appropriate to, the offices and positions of an Executive Vice President, Head of R&D of a corporation. In the performance of his duties and responsibilities as Executive Vice President, Head of R&D, the Employee shall report only to the President or the Chief Executive Officer of the Company. During the Employment Period, the Employee shall devote substantially all of his business time, during normal business hours, to the business and affairs of the Company and the Employee shall use his best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, the Employee may manage his personal, financial and legal affairs and engage in any activities of a volunteer, civic or business nature, as long as such activities do not materially interfere with Employee’s responsibilities as Executive Vice President, Head of R&D.

4.   COMPENSATION AND OTHER BENEFITS

(a)   Salary

As compensation for the Employee’s services under this Agreement, beginning on the Commencement Date and until the termination of the Employment Period, the Employee shall be paid by the Company a base salary of $335,000 per annum, payable in equal semi-monthly installments in accordance with the Company’s normal payroll practices, which base salary may be increased but not decreased (other than in connection with an across the board salary reduction agreed to by the Employee) during the Employment Period at the sole discretion of the Board or the Board’s designee (the “Base Salary”). Such increased (or decreased) Base Salary shall then constitute the “Base Salary’ for purposes of this Agreement.

(b)   Annual Bonus

In addition to the Base Salary, at the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such annual bonuses during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that annual bonus awards, if any, will be calculated on the basis of both Company and individual performance and that Employee’s annual target bonus for complete achievement of all Company and individual objectives will be targeted at a level equal to thirty-five percent (35%) of Base Salary. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any annual bonuses or the determination not to make any such awards in any year.

(c)   Benefits

During the Employment Period, the Employee shall be eligible to participate in all employee and incentive benefit plans and programs maintained from time to time by the Company for the benefit of senior executives. During the Employment Period, the Employee, Employee’s spouse, if any, and their eligible dependents, if any, shall be eligible to participate in and be covered under all the employee and dependent health and welfare benefit plans or programs maintained from time to time by the Company. However, the Company shall have no obligations under this Section 4(c) unless and until the Employee has met any generally applicable eligibility requirements for participation in such plans and programs.

(d)   Equity

At the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such stock option grants during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that stock option awards, if any, will be calculated on the basis of both Company and individual performance and that Employee’s annual target stock option grant for complete achievement of all Company and individual objectives will be targeted at a level equal to forty thousand (40,000) shares. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any stock options or the determination not to make any such awards in any year. Notwithstanding any other provision of this Agreement, in the event of a Change in Control of the Company (as defined below), on the first annual anniversary of the effective date of such Change in Control, all stock options granted to the Employee prior to the effective date of the Change in Control that have not otherwise vested or expired shall automatically vest and be exercisable by the Employee. For purposes of this Agreement, the term “Change in Control” shall have the same meaning given to that term in Section 2.4 of the Amended and Restated Neurogen Corporation 2001 Stock Option Plan.

5.   NON-COMPETITION

(a)During the Employment Period and for one year after the date of any such termination of employment, the Employee agrees that, without the prior express written consent of the Company, he shall not, directly or indirectly, for his own benefit or as an employee, owner, shareholder, partner, consultant, (or in any other representative capacity) for any other person, firm, partnership, corporation or other entity (other than the Company), (i) engage in the discovery, research and/or development of therapeutic, diagnostic or prophylactic products which work through the same biological mechanisms as products which at the time of such termination are under active clinical or pre-clinical development or have been pre-clinically or clinically developed by the Company and which the Company has not abandoned (“Related Programs”) or (ii) solicit or hire (or direct another to solicit or hire) the services of any employee of the Company or attempt to induce any such employee or any consultant to the Company to leave the employ of the Company (except when such acts are performed in good faith by the Employee on behalf of the Company). Notwithstanding the above, this provision shall not be deemed to prevent or prohibit Employee from being employed during such one year period by another entity in a managerial role where Employee has overall responsibility for managing (or assisting in the management of) a research and development portfolio which includes one or more Related Programs, provided that Employee does not violate the terms of Section 6 hereof and does not during such one year term actively advise or direct the discovery, research or development efforts of such other entity in the Related Program(s). During the Employment Period, the Employee shall not own more than 2% of the outstanding common stock of any corporation. The provisions of this Section 5 shall not be deemed to reduce in any way any other fiduciary, contractual or other legal obligation the Employee may have to the Company, including without limitation any obligation which may arise by virtue of any corporation law, securities law, patent or intellectual property law or right, the common law, other agreements with the Company or otherwise.

For purposes of Section 5 of this Agreement, the term “solicit” shall mean any communication of any kind whatsoever, regardless of by whom initiated, inviting, encouraging, or requesting any person or entity to take or refrain from taking any action.

(b)The Employee agrees to comply with the terms set forth in the Proprietary Information and Inventions Agreement previously entered into by the Company and Employee.

(c)If at any time within twelve (12) months after the date on which the Employee exercises a Company stock option or stock appreciation right, or on which Company restricted stock vests, or on which income is realized by the Employee in connection with any other

(d)Company equity-based award (each of which events is a “Realization Event”), the Employee breaches any provision of Section 5(a) or 5(b) of the Agreement in more than a minor, deminimus or trivial manner that causes or is likely it cause, more than deminimus financial or reputational harm to the Company (and, if such breach is susceptible to cure, the Employee does not cure such breach and harm within ten (10) days after the Employee’s receipt of written notice of such breach of the Company which specifies in reasonable detail the facts and circumstances claimed to be the basis for such breach), then (i) the Employee shall forfeit all of Employee’s unexercised (including unvested) Neurogen Corporation stock options and restricted stock and (ii) any gain realized within the twelve (12) months prior to such breach from the exercise of any Company stock options or the vesting of any Company restricted stock or other equity-based awards by the Employee from the Realization Event shall be paid by the Employee to the Company upon written notice from the Company within ninety (90) days of such notice (such payments may be made in increments over such period). Such gain shall be determined after reduction for any taxes paid (or, if such gain is determined before such taxes are paid, owing, provided that such taxes are actually paid in a timely manner) by the Employee which are attributable to such gain as of the date of the Realization Event, and without regard to any subsequent change in the Fair Market Value (as defined below) of a share of Company common stock; provided that any federal or state income tax benefit actually realized by the Employee as a result of making payments to the Company under this Section 5(c) (relating to any of the next ten (10) tax year periods) shall also be paid to the Company within fifteen (15) days of such realization. Such gain shall be paid by the Employee delivering to the Company shares of Company Common Stock with a Fair Market Value on the date of delivery equal to the amount of such gain. To the extent permitted by applicable law, the Company shall have the right to offset such gain against any amounts otherwise owed to the Employee by the Company (whether as wages, vacation pay, or pursuant to any benefit plan or other compensatory arrangement). For purposes of this Section 5(c), the “Fair Market Value” of a share of Company Common Stock on any date shall be (i) the closing sale price per share of Company Common Stock during normal trading hours on the national securities exchange on which the Company Common Stock is principally traded for such date or the last preceding date on which there was a sale of such Company Common Stock on such exchange or (ii) if the shares of Company Common Stock are then traded on the NASDAQ Stock Market or any other over-the-counter market, the average of the closing bid and asked prices for the shares of Company Common Stock during normal trading hours in such over-the-counter market for such date or the last preceding date on which there was a sale of such Company Common Stock in such market, or (iii) if the shares of Company Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Compensation Committee, in its sole discretion, shall reasonably determine. In the event that the Company seeks to enforce the provisions of this Section 5(c), and such enforcement is contested by the Employee, and it is finally determined that the Employee is not subject to the provisions of this Section 5(c), then the Company shall (i) reimburse the Employee for reasonable attorneys’ fees incurred by the Employee in connection with such contest; and (ii) pay to the Employee an additional amount equal to one (1) times the amount in clause (i); provided that such payment under this clause (ii) shall not exceed $250,000.

(e)Any termination of the Employee’s employment or of this Agreement shall have no effect on the continuing operation of this Section 5.

(f)The Employee acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Employee breaches or threatens to breach any of the provisions of this Section 5. The Employee agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 5, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. The Employee further agrees that Employee shall not, in any equity proceeding relating to the enforcement of the terms of this Section 5, raise the defense that the Company has an adequate remedy at law.

(g)The terms and provisions of this Section 5 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Employee’s future employment imposed by this Section 5 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 5 unreasonable in duration or geographic scope or otherwise, the Employee and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(h)The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 4 of this Agreement would not have been promised in the absence of the Employee’s promises under this Section 5.

6.   CONFIDENTIAL INFORMATION

The Employee agrees to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company, a copy of which is attached hereto as Exhibit A and incorporated by reference herein.

7.   TERMINATION

(a)   Termination by the Company for Cause

The Company may terminate the Employee’s employment hereunder for cause. If the Company terminates the Employee’s employment hereunder for cause, the Employment Period shall end and the Employee shall only be entitled to any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the date of termination of the Employee’s employment with the Company.

