**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **ý  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                         |
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| **For the Fiscal Year Ended December  31, 2002**                                                                                                                                          |
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| **o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                          |
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| **For the Transition Period From               to              ** |

 

**Commission File No. 0-23553**

 

**PHOTOGEN TECHNOLOGIES, INC.**

(Exact name ofRegistrant as specified in its Charter)

 

**NEVADA**

(State or otherjurisdiction ofincorporation or organization)

 

**62-1742885**

(I.R.S. EmployerIdentification No.)

 

**140 UNION SQUARE DRIVENEW HOPE, PA 18938**

(Address ofprincipal executive offices) (Zip Code)

 

**(215) 862-6860**

(Registrant’stelephone number, including area code)

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act: **common stock, par value $.001 per share**

 

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

 

Yes  ý No  o

 

Indicate by checkmark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).

 

Yes  o No  ý

 

The approximate aggregatemarket value of voting and non-voting common stock held by non-affiliatescomputed as of June 28, 2002 and March 5**,**2003, based upon the last sale price ofthe common stock reported on the Nasdaq SmallCap Market was approximately$27,738,961 and $13,555,713, respectively. For purposes of this calculation only, the registrant has assumed thatits directors and executive officers, and any person known to the issuer tohold 10% or more of the outstanding common stock, are affiliates.

 

The number of shares outstandingof each of the registrant’s classes of common stock, as of March 5, 2003:  17,114,868.

 

 

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**PART I**

 

Photogen Technologies,Inc. and its 80.1% owned affiliate, Sentigen, Ltd., are collectively referredto as “Photogen,” the “company,” “we,” or “us.”  Portions of the discussion in this Form 10-K containforward-looking statements and are subject to the “Risk Factors” describedbelow in Item 1.

 

In November, 2002, weeffected a one-for-four reverse split of our common stock and split off ourtherapeutic line of business.  Unlessotherwise indicated, all data (including historical numbers) in this Form 10-Kreflect the impact of the reverse split and the split off of our therapeuticline of business.

 

**ITEM 1. BUSINESS.**

 

**INTRODUCTION**

 

During the past twoyears, we have refocused our efforts on the development of medical imagingagents, including cardiovascular and lymphography contrast imaging agents.  We accomplished this shift in focus bysplitting off our therapeutic line of business, as more fully described in“Recent Developments” below.

 

We are currently anemerging, development-stage biopharmaceutical company focused on developing anovel contrast agent with potential applications (1) as a blood pool agent, todiagnose diseased tissue in the cardiovascular system and other organs, and (2)to diagnose cancer metastasizing into the lymphatic system.  We are the exclusive licensee of a group ofproprietary materials, the lead compound of which is a contrast agent we referto as PH-50 or N1177.  We establishedthe two names to distinguish commercialization rights between cardiovascularimaging (and all other indications) (PH-50) to which we retain rights, and thefield of lymphography (N1177), which we licensed to our joint venture(Sentigen, Ltd.) with affiliates of Elan Corporation, plc (“Elan”).

 

Pharmaceutical imagingagents are used with computed tomography (“CT”), nuclear medicine,echocardiography and magnetic resonance imaging (“MRI”) equipment in order toincrease the diagnostic capabilities of these techniques.  By enhancing the contrast between differenttypes of tissues, these intravenously administered contrast agents providecritical anatomical and disease state information that is not obtainable usingthe equipment alone.  There are numerouspotential applications for a contrast agent used in imaging parts or all of thecardiovascular system as well as other organs. Our proposed products have the potential to enhance a physician’sability to diagnose certain cardiovascular abnormalities and the spread ofcancer in the lymphatic system.

 

We have no approveddiagnostic products or operating revenues at this time; however, we haveentered into a term sheet relating to a transaction with AlliancePharmaceutical Corp. (“Alliance”).  Theterm sheet gives us an exclusive option until April 19, 2003 to acquire all ofthe assets of Alliance related to

 

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medical imaging,including all manufacturing and marketing rights to *Imagent*® (formerly *Imavist*TM),Alliance’s ultrasound imaging contrast agent that was approved by the FDA formarketing in the United States in June, 2002 (the “*Imagent*® business”).  It is anticipated that *Imagent*® will be ready tomarket in the third quarter of 2003. Our acquisition of the *Imagent®*business is subject to certaincontingencies, including our ability to raise the funds to finance theacquisition.  See “Recent Developments”below.

 

We have 6 full-timeemployees.  A majority of our employeeshold Ph.D.’s or other advanced degrees. Our senior executive and clinical development team is based at ourcorporate headquarters in New Hope, Pennsylvania, a suburb ofPhiladelphia.  We have personnel with expertisein clinical development, clinical trial design and regulatory approval processes.  We also work closely with consultantsexperienced in drug development and regulatory requirements.