If the Employee’s employment is to be terminated for cause, the Company shall give written notice of such termination to the Employee. Such notice shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Employee’s employment for cause.

(b)   Termination Without Cause or Termination For Good Reason

The Company may terminate the Employee’s employment hereunder without cause and the Employee may terminate Employee’s employment hereunder for good reason. If the Company terminates the Employee’s employment hereunder without cause, or if the Employee terminates Employee’s employment hereunder for good reason, the Employment Period shall end and the Employee shall only be entitled to (i) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company; (ii) a lump sum payment in an amount equal to the Employee’s annual Base Salary as provided in Section 4 (a) above; (iii) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such date of termination; and (iv) the right to exercise immediately any stock options and to freely trade any restricted stock granted to the Employee which, but for such termination, would have become exercisable or tradable, as the case may be, within one year of the date of such termination without cause or for good reason. Notwithstanding any other provision of this Agreement, in addition to the benefits described above, if Employee is terminated without cause or terminates his employment for good reason as a result of a Change in Control of the Company (including without limitation any termination within two (2) years of a Change in Control which shall be deemed to be as a result of a Change in Control) then Employee shall also be entitled to a lump sum payment in an amount equal to the greater of (i) the Employee’s then targeted annual bonus or (ii) the Employee’s targeted annual bonus immediately prior to the Change in Control.

If the Employee’s employment is to be terminated without cause, the Company shall give the Employee thirty (30) days prior written notice of its intent to so terminate the Employee’s employment. If the Employee intends to terminate Employee’s employment for good reason, the Employee agrees to give the Company at least thirty (30) days prior written notice.

(c)   Termination Due to Death or Disability

The Company may terminate the Employee’s employment hereunder due to the Employee’s inability to render, for a period of three consecutive months or an aggregate of any on hundred twenty (120) days within any six (6) month period, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician selected in good faith by the Company (“Disability”). In the event of the Employee’s death or a termination of the Employee’s employment by the Company due to Disability, the Employment Period shall end and the Employee, Employee’s estate or Employee’s legal representative, as the case may be, shall only be entitled to (i) (a) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company, and (b) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company; and (ii) in the case of Disability, (a) continuation of payment of the Employee’s Base Salary, as set forth in Section 4(a) above, until the Employee commences to receive payments under the Company’s long-term disability plan, (b) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination for one (1) year after the date of termination and (c) the right to exercise immediately that proportion of the stock options (rounded up to the nearest whole number of shares) granted to the Employee which would become exercisable on or before the June 27 immediately following the date of termination of the Employee’s employment with the Company due to Disability which is equal to the number of days worked by the Employee from, but excluding, the June 27 immediately preceding such termination date to, and including, such termination date divided by 365 days.

(d)   Voluntary Termination

The Employee may affect a Voluntary Termination of Employee’s employment with the Company hereunder. A “Voluntary Termination” shall mean a termination of employment by the Employee on Employee’s own initiative other than a termination due to death or Disability or a termination for good reason. A Voluntary Termination shall not be, and shall not be deemed to be, a breach of this Agreement and shall result in the end of the Employment Period and only entitle the Employee to all of the rights and benefits which the Employee would be entitled in the event of a termination of the Employee’s employment by the Company for cause.

(e)   Termination by the Company at End of Employment Period

Notwithstanding any provision of this Agreement to the contrary, if (a) the Employment Period is not terminated early under Sections 7(a), 7(b), 7(c) or 7(d) above and (b) the Company provides written notice to the Employee, pursuant to Section 2 above, that it does not wish to extend or further extend the Employment Period, then the Employee’s employment with the Company shall end on the last day of the Employment Period and the Employee shall be entitled to (x) continuation of payment of the Employee’s Base Salary, as provided in Section 4(a) above, as of the date of termination of the Employee’s employment with the Company for a period equal to (1) one year less the number of days notice given by the Company to the Employee that it does not wish to extend or further extend the Employment Period (such notice period shall be deemed to commence as of the date of such written notice by the Company); (y) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such termination; and (z) the right to exercise immediately any stock options and to trade freely any restricted stock granted to the Employee which, but for such termination, would have become exercisable or freely tradable, as the case may be, on or before the June 27 immediately following the date on which the one (1) year period referred to the preceding subclause (x) ends; provided, however, that the severance payment by the Company to the Employee under subclause (x) of this Section 7(e) shall be offset on a dollar for dollar basis by any cash, or the fair market value of any non-cash, remuneration, benefit or other entitlement earned, received or receivable by the Employee in connection with the employment of such Employee in any capacity, other than dividends, interest income or other passive investment income earned as a result of an interest in a business or entity of which the Employee owns less than 2% of the beneficial ownership. If the Employee shall be entitled to any such severance payment from the Company after the termination of the Employment Period, the Employee shall have the obligation to notify the Company of any employment, consultation or other activity which may involve any remuneration, benefits or other entitlements as described above, and as to which the Company may be entitled to an offset.

8.   SURVIVAL

The rights and obligations of the parties hereunder shall survive the termination of the Employee’s employment hereunder and the termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

9.   WHOLE AGREEMENT AND MODIFICATION

This Agreement, including the “Proprietary Information and Inventions Agreement”, sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein, and supersedes all prior and existing agreements except as set forth above, whether written or oral, between them concerning the subject matter contained herein. This Agreement may be modified only by a written agreement executed by each party to this Agreement.

10.   NOTICES

Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth above or to such other address as the party shall have furnished in writing in accordance with this provision. Notice to the estate of the Employee shall be sufficient if addressed to the Employee in accordance with this provision. Any notice or other communication given by certified mail shall be deemed given three (3) days after posting. However, a notice changing a party’s address shall be deemed given at the time of the receipt of the notice.

11.   WAIVER

Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver.

12.   SUCCESSORS

(a)   Effect on Employee

This Agreement is personal to the Employee and, without the prior express written consent of the Company, shall not be assignable by the Employee, except that the Employee’s rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition, intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Employee’s heirs, beneficiaries and/or legal representatives.

(b)   Effect on Company

This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns. The Company shall reasonably require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

13.   NO THIRD PARTY BENEFICIARIES

This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement except as provided in Section 12 of this Agreement.

14.   COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.   GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflict of laws thereof.

16.   SEVERABILITY

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

17.   NO VIOLATION OF OUTSTANDING AGREEMENT(S)

Employee hereby warrants that the execution of this Agreement and the performance of his duties hereunder do not and will not violate any agreement with any other person or entity.

IN WITNESS WHEREOF, the parties have duly executed this Agreement which shall be effective as of the effective date noted above.

	NEUROGEN CORPORATION
By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	/s/ Stephen Uden
	Stephen Uden

EX-10.3

EXHIBIT 10.3

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT, originally effective as of December 1, 1997 (the “Commencement Date”) and amended and restated as of May 8, 2007, is made by and between Neurogen Corporation, a Delaware corporation (the “Company”) with offices at 35 Northeast Industrial Road, Branford, Connecticut 06405, and Alan J. Hutchison (the “Employee”).

WHEREAS, the Company and the Employee desire to maintain an employment relationship; and

WHEREAS, the Company and the Employee desire to enter into this Agreement to address, on the terms and conditions hereinafter set forth, certain matters relating to such employment.

NOW, THEREFORE, the Company and the Employee agree as follows:

1.   DEFINITIONS

(a)   Cause

For purposes of this Agreement “cause” means:

 (i)the Employee is convicted of a felony or entry of a plea of nolo contendere (or similar plea) in a criminal proceeding for commission of a felony or serious misdemeanor;

 (ii)any willful act or omission by the Employee which constitutes gross misconduct or gross negligence and which results in demonstrable material harm to the Company;

 (iii)the Employee’s habitual drug or alcohol abuse;

 (iv)the Employee’s willful and continuous failure to perform his duties with the Company after reasonable notice of such failure;

 (v)the Employee’s participation in any act of dishonesty intended to result in his material personal enrichment at the expense of the Company; or

 (vi)the Employee’s failure to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company.

No act, or failure to act, by the Employee shall be considered “willful” unless committed in bad faith and without a reasonable belief that the act or omission was in the Company’s best interest.

(b)   Good Reason

For purposes of this Agreement “good reason” means and shall be deemed to exist if, without the prior written consent of the Employee,

 (i)the Company relocates the primary place of performance of the duties specified in Section 3 of this Agreement to a location more than fifty (50) miles from its current offices located in Branford, Connecticut;

 (ii)as a result of any action or inaction on the part of the Company the Employee suffers a material reduction in Employee’s duties, responsibilities or effective authority typically associated with his title and position as set forth and described in Section 3 of this Agreement;

 (iii)the Employee’s rate of Base Salary (as hereinafter defined) is decreased by the Company (other than in connection with an across the board salary reduction agreed to by the Employee);

 (iv)the Company fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 12(b) of this Agreement; or

 (v)the Board of Directors of the Company (the “Board”) or the Company’s stockholders, either or both, as may be required to authorize the same, shall approve any liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company.

2.   TERM

The term of Employee’s employment under this Agreement shall, unless earlier terminated under Section 7 herein or extended as hereinafter provided, be for a period commencing as of (the “Commencement Date”) and terminating on November 30, 1999, subject to the terms and conditions contained in this Agreement (the “Employment Period”). The Employment Period shall automatically be extended commencing on December 1, 1999 and thereafter on the relevant alternate anniversary of the Commencement Date, for successive two (2) year periods unless, not later than three (3) months prior to December 1, 1999 or any such anniversary, either party to this Agreement shall give written notice to the other that such party does not wish to extend or further extend the Employment Period beyond its then already automatically extended term, if any.

3.   DUTIES AND SERVICES

During the Employment Period, the Employee shall be employed as Executive Vice President, Discovery Research of the Company. In such position, the Employee shall have the duties, responsibilities and authority normally associated with, or otherwise appropriate to, the offices and positions of an Executive Vice President, Discovery Research of a corporation. In the performance of his duties and responsibilities as Executive Vice President, Discovery Research, the Employee shall report only to the Head of Research and Development (or a comparable title and position) of the Company. During the Employment Period, the Employee shall devote substantially all of his business time, during normal business hours, to the business and affairs of the Company and the Employee shall use his best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, the Employee may manage his personal, financial and legal affairs and engage in any activities of a volunteer, civic or business nature, as long as such activities do not materially interfere with Employee’s responsibilities as Executive Vice President, Discovery Research.

4.   COMPENSATION AND OTHER BENEFITS

(a)   Salary

As compensation for the Employee’s services under this Agreement, beginning on the Commencement Date and until the termination of the Employment Period, the Employee shall be paid by the Company a base salary of $215,000 per annum, payable in equal semi-monthly installments in accordance with the Company’s normal payroll practices, which base salary may be increased but not decreased (other than in connection with an across the board salary reduction agreed to by the Employee) during the Employment Period at the sole discretion of the Board or the Board’s designee (the “Base Salary”). Such increased (or decreased) Base Salary shall then constitute the “Base Salary’ for purposes of this Agreement.

(b)   Annual Bonus

In addition to the Base Salary, at the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such annual bonuses during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that annual bonus awards, if any, will be calculated on the basis of both Company and individual performance and that Employee’s annual target bonus for complete achievement of all Company and individual objectives will be targeted at a level equal to thirty percent (30%) of Base Salary. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any annual bonuses or the determination not to make any such awards in any year.

(c)   Benefits

During the Employment Period, the Employee shall be eligible to participate in all employee and incentive benefit plans and programs maintained from time to time by the Company for the benefit of senior executives. During the Employment Period, the Employee, Employee’s spouse, if any, and their eligible dependents, if any, shall be eligible to participate in and be covered under all the employee and dependent health and welfare benefit plans or programs maintained from time to time by the Company. However, the Company shall have no obligations under this Section 4(c) unless and until the Employee has met any generally applicable eligibility requirements for participation in such plans and programs.

(d)   Equity

At the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such stock option grants during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that stock option awards, if any, will be calculated on the basis of both Company and individual performance. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any stock options or the determination not to make any such awards in any year.

5.   NON-COMPETITION

(a)During the Employment Period and for one year after the date of any such termination of employment, the Employee agrees that, without the prior express written consent of the Company, he shall not, directly or indirectly, for his own benefit or as an employee, owner, shareholder, partner, consultant, (or in any other representative capacity) for any other person, firm, partnership, corporation or other entity (other than the Company), (i) engage in the discovery, research and/or development of therapeutic, diagnostic or prophylactic products which work through the same biological mechanisms as products which at the time of such termination are under active clinical or pre-clinical development or have been pre-clinically or clinically developed by the Company and which the Company has not abandoned (“Related Programs”) or (ii) solicit or hire (or direct another to solicit or hire) the services of any employee of the Company or attempt to induce any such employee or any consultant to the Company to leave the employ of the Company (except when such acts are performed in good faith by the Employee on behalf of the Company). Notwithstanding the above, this provision shall not be deemed to prevent or prohibit Employee from being employed during such one year period by another entity in a managerial role where Employee has overall responsibility for managing (or assisting in the management of) a research and development portfolio which includes one or more Related Programs, provided that Employee does not violate the terms of Section 6 hereof and does not during such one year term actively advise or direct the discovery, research or development efforts of such other entity in the Related Program(s). During the Employment Period, the Employee shall not own more than 2% of the outstanding common stock of any corporation. The provisions of this Section 5 shall not be deemed to reduce in any way any other fiduciary, contractual or other legal obligation the Employee may have to the Company, including without limitation any obligation which may arise by virtue of any corporation law, securities law, patent or intellectual property law or right, the common law, other agreements with the Company or otherwise.

For purposes of Section 5 of this Agreement, the term “solicit” shall mean any communication of any kind whatsoever, regardless of by whom initiated, inviting, encouraging, or requesting any person or entity to take or refrain from taking any action.

(b)The Employee agrees to comply with the terms set forth in the Proprietary Information and Inventions Agreement previously entered into by the Company and Employee.

(c)If at any time within twelve (12) months after the date on which the Employee exercises a Company stock option or stock appreciation right, or on which Company restricted stock vests, or on which income is realized by the Employee in connection with any other Company equity-based award (each of which events is a “Realization Event”), the Employee breaches any provision of Section 5(a) or 5(b) of the Agreement in more than a minor, deminimus or trivial manner that causes or is likely it cause, more than deminimus financial or reputational harm to the Company (and, if such breach is susceptible to cure, the Employee does not cure such breach and harm within ten (10) days after the Employee’s receipt of written notice of such breach of the Company which specifies in reasonable detail the facts and circumstances claimed to be the basis for such breach), then (i) the Employee shall forfeit all of Employee’s unexercised (including unvested) Neurogen Corporation stock options and restricted stock and (ii) any gain realized within the twelve (12) months prior to such breach from the exercise of any Company stock options or the vesting of any Company restricted stock or other equity-based awards by the Employee from the Realization Event shall be paid by the Employee to the Company upon written notice from the Company within ninety (90) days of such notice (such payments may be made in increments over such period). Such gain shall be determined after reduction for any taxes paid (or, if such gain is determined before such taxes are paid, owing, provided that such taxes are actually paid in a timely manner) by the Employee which are attributable to such gain as of the date of the Realization Event, and without regard to any subsequent change in the Fair Market Value (as defined below) of a share of Company common stock; provided that any federal or state income tax benefit actually realized by the Employee as a result of making payments to the Company under this Section 5(c) (relating to any of the next ten (10) tax year periods) shall also be paid to the Company within fifteen (15) days of such realization. Such gain shall be paid by the Employee delivering to the Company shares of Company Common Stock with a Fair Market Value on the date of delivery equal to the amount of such gain. To the extent permitted by applicable law, the Company shall have the right to offset such gain against any amounts otherwise owed to the Employee by the Company (whether as wages, vacation pay, or pursuant to any benefit plan or other compensatory arrangement). For purposes of this Section 5(c), the “Fair Market Value” of a share of Company Common Stock on any date shall be (i) the closing sale price per share of Company Common Stock during normal trading hours on the national securities exchange on which the Company Common Stock is principally traded for such date or the last preceding date on which there was a sale of such Company Common Stock on such exchange or (ii) if the shares of Company Common Stock are then traded on the NASDAQ Stock Market or any other over-the-counter market, the average of the closing bid and asked prices for the shares of Company Common Stock during normal trading hours in such over-the-counter market for such date or the last preceding date on which there was a sale of such Company Common Stock in such market, or (iii) if the shares of Company Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Compensation Committee, in its sole discretion, shall reasonably determine. In the event that the Company seeks to enforce the provisions of this Section 5(c), and such enforcement is contested by the Employee, and it is finally determined that the Employee is not subject to the provisions of this Section 5(c), then the Company shall (i) reimburse the Employee for reasonable attorneys’ fees incurred by the Employee in connection with such contest; and (ii) pay to the Employee an additional amount equal to one (1) times the amount in clause (i); provided that such payment under this clause (ii) shall not exceed $250,000.

(d)Any termination of the Employee’s employment or of this Agreement shall have no effect on the continuing operation of this Section 5.

(e)The Employee acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Employee breaches or threatens to breach any of the provisions of this Section 5. The Employee agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 5, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. The Employee further agrees that Employee shall not, in any equity proceeding relating to the enforcement of the terms of this Section 5, raise the defense that the Company has an adequate remedy at law.

(f)The terms and provisions of this Section 5 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Employee’s future employment imposed by this Section 5 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 5 unreasonable in duration or geographic scope or otherwise, the Employee and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(g)The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 4 of this Agreement would not have been promised in the absence of the Employee’s promises under this Section 5.

6.   CONFIDENTIAL INFORMATION

The Employee agrees to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company, a copy of which is attached hereto as Exhibit A and incorporated by reference herein.

7.   TERMINATION

(a)   Termination by the Company for Cause

The Company may terminate the Employee’s employment hereunder for cause. If the Company terminates the Employee’s employment hereunder for cause, the Employment Period shall end and the Employee shall only be entitled to any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the date of termination of the Employee’s employment with the Company.

If the Employee’s employment is to be terminated for cause, the Company shall give written notice of such termination to the Employee. Such notice shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Employee’s employment for cause.

(b)   Termination Without Cause or Termination For Good Reason

The Company may terminate the Employee’s employment hereunder without cause and the Employee may terminate Employee’s employment hereunder for good reason. If the Company terminates the Employee’s employment hereunder without cause, or if the Employee terminates Employee’s employment hereunder for good reason, the Employment Period shall end and the Employee shall only be entitled to (i) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company; (ii) a lump sum payment in an amount equal to the Employee’s annual Base Salary as provided in Section 4 (a) above; (iii) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such date of termination; and (iv) the right to exercise immediately any stock options and to freely trade any restricted stock granted to the Employee which, but for such termination, would have become exercisable or tradable, as the case may be, within one year of the date of such termination without cause or for good reason. Notwithstanding any other provision of this Agreement, in addition to the benefits described above, if Employee is terminated without cause or terminates his employment for good reason as a result of a Change in Control of the Company (including without limitation any termination within two (2) years of a Change in Control which shall be deemed to be as a result of a Change in Control) then Employee shall also be entitled to a lump sum payment in an amount equal to the greater of (i) the Employee’s then targeted annual bonus or (ii) the Employee’s targeted annual bonus immediately prior to the Change in Control.

If the Employee’s employment is to be terminated without cause, the Company shall give the Employee thirty (30) days prior written notice of its intent to so terminate the Employee’s employment. If the Employee intends to terminate Employee’s employment for good reason, the Employee agrees to give the Company at least thirty (30) days prior written notice.

(c)   Termination Due to Death or Disability

The Company may terminate the Employee’s employment hereunder due to the Employee’s inability to render, for a period of three consecutive months or an aggregate of any on hundred twenty (120) days within any six (6) month period, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician selected in good faith by the Company (“Disability”). In the event of the Employee’s death or a termination of the Employee’s employment by the Company due to Disability, the Employment Period shall end and the Employee, Employee’s estate or Employee’s legal representative, as the case may be, shall only be entitled to (i) (a) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company, and (b) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company; and (ii) in the case of Disability, (a) continuation of payment of the Employee’s Base Salary, as set forth in Section 4(a) above, until the Employee commences to receive payments under the Company’s long-term disability plan, (b) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination for one (1) year after the date of termination and (c) the right to exercise immediately that proportion of the stock options (rounded up to the nearest whole number of shares) granted to the Employee which would become exercisable on or before the December 1 immediately following the date of termination of the Employee’s employment with the Company due to Disability which is equal to the number of days worked by the Employee from, but excluding, the December 1 immediately preceding such termination date to, and including, such termination date divided by 365 days.

(d)   Voluntary Termination

The Employee may affect a Voluntary Termination of Employee’s employment with the Company hereunder. A “Voluntary Termination” shall mean a termination of employment by the Employee on Employee’s own initiative other than a termination due to death or Disability or a termination for good reason. A Voluntary Termination shall not be, and shall not be deemed to be, a breach of this Agreement and shall result in the end of the Employment Period and only entitle the Employee to all of the rights and benefits which the Employee would be entitled in the event of a termination of the Employee’s employment by the Company for cause.

(e)   Termination by the Company at End of Employment Period

Notwithstanding any provision of this Agreement to the contrary, if (a) the Employment Period is not terminated early under Sections 7(a), 7(b), 7(c) or 7(d) above and (b) the Company provides written notice to the Employee, pursuant to Section 2 above, that it does not wish to extend or further extend the Employment Period, then the Employee’s employment with the Company shall end on the last day of the Employment Period and the Employee shall be entitled to (x) continuation of payment of the Employee’s Base Salary, as provided in Section 4(a) above, as of the date of termination of the Employee’s employment with the Company for a period equal to (1) one year less the number of days notice given by the Company to the Employee that it does not wish to extend or further extend the Employment Period (such notice period shall be deemed to commence as of the date of such written notice by the Company); (y) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such termination; and (z) the right to exercise immediately any stock options and to trade freely any restricted stock granted to the Employee which, but for such termination, would have become exercisable or freely tradable, as the case may be, on or before the December 1 immediately following the date on which the one (1) year period referred to the preceding subclause (x) ends; provided, however, that the severance payment by the Company to the Employee under subclause (x) of this Section 7(e) shall be offset on a dollar for dollar basis by any cash, or the fair market value of any non-cash, remuneration, benefit or other entitlement earned, received or receivable by the Employee in connection with the employment of such Employee in any capacity, other than dividends, interest income or other passive investment income earned as a result of an interest in a business or entity of which the Employee owns less than 2% of the beneficial ownership. If the Employee shall be entitled to any such severance payment from the Company after the termination of the Employment Period, the Employee shall have the obligation to notify the Company of any employment, consultation or other activity which may involve any remuneration, benefits or other entitlements as described above, and as to which the Company may be entitled to an offset.

8.   SURVIVAL

The rights and obligations of the parties hereunder shall survive the termination of the Employee’s employment hereunder and the termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

9.   WHOLE AGREEMENT AND MODIFICATION

This Agreement, including the “Proprietary Information and Inventions Agreement”, sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein, and supersedes all prior and existing agreements except as set forth above, whether written or oral, between them concerning the subject matter contained herein. This Agreement may be modified only by a written agreement executed by each party to this Agreement.

10.   NOTICES

Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth above or to such other address as the party shall have furnished in writing in accordance with this provision. Notice to the estate of the Employee shall be sufficient if addressed to the Employee in accordance with this provision. Any notice or other communication given by certified mail shall be deemed given three (3) days after posting. However, a notice changing a party’s address shall be deemed given at the time of the receipt of the notice.

11.   WAIVER

Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver.

12.   SUCCESSORS

(a)   Effect on Employee

This Agreement is personal to the Employee and, without the prior express written consent of the Company, shall not be assignable by the Employee, except that the Employee’s rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition, intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Employee’s heirs, beneficiaries and/or legal representatives.

(b)   Effect on Company

This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns. The Company shall reasonably require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

13.   NO THIRD PARTY BENEFICIARIES

This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement except as provided in Section 12 of this Agreement.

14.   COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.   GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflict of laws thereof.

16.   SEVERABILITY

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

17.   NO VIOLATION OF OUTSTANDING AGREEMENT(S)

Employee hereby warrants that the execution of this Agreement and the performance of his duties hereunder do not and will not violate any agreement with any other person or entity.

IN WITNESS WHEREOF, the parties have duly executed this Agreement which shall be effective as of the effective date noted above.

	NEUROGEN CORPORATION
By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	/s/ Alan Hutchison
	Alan Hutchison

EX-10.4

EXHIBIT 10.4

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT, effective as of May 8, 2007 (the “Commencement Date”), is made by and between Neurogen Corporation, a Delaware corporation (the “Company”) with offices at 35 Northeast Industrial Road, Branford, Connecticut 06405, and James E. Krause, who currently resides at 123 Five Field Road, Madison, CT 06443 (the “Employee”).

WHEREAS, the Company and the Employee desire to maintain an employment relationship; and

WHEREAS, the Company and the Employee desire to enter into this Agreement to address, on the terms and conditions hereinafter set forth, certain matters relating to such employment.

NOW, THEREFORE, the Company and the Employee agree as follows:

1.   DEFINITIONS

(a)   Cause

For purposes of this Agreement “cause” means:

(i)the Employee is convicted of a felony or entry of a plea of nolo contendere (or similar plea) in a criminal proceeding for commission of a felony or serious misdemeanor;

(ii)any willful act or omission by the Employee which constitutes gross misconduct or gross negligence and which results in demonstrable material harm to the Company;

(iii)the Employee’s habitual drug or alcohol abuse;

(iv)the Employee’s willful and continuous failure to perform his duties with the Company after reasonable notice of such failure;

(v)the Employee’s participation in any act of dishonesty intended to result in his material personal enrichment at the expense of the Company; or

(vi)the Employee’s failure to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company.

No act, or failure to act, by the Employee shall be considered “willful” unless committed in bad faith and without a reasonable belief that the act or omission was in the Company’s best interest.

(b)   Good Reason

For purposes of this Agreement “good reason” means and shall be deemed to exist if, without the prior written consent of the Employee,

(i)the Company relocates the primary place of performance of the duties specified in Section 3 of this Agreement to a location more than fifty (50) miles from its current offices located in Branford, Connecticut;

(ii)as a result of any action or inaction on the part of the Company the Employee suffers a material reduction in Employee’s duties, responsibilities or effective authority typically associated with his title and position as set forth and described in Section 3 of this Agreement;

(iii)the Employee’s rate of Base Salary (as hereinafter defined) is decreased by the Company (other than in connection with an across the board salary reduction agreed to by the Employee);

(iv)the Company fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 12(b) of this Agreement; or

(v)the Board of Directors of the Company (the “Board”) or the Company’s stockholders, either or both, as may be required to authorize the same, shall approve any liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company.

2.   TERM

The term of Employee’s employment under this Agreement shall, unless earlier terminated under Section 7 herein or extended as hereinafter provided, be for a period commencing as of (the “Commencement Date”) and terminating on May __, 2008, subject to the terms and conditions contained in this Agreement (the “Employment Period”). The Employment Period shall automatically be extended commencing on May __, 2008 and thereafter on the relevant anniversary of the Commencement Date, for successive one (1) year periods unless, not later than ninety (90) days prior to May __, 2008 or any such anniversary, either party to this Agreement shall give written notice to the other that such party does not wish to extend or further extend the Employment Period beyond its then already automatically extended term, if any.

3.   DUTIES AND SERVICES

During the Employment Period, the Employee shall devote substantially all of his business time, during normal business hours, to the business and affairs of the Company and the Employee shall use his best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, the Employee may manage his personal, financial and legal affairs and engage in any activities of a volunteer, civic or business nature, as long as such activities do not materially interfere with Employee’s responsibilities.

4.   COMPENSATION AND OTHER BENEFITS

(a)   Salary

As compensation for the Employee’s services under this Agreement, beginning on the Commencement Date and until the termination of the Employment Period, the Employee shall be paid by the Company a base salary of $270,842 per annum, payable in equal semi-monthly installments in accordance with the Company’s normal payroll practices, which base salary may be increased but not decreased (other than in connection with an across the board salary reduction agreed to by the Employee) during the Employment Period at the sole discretion of the Board or the Board’s designee (the “Base Salary”). Such increased (or decreased) Base Salary shall then constitute the “Base Salary’ for purposes of this Agreement.

(b)   Annual Bonus

In addition to the Base Salary, at the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such annual bonuses during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that annual bonus awards, if any, will be calculated on the basis of both Company and individual performance and that Employee’s annual target bonus for complete achievement of all Company and individual objectives will be targeted at a level equal to twenty-five percent (25%) of Base Salary. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any annual bonuses or the determination not to make any such awards in any year.

(c)   Benefits

During the Employment Period, the Employee shall be eligible to participate in all employee and incentive benefit plans and programs maintained from time to time by the Company for the benefit of senior executives. During the Employment Period, the Employee, Employee’s spouse, if any, and their eligible dependents, if any, shall be eligible to participate in and be covered under all the employee and dependent health and welfare benefit plans or programs maintained from time to time by the Company. However, the Company shall have no obligations under this Section 4(c) unless and until the Employee has met any generally applicable eligibility requirements for participation in such plans and programs.

(d)   Equity

At the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such stock option grants during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that stock option awards, if any, will be calculated on the basis of both Company and individual performance. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any stock options or the determination not to make any such awards in any year.

5.   NON-COMPETITION

(a)During the Employment Period and for one year after the date of any such termination of employment, the Employee agrees that, without the prior express written consent of the Company, he shall not, directly or indirectly, for his own benefit or as an employee, owner, shareholder, partner, consultant, (or in any other representative capacity) for any other person, firm, partnership, corporation or other entity (other than the Company), (i) engage in the discovery, research and/or development of therapeutic, diagnostic or prophylactic products which work through the same biological mechanisms as products which at the time of such termination are under active clinical or pre-clinical development or have been pre-clinically or clinically developed by the Company and which the Company has not abandoned (“Related Programs”) or (ii) solicit or hire (or direct another to solicit or hire) the services of any employee of the Company or attempt to induce any such employee or any consultant to the Company to leave the employ of the Company (except when such acts are performed in good faith by the Employee on behalf of the Company). Notwithstanding the above, this provision shall not be deemed to prevent or prohibit Employee from being employed during such one year period by another entity in a managerial role where Employee has overall responsibility for managing (or assisting in the management of) a research and development portfolio which includes one or more Related Programs, provided that Employee does not violate the terms of Section 6 hereof and does not during such one year term actively advise or direct the discovery, research or development efforts of such other entity in the Related Program(s). During the Employment Period, the Employee shall not own more than 2% of the outstanding common stock of any corporation. The provisions of this Section 5 shall not be deemed to reduce in any way any other fiduciary, contractual or other legal obligation the Employee may have to the Company, including without limitation any obligation which may arise by virtue of any corporation law, securities law, patent or intellectual property law or right, the common law, other agreements with the Company or otherwise.

For purposes of Section 5 of this Agreement, the term “solicit” shall mean any communication of any kind whatsoever, regardless of by whom initiated, inviting, encouraging, or requesting any person or entity to take or refrain from taking any action.

(b)The Employee agrees to comply with the terms set forth in the Proprietary Information and Inventions Agreement previously entered into by the Company and Employee.

(c)If at any time within twelve (12) months after the date on which the Employee exercises a Company stock option or stock appreciation right, or on which Company restricted stock vests, or on which income is realized by the Employee in connection with any other Company equity-based award (each of which events is a “Realization Event”), the Employee breaches any provision of Section 5(a) or 5(b) of the Agreement in more than a minor, deminimus or trivial manner that causes or is likely it cause, more than deminimus financial or reputational harm to the Company (and, if such breach is susceptible to cure, the Employee does not cure such breach and harm within ten (10) days after the Employee’s receipt of written notice of such breach of the Company which specifies in reasonable detail the facts and circumstances claimed to be the basis for such breach), then (i) the Employee shall forfeit all of Employee’s unexercised (including unvested) Neurogen Corporation stock options and restricted stock and (ii) any gain realized within the twelve (12) months prior to such breach from the exercise of any Company stock options or the vesting of any Company restricted stock or other equity-based awards by the Employee from the Realization Event shall be paid by the Employee to the Company upon written notice from the Company within ninety (90) days of such notice (such payments may be made in increments over such period). Such gain shall be determined after reduction for any taxes paid (or, if such gain is determined before such taxes are paid, owing, provided that such taxes are actually paid in a timely manner) by the Employee which are attributable to such gain as of the date of the Realization Event, and without regard to any subsequent change in the Fair Market Value (as defined below) of a share of Company common stock; provided that any federal or state income tax benefit actually realized by the Employee as a result of making payments to the Company under this Section 5(c) (relating to any of the next ten (10) tax year periods) shall also be paid to the Company within fifteen (15) days of such realization. Such gain shall be paid by the Employee delivering to the Company shares of Company Common Stock with a Fair Market Value on the date of delivery equal to the amount of such gain. To the extent permitted by applicable law, the Company shall have the right to offset such gain against any amounts otherwise owed to the Employee by the Company (whether as wages, vacation pay, or pursuant to any benefit plan or other compensatory arrangement). For purposes of this Section 5(c), the “Fair Market Value” of a share of Company Common Stock on any date shall be (i) the closing sale price per share of Company Common Stock during normal trading hours on the national securities exchange on which the Company Common Stock is principally traded for such date or the last preceding date on which there was a sale of such Company Common Stock on such exchange or (ii) if the shares of Company Common Stock are then traded on the NASDAQ Stock Market or any other over-the-counter market, the average of the closing bid and asked prices for the shares of Company Common Stock during normal trading hours in such over-the-counter market for such date or the last preceding date on which there was a sale of such Company Common Stock in such market, or (iii) if the shares of Company Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Compensation Committee, in its sole discretion, shall reasonably determine. In the event that the Company seeks to enforce the provisions of this Section 5(c), and such enforcement is contested by the Employee, and it is finally determined that the Employee is not subject to the provisions of this Section 5(c), then the Company shall (i) reimburse the Employee for reasonable attorneys’ fees incurred by the Employee in connection with such contest; and (ii) pay to the Employee an additional amount equal to one (1) times the amount in clause (i); provided that such payment under this clause (ii) shall not exceed $250,000.

(d)Any termination of the Employee’s employment or of this Agreement shall have no effect on the continuing operation of this Section 5.

(e)The Employee acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Employee breaches or threatens to breach any of the provisions of this Section 5. The Employee agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 5, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. The Employee further agrees that Employee shall not, in any equity proceeding relating to the enforcement of the terms of this Section 5, raise the defense that the Company has an adequate remedy at law.

(f)The terms and provisions of this Section 5 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Employee’s future employment imposed by this Section 5 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 5 unreasonable in duration or geographic scope or otherwise, the Employee and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(g)The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 4 of this Agreement would not have been promised in the absence of the Employee’s promises under this Section 5.

6.   CONFIDENTIAL INFORMATION

The Employee agrees to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company, a copy of which is attached hereto as Exhibit A and incorporated by reference herein.

7.   TERMINATION

(a)   Termination by the Company for Cause

The Company may terminate the Employee’s employment hereunder for cause. If the Company terminates the Employee’s employment hereunder for cause, the Employment Period shall end and the Employee shall only be entitled to any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the date of termination of the Employee’s employment with the Company.

If the Employee’s employment is to be terminated for cause, the Company shall give written notice of such termination to the Employee. Such notice shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Employee’s employment for cause.

(b)   Termination Without Cause or Termination For Good Reason

The Company may terminate the Employee’s employment hereunder without cause and the Employee may terminate Employee’s employment hereunder for good reason. If the Company terminates the Employee’s employment hereunder without cause, or if the Employee terminates Employee’s employment hereunder for good reason, the Employment Period shall end and the Employee shall only be entitled to (i) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company; (ii) a lump sum payment in an amount equal to the Employee’s annual Base Salary as provided in Section 4(a) above; (iii) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such date of termination; and (iv) the right to exercise immediately any stock options and to freely trade any restricted stock granted to the Employee which, but for such termination, would have become exercisable or tradable, as the case may be, within one year of the date of such termination without cause or for good reason. Notwithstanding any other provision of this Agreement, in addition to the benefits described above, if Employee is terminated without cause or terminates his employment for good reason as a result of a Change in Control of the Company (including without limitation any termination within two (2) years of a Change in Control which shall be deemed to be as a result of a Change in Control) then Employee shall also be entitled to a lump sum payment in an amount equal to the greater of (i) the Employee’s then targeted annual bonus or (ii) the Employee’s targeted annual bonus immediately prior to the Change in Control.

If the Employee’s employment is to be terminated without cause, the Company shall give the Employee thirty (30) days prior written notice of its intent to so terminate the Employee’s employment. If the Employee intends to terminate Employee’s employment for good reason, the Employee agrees to give the Company at least thirty (30) days prior written notice.

(c)   Termination Due to Death or Disability

The Company may terminate the Employee’s employment hereunder due to the Employee’s inability to render, for a period of three consecutive months or an aggregate of any on hundred twenty (120) days within any six (6) month period, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician selected in good faith by the Company (“Disability”). In the event of the Employee’s death or a termination of the Employee’s employment by the Company due to Disability, the Employment Period shall end and the Employee, Employee’s estate or Employee’s legal representative, as the case may be, shall only be entitled to (i) (a) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company, and (b) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company; and (ii) in the case of Disability, (a) continuation of payment of the Employee’s Base Salary, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(a) above, until the Employee commences to receive payments under the Company’s long-term disability plan, (b) continuation of the health and welfare benefits of the Employee, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination for one (1) year after the date of termination and (c) the right to exercise immediately that proportion of the stock options (rounded up to the nearest whole number of shares) granted to the Employee which would become exercisable on or before the May __ immediately following the date of termination of the Employee’s employment with the Company due to Disability which is equal to the number of days worked by the Employee from, but excluding, the May __ immediately preceding such termination date to, and including, such termination date divided by 365 days.

(d)   Voluntary Termination

The Employee may affect a Voluntary Termination of Employee’s employment with the Company hereunder. A “Voluntary Termination” shall mean a termination of employment by the Employee on Employee’s own initiative other than a termination due to death or Disability or a termination for good reason. A Voluntary Termination shall not be, and shall not be deemed to be, a breach of this Agreement and shall result in the end of the Employment Period and only entitle the Employee to all of the rights and benefits which the Employee would be entitled in the event of a termination of the Employee’s employment by the Company for cause.

(e)   Termination by the Company at End of Employment Period

Notwithstanding any provision of this Agreement to the contrary, if (a) the Employment Period is not terminated early under Sections 7(a), 7(b), 7(c) or 7(d) above and (b) the Company provides written notice to the Employee, pursuant to Section 2 above, that it does not wish to extend or further extend the Employment Period, then the Employee’s employment with the Company shall end on the last day of the Employment Period and the Employee shall be entitled to (x) continuation of payment of the Employee’s Base Salary, as provided in Section 4(a) above, as of the date of termination of the Employee’s employment with the Company for a period equal to (1) one year less the number of days notice given by the Company to the Employee that it does not wish to extend or further extend the Employment Period (such notice period shall be deemed to commence as of the date of such written notice by the Company); (y) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such termination; and (z) the right to exercise immediately any stock options and to trade freely any restricted stock granted to the Employee which, but for such termination, would have become exercisable or freely tradable, as the case may be, on or before the May __ immediately following the date on which the one (1) year period referred to the preceding subclause (x) ends; provided, however, that the severance payment by the Company to the Employee under subclause (x) of this Section 7(e) shall be offset on a dollar for dollar basis by any cash, or the fair market value of any non-cash, remuneration, benefit or other entitlement earned, received or receivable by the Employee in connection with the employment of such Employee in any capacity, other than dividends, interest income or other passive investment income earned as a result of an interest in a business or entity of which the Employee owns less than 2% of the beneficial ownership. If the Employee shall be entitled to any such severance payment from the Company after the termination of the Employment Period, the Employee shall have the obligation to notify the Company of any employment, consultation or other activity which may involve any remuneration, benefits or other entitlements as described above, and as to which the Company may be entitled to an offset.

8.   SURVIVAL

The rights and obligations of the parties hereunder shall survive the termination of the Employee’s employment hereunder and the termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

9.   WHOLE AGREEMENT AND MODIFICATION

This Agreement, including the “Proprietary Information and Inventions Agreement”, sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein, and supersedes all prior and existing agreements except as set forth above, whether written or oral, between them concerning the subject matter contained herein. This Agreement may be modified only by a written agreement executed by each party to this Agreement.

10.   NOTICES

Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth above or to such other address as the party shall have furnished in writing in accordance with this provision. Notice to the estate of the Employee shall be sufficient if addressed to the Employee in accordance with this provision. Any notice or other communication given by certified mail shall be deemed given three (3) days after posting. However, a notice changing a party’s address shall be deemed given at the time of the receipt of the notice.

11.   WAIVER

Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver.

12.   SUCCESSORS

(a)   Effect on Employee

This Agreement is personal to the Employee and, without the prior express written consent of the Company, shall not be assignable by the Employee, except that the Employee’s rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition, intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Employee’s heirs, beneficiaries and/or legal representatives.

(b)   Effect on Company

This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns. The Company shall reasonably require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

13.   NO THIRD PARTY BENEFICIARIES

This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement except as provided in Section 12 of this Agreement.

14.   COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.   GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflict of laws thereof.

16.   SEVERABILITY

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

17.   NO VIOLATION OF OUTSTANDING AGREEMENT(S)

Employee hereby warrants that the execution of this Agreement and the performance of his duties hereunder do not and will not violate any agreement with any other person or entity.

IN WITNESS WHEREOF, the parties have duly executed this Agreement which shall be effective as of the effective date noted above.

	NEUROGEN CORPORATION
By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	/s/ James E. Krause
	James E. Krause

EX-10.5

EXHIBIT 10.5

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT, effective as of May 8, 2007 (the “Commencement Date”), is made by and between Neurogen Corporation, a Delaware corporation (the “Company”) with offices at 35 Northeast Industrial Road, Branford, Connecticut 06405, and Bertrand L. Chenard, who currently resides at 7 Whaling Dr., Waterford, CT 06385 (the “Employee”).

WHEREAS, the Company and the Employee desire to maintain an employment relationship; and

WHEREAS, the Company and the Employee desire to enter into this Agreement to address, on the terms and conditions hereinafter set forth, certain matters relating to such employment.

NOW, THEREFORE, the Company and the Employee agree as follows:

1.   DEFINITIONS

(a)   Cause

For purposes of this Agreement “cause” means:

(i)the Employee is convicted of a felony or entry of a plea of nolo contendere (or similar plea) in a criminal proceeding for commission of a felony or serious misdemeanor;

(ii)any willful act or omission by the Employee which constitutes gross misconduct or gross negligence and which results in demonstrable material harm to the Company;

(iii)the Employee’s habitual drug or alcohol abuse;

(iv)the Employee’s willful and continuous failure to perform his duties with the Company after reasonable notice of such failure;

(v)the Employee’s participation in any act of dishonesty intended to result in his material personal enrichment at the expense of the Company; or

(vi)the Employee’s failure to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company.

No act, or failure to act, by the Employee shall be considered “willful” unless committed in bad faith and without a reasonable belief that the act or omission was in the Company’s best interest.

(b)   Good Reason

For purposes of this Agreement “good reason” means and shall be deemed to exist if, without the prior written consent of the Employee,

(i)the Company relocates the primary place of performance of the duties specified in Section 3 of this Agreement to a location more than fifty (50) miles from its current offices located in Branford, Connecticut;

(ii)the Employee’s rate of Base Salary (as hereinafter defined) is decreased by the Company (other than in connection with an across the board salary reduction agreed to by the Employee);

(iii)the Company fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 12(b) of this Agreement; or

(iv)the Board of Directors of the Company (the “Board”) or the Company’s stockholders, either or both, as may be required to authorize the same, shall approve any liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company.

2.   TERM

The term of Employee’s employment under this Agreement shall, unless earlier terminated under Section 7 herein or extended as hereinafter provided, be for a period commencing as of (the “Commencement Date”) and terminating on May __, 2008, subject to the terms and conditions contained in this Agreement (the “Employment Period”). The Employment Period shall automatically be extended commencing on May __, 2008 and thereafter on the relevant anniversary of the Commencement Date, for successive one (1) year periods unless, not later than ninety (90) days prior to May __, 2008 or any such anniversary, either party to this Agreement shall give written notice to the other that such party does not wish to extend or further extend the Employment Period beyond its then already automatically extended term, if any.

3.   DUTIES AND SERVICES

During the Employment Period, the Employee shall devote substantially all of his business time, during normal business hours, to the business and affairs of the Company and the Employee shall use his best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, the Employee may manage his personal, financial and legal affairs and engage in any activities of a volunteer, civic or business nature, as long as such activities do not materially interfere with Employee’s responsibilities.

4.   COMPENSATION AND OTHER BENEFITS

(a)   Salary

As compensation for the Employee’s services under this Agreement, beginning on the Commencement Date and until the termination of the Employment Period, the Employee shall be paid by the Company a base salary of $262,650 per annum, payable in equal semi-monthly installments in accordance with the Company’s normal payroll practices, which base salary may be increased but not decreased (other than in connection with an across the board salary reduction agreed to by the Employee) during the Employment Period at the sole discretion of the Board or the Board’s designee (the “Base Salary”). Such increased (or decreased) Base Salary shall then constitute the “Base Salary’ for purposes of this Agreement.

(b)   Annual Bonus

In addition to the Base Salary, at the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such annual bonuses during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that annual bonus awards, if any, will be calculated on the basis of both Company and individual performance and that Employee’s annual target bonus for complete achievement of all Company and individual objectives will be targeted at a level equal to twenty-five percent (25%) of Base Salary. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any annual bonuses or the determination not to make any such awards in any year.

(c)   Benefits

During the Employment Period, the Employee shall be eligible to participate in all employee and incentive benefit plans and programs maintained from time to time by the Company for the benefit of senior executives. During the Employment Period, the Employee, Employee’s spouse, if any, and their eligible dependents, if any, shall be eligible to participate in and be covered under all the employee and dependent health and welfare benefit plans or programs maintained from time to time by the Company. However, the Company shall have no obligations under this Section 4(c) unless and until the Employee has met any generally applicable eligibility requirements for participation in such plans and programs.

(d)   Equity

At the sole discretion of the Board of Directors or its designee, the Employee is eligible to receive such stock option grants during the Employment Period as the Board or its designee, in its sole discretion, may approve. It is anticipated that stock option awards, if any, will be calculated on the basis of both Company and individual performance. Notwithstanding anything in this agreement to the contrary, the Company reserves the right at the sole discretion of the Board or its designee at any time and without notice to change or abandon altogether any or all of it’s incentive compensation policies and practices, including the award of any stock options or the determination not to make any such awards in any year.

5.   NON-COMPETITION

(a)During the Employment Period and for one year after the date of any such termination of employment, the Employee agrees that, without the prior express written consent of the Company, he shall not, directly or indirectly, for his own benefit or as an employee, owner, shareholder, partner, consultant, (or in any other representative capacity) for any other person, firm, partnership, corporation or other entity (other than the Company), (i) engage in the discovery, research and/or development of therapeutic, diagnostic or prophylactic products which work through the same biological mechanisms as products which at the time of such termination are under active clinical or pre-clinical development or have been pre-clinically or clinically developed by the Company and which the Company has not abandoned (“Related Programs”) or (ii) solicit or hire (or direct another to solicit or hire) the services of any employee of the Company or attempt to induce any such employee or any consultant to the Company to leave the employ of the Company (except when such acts are performed in good faith by the Employee on behalf of the Company). Notwithstanding the above, this provision shall not be deemed to prevent or prohibit Employee from being employed during such one year period by another entity in a managerial role where Employee has overall responsibility for managing (or assisting in the management of) a research and development portfolio which includes one or more Related Programs, provided that Employee does not violate the terms of Section 6 hereof and does not during such one year term actively advise or direct the discovery, research or development efforts of such other entity in the Related Program(s). During the Employment Period, the Employee shall not own more than 2% of the outstanding common stock of any corporation. The provisions of this Section 5 shall not be deemed to reduce in any way any other fiduciary, contractual or other legal obligation the Employee may have to the Company, including without limitation any obligation which may arise by virtue of any corporation law, securities law, patent or intellectual property law or right, the common law, other agreements with the Company or otherwise.

For purposes of Section 5 of this Agreement, the term “solicit” shall mean any communication of any kind whatsoever, regardless of by whom initiated, inviting, encouraging, or requesting any person or entity to take or refrain from taking any action.

(b)The Employee agrees to comply with the terms set forth in the Proprietary Information and Inventions Agreement previously entered into by the Company and Employee.

(c)If at any time within twelve (12) months after the date on which the Employee exercises a Company stock option or stock appreciation right, or on which Company restricted stock vests, or on which income is realized by the Employee in connection with any other Company equity-based award (each of which events is a “Realization Event”), the Employee breaches any provision of Section 5(a) or 5(b) of the Agreement in more than a minor, deminimus or trivial manner that causes or is likely it cause, more than deminimus financial or reputational harm to the Company (and, if such breach is susceptible to cure, the Employee does not cure such breach and harm within ten (10) days after the Employee’s receipt of written notice of such breach of the Company which specifies in reasonable detail the facts and circumstances claimed to be the basis for such breach), then (i) the Employee shall forfeit all of Employee’s unexercised (including unvested) Neurogen Corporation stock options and restricted stock and (ii) any gain realized within the twelve (12) months prior to such breach from the exercise of any Company stock options or the vesting of any Company restricted stock or other equity-based awards by the Employee from the Realization Event shall be paid by the Employee to the Company upon written notice from the Company within ninety (90) days of such notice (such payments may be made in increments over such period). Such gain shall be determined after reduction for any taxes paid (or, if such gain is determined before such taxes are paid, owing, provided that such taxes are actually paid in a timely manner) by the Employee which are attributable to such gain as of the date of the Realization Event, and without regard to any subsequent change in the Fair Market Value (as defined below) of a share of Company common stock; provided that any federal or state income tax benefit actually realized by the Employee as a result of making payments to the Company under this Section 5(c) (relating to any of the next ten (10) tax year periods) shall also be paid to the Company within fifteen (15) days of such realization. Such gain shall be paid by the Employee delivering to the Company shares of Company Common Stock with a Fair Market Value on the date of delivery equal to the amount of such gain. To the extent permitted by applicable law, the Company shall have the right to offset such gain against any amounts otherwise owed to the Employee by the Company (whether as wages, vacation pay, or pursuant to any benefit plan or other compensatory arrangement). For purposes of this Section 5(c), the “Fair Market Value” of a share of Company Common Stock on any date shall be (i) the closing sale price per share of Company Common Stock during normal trading hours on the national securities exchange on which the Company Common Stock is principally traded for such date or the last preceding date on which there was a sale of such Company Common Stock on such exchange or (ii) if the shares of Company Common Stock are then traded on the NASDAQ Stock Market or any other over-the-counter market, the average of the closing bid and asked prices for the shares of Company Common Stock during normal trading hours in such over-the-counter market for such date or the last preceding date on which there was a sale of such Company Common Stock in such market, or (iii) if the shares of Company Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Compensation Committee, in its sole discretion, shall reasonably determine. In the event that the Company seeks to enforce the provisions of this Section 5(c), and such enforcement is contested by the Employee, and it is finally determined that the Employee is not subject to the provisions of this Section 5(c), then the Company shall (i) reimburse the Employee for reasonable attorneys’ fees incurred by the Employee in connection with such contest; and (ii) pay to the Employee an additional amount equal to one (1) times the amount in clause (i); provided that such payment under this clause (ii) shall not exceed $250,000.

(d)Any termination of the Employee’s employment or of this Agreement shall have no effect on the continuing operation of this Section 5.

(e)The Employee acknowledges and agrees that the Company will have no adequate remedy at law, and could be irreparably harmed, if the Employee breaches or threatens to breach any of the provisions of this Section 5. The Employee agrees that the Company shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 5, and to specific performance of each of the terms hereof in addition to any other legal or equitable remedies that the Company may have. The Employee further agrees that Employee shall not, in any equity proceeding relating to the enforcement of the terms of this Section 5, raise the defense that the Company has an adequate remedy at law.

(f)The terms and provisions of this Section 5 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Employee’s future employment imposed by this Section 5 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 5 unreasonable in duration or geographic scope or otherwise, the Employee and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(g)The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 4 of this Agreement would not have been promised in the absence of the Employee’s promises under this Section 5.

6.   CONFIDENTIAL INFORMATION

The Employee agrees to substantially comply with the terms set forth in the Proprietary Information and Inventions Agreement between the Employee and the Company, a copy of which is attached hereto as Exhibit A and incorporated by reference herein.

7.   TERMINATION

(a)   Termination by the Company for Cause

The Company may terminate the Employee’s employment hereunder for cause. If the Company terminates the Employee’s employment hereunder for cause, the Employment Period shall end and the Employee shall only be entitled to any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the date of termination of the Employee’s employment with the Company.

If the Employee’s employment is to be terminated for cause, the Company shall give written notice of such termination to the Employee. Such notice shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Employee’s employment for cause.

(b)   Termination Without Cause or Termination For Good Reason

The Company may terminate the Employee’s employment hereunder without cause and the Employee may terminate Employee’s employment hereunder for good reason. If the Company terminates the Employee’s employment hereunder without cause, or if the Employee terminates Employee’s employment hereunder for good reason, the Employment Period shall end and the Employee shall only be entitled to (i) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company; (ii) a lump sum payment in an amount equal to the Employee’s annual Base Salary as provided in Section 4(a) above; (iii) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such date of termination; and (iv) the right to exercise immediately any stock options and to freely trade any restricted stock granted to the Employee which, but for such termination, would have become exercisable or tradable, as the case may be, within one year of the date of such termination without cause or for good reason. Notwithstanding any other provision of this Agreement, in addition to the benefits described above, if Employee is terminated without cause or terminates his employment for good reason as a result of a Change in Control of the Company (including without limitation any termination within two (2) years of a Change in Control which shall be deemed to be as a result of a Change in Control) then Employee shall also be entitled to a lump sum payment in an amount equal to the greater of (i) the Employee’s then targeted annual bonus or (ii) the Employee’s targeted annual bonus immediately prior to the Change in Control.

If the Employee’s employment is to be terminated without cause, the Company shall give the Employee thirty (30) days prior written notice of its intent to so terminate the Employee’s employment. If the Employee intends to terminate Employee’s employment for good reason, the Employee agrees to give the Company at least thirty (30) days prior written notice.

(c)   Termination Due to Death or Disability

The Company may terminate the Employee’s employment hereunder due to the Employee’s inability to render, for a period of three consecutive months or an aggregate of any on hundred twenty (120) days within any six (6) month period, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician selected in good faith by the Company (“Disability”). In the event of the Employee’s death or a termination of the Employee’s employment by the Company due to Disability, the Employment Period shall end and the Employee, Employee’s estate or Employee’s legal representative, as the case may be, shall only be entitled to (i) (a) any Base Salary accrued or annual bonus awarded and earned but not yet paid as of the actual date of termination of the Employee’s employment with the Company, and (b) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company; and (ii) in the case of Disability, (a) continuation of payment of the Employee’s Base Salary, as set forth in Section 4(a) above, until the Employee commences to receive payments under the Company’s long-term disability plan, (b) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in Section 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination for one (1) year after the date of termination and (c) the right to exercise immediately that proportion of the stock options (rounded up to the nearest whole number of shares) granted to the Employee which would become exercisable on or before the May __ immediately following the date of termination of the Employee’s employment with the Company due to Disability which is equal to the number of days worked by the Employee from, but excluding, the May __ immediately preceding such termination date to, and including, such termination date divided by 365 days.

(d)   Voluntary Termination

The Employee may affect a Voluntary Termination of Employee’s employment with the Company hereunder. A “Voluntary Termination” shall mean a termination of employment by the Employee on Employee’s own initiative other than a termination due to death or Disability or a termination for good reason. A Voluntary Termination shall not be, and shall not be deemed to be, a breach of this Agreement and shall result in the end of the Employment Period and only entitle the Employee to all of the rights and benefits which the Employee would be entitled in the event of a termination of the Employee’s employment by the Company for cause.

(e)   Termination by the Company at End of Employment Period

Notwithstanding any provision of this Agreement to the contrary, if (a) the Employment Period is not terminated early under Sections 7(a), 7(b), 7(c) or 7(d) above and (b) the Company provides written notice to the Employee, pursuant to Section 2 above, that it does not wish to extend or further extend the Employment Period, then the Employee’s employment with the Company shall end on the last day of the Employment Period and the Employee shall be entitled to (x) continuation of payment of the Employee’s Base Salary, as provided in Section 4(a) above, as of the date of termination of the Employee’s employment with the Company for a period equal to (1) one year less the number of days notice given by the Company to the Employee that it does not wish to extend or further extend the Employment Period (such notice period shall be deemed to commence as of the date of such written notice by the Company); (y) continuation of the health and welfare benefits of the Employee, Employee’s spouse and their eligible dependents, if any, as set forth in 4(c) above (except for Disability Insurance), or the economic equivalent thereof, at the same cost and level in effect on the date of termination of the Employee’s employment with the Company for one (1) year after such termination; and (z) the right to exercise immediately any stock options and to trade freely any restricted stock granted to the Employee which, but for such termination, would have become exercisable or freely tradable, as the case may be, on or before the May __ immediately following the date on which the one (1) year period referred to the preceding subclause (x) ends; provided, however, that the severance payment by the Company to the Employee under subclause (x) of this Section 7(e) shall be offset on a dollar for dollar basis by any cash, or the fair market value of any non-cash, remuneration, benefit or other entitlement earned, received or receivable by the Employee in connection with the employment of such Employee in any capacity, other than dividends, interest income or other passive investment income earned as a result of an interest in a business or entity of which the Employee owns less than 2% of the beneficial ownership. If the Employee shall be entitled to any such severance payment from the Company after the termination of the Employment Period, the Employee shall have the obligation to notify the Company of any employment, consultation or other activity which may involve any remuneration, benefits or other entitlements as described above, and as to which the Company may be entitled to an offset.

8.   SURVIVAL

The rights and obligations of the parties hereunder shall survive the termination of the Employee’s employment hereunder and the termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

9.   WHOLE AGREEMENT AND MODIFICATION

This Agreement, including the “Proprietary Information and Inventions Agreement”, sets forth the entire agreement and understanding of the parties with respect to the subject matter contained herein, and supersedes all prior and existing agreements except as set forth above, whether written or oral, between them concerning the subject matter contained herein. This Agreement may be modified only by a written agreement executed by each party to this Agreement.

10.   NOTICES

Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth above or to such other address as the party shall have furnished in writing in accordance with this provision. Notice to the estate of the Employee shall be sufficient if addressed to the Employee in accordance with this provision. Any notice or other communication given by certified mail shall be deemed given three (3) days after posting. However, a notice changing a party’s address shall be deemed given at the time of the receipt of the notice.

11.   WAIVER

Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing, signed by the party giving such waiver.

12.   SUCCESSORS

(a)   Effect on Employee

This Agreement is personal to the Employee and, without the prior express written consent of the Company, shall not be assignable by the Employee, except that the Employee’s rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition, intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Employee’s heirs, beneficiaries and/or legal representatives.

(b)   Effect on Company

This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns. The Company shall reasonably require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance reasonably satisfactory to the Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

13.   NO THIRD PARTY BENEFICIARIES

This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement except as provided in Section 12 of this Agreement.

14.   COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.   GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflict of laws thereof.

16.   SEVERABILITY

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

17.   NO VIOLATION OF OUTSTANDING AGREEMENT(S)

Employee hereby warrants that the execution of this Agreement and the performance of his duties hereunder do not and will not violate any agreement with any other person or entity.

IN WITNESS WHEREOF, the parties have duly executed this Agreement which shall be effective as of the effective date noted above.

	NEUROGEN CORPORATION
By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	/s/ Bertrand L. Chenard
	Bertrand L. Chenard

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William H. Koster, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Neurogen Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.  

By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	Date: May 10, 2007

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen R. Davis, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Neurogen Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.  

By:	/s/ Stephen R. Davis
	Stephen R. Davis
	Executive Vice President and Chief Operating Officer
	Date: May 10, 2007

EX-32.1

Exhibit 32.1

Neurogen Corporation

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), the undersigned hereby certifies as follows:

1. I am the President and Chief Executive Officer of Neurogen Corporation (the “Company”).

2. To the best of my knowledge:

a.   The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2007 accompanying this Certification, in the form filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

b.   The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ William H. Koster
	William H. Koster
	President and Chief Executive Officer
	Date: May 10, 2007

EX-32.2

Exhibit 32.2

Neurogen Corporation

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), the undersigned hereby certifies as follows:

1. I am the Executive Vice President and Chief Operating Officer of Neurogen Corporation (the “Company”).

2. To the best of my knowledge:

a.   The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2007 accompanying this Certification, in the form filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

b.   The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Stephen R. Davis
	Stephen R. Davis
	Executive Vice President and Chief Operating Officer
	Date: May 10, 2007