 

*Our History*

 

In May, 1997, PhotogenTechnologies, Inc. (formerly known as M T Financial Group, Inc. (“M TFinancial”)), acquired Photogen, Inc. through a subsidiary merger.  As a result, Photogen, Inc. became awholly-owned subsidiary of M T Financial and then M T Financial changed itsname to Photogen Technologies, Inc.  InNovember, 2002, we effected the split off of Photogen, Inc. and substantiallyall of the assets and all of the liabilities related to our therapeutic line ofbusiness, including a compound known as PH-10, to our five foundingstockholders (Drs. Wachter, Dees, Fisher and Scott and Mr. Smolik, who arecollectively referred to as the “Tennessee Stockholders”) in exchange for andin cancellation of all of their stock in Photogen Technologies, Inc. (5,137,109shares).  At that time, we also sold$9.0 million of our common stock to a group of institutional investors at aprice of $1.08 per share and effected a one-for-four reverse split of ourcommon stock.  In this offering, wereceived $6,500,000 in cash and Tannebaum, LLC's $2,500,000 credit facility waseliminated and converted into 2,314,815 shares of common stock at $1.08 pershare.  In December, 2002 and thebeginning of January, 2003, we sold an additional approximately $3.0 million ofour common stock at $1.08 per share to certain institutional investors andaccredited individual investors. See “Recent Developments” below.

* *

*Available Information*

 

Our website(www.photogen.com) is under development and at this time you cannot obtaincopies of our SEC filings on our website; however, you can obtain, free ofcharge, a copy of our filed annual reports on Form 10-K, our quarterly reportson Form 10-Q, our current reports on Form 8-K, and any amendments to thosereports, our proxy statements and information statements, by sending a requestfor those documents to our corporate secretary, Brooks Boveroux, at 140 UnionSquare Drive, New Hope, PA 18938, or calling (215) 862-6860.  Our filingsare also available to the public from the SEC’s website at (www.sec.gov) or atthe SEC’s Public Reference Rooms in Washington D.C., New York, N.Y. andChicago, IL.  The Public Reference Roomin Washington, D.C. is located at 450 Fifth Street N.W.  Please call the SEC at 1-800-SEC-0330 forfurther information on the Public Reference Room.

 

###### **CORE TECHNOLOGY**

 

In 1999, we entered intoan exclusive license for a group of proprietary materials, the lead compound ofwhich was known as WN67722.  At thattime, the product was being developed only for the field of lymphography.  We now call this product N1177 (for use inthe field of lymphography) or PH-50 (when referring to cardiovascular and allother indications).  The productdesignations PH-50 and N1177 refer to the same chemical compound.  These materials are very small particlesdesigned to travel through the circulatory or lymphatic system (depending onhow they are administered) and are called “nanoparticulates.”  The compound is covered by patents andpatent applications filed in the U.S. and elsewhere.  As part of the initial acquisition of this product we alsoacquired patented methods for performing minimally invasive lymphography usingx-ray, CT or MRI.

 

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**Cardiac andvascular imaging**

 

According to 1998statistics of the National Heart, Lung, and Blood Institute, ischemic heartdisease is the leading cause of death in the U.S., accounting for one of everyfive deaths.  The American HeartAssociation (www.americanheart.org) estimates that approximately 1.1 millionAmericans suffer a myocardial infarction (“MI”) annually, and over 40 percentwill not survive the event. Atherosclerotic coronary artery disease (“CAD”) is the underlying causeof most ischemic cardiac events and can result in MI, congestive heart failure,cardiac arrhythmias and sudden cardiac death. Clinically significant CAD is uncommon in men under 40 andpre-menopausal women, but risk increases with advancing age and in the presenceof risk factors such as smoking, hypertension, diabetes, high cholesterol andfamily history of heart disease.  Anginais the most common presenting symptom of myocardial ischemia and underlyingCAD, but in many persons the first evidence of CAD may be MI or suddendeath.  The American Heart Associationestimates that 1-2 million middle-aged men have asymptomatic butphysiologically significant coronary disease, also referred to as silentmyocardial ischemia.  Over two millionangiography procedures are conducted annually in the U.S.  Although mortality from heart disease hasdeclined steadily over the past three decades in the U.S., the total burden ofcoronary disease is predicted to increase substantially over the next 30 yearsdue to the increasing size of the elderly population.

 

*Development of PH-50*

 

We are developing PH-50to extend the clinical utility of x-ray based imaging, chiefly CT.  The indications we envision for PH-50include:  CT angiography (of the heartand peripheral blood vessels), assessment of whole-body disease burden ofatherosclerosis, organ perfusion and cancer staging.  PH-50 is a contrast agent that is not penetrated by x-rays(called “radiopaque”).  When injectedsystemically into the circulatory system (i.e., the blood stream), it remainswithin the system mixing with the blood and flowing throughout the circulatorysystem.  As the compound is radiopaque,a physician using a device such as a CT machine along with the contrast agentcan create an image of the desired area. In our preclinical studies we have obtained encouraging results thathave been demonstrated by imaging heart, liver and other organs with resultsthat are comparable or superior to those obtained by currently available products.  We believe that PH-50 could allow theimaging of the cardiovascular system (angiography) and other organs as anon-invasive procedure, at lower cost and with reduced risk and morbidity.

 

We are completingpre-clinical studies of PH-50 for potentially significant new applications incardiovascular imaging and have filed for additional patent protection of theuse of the compound for vascular and organ imaging applications.  We plan to develop PH-50 as a blood poolcontrast agent for several indications. Based on considerable existing preclinical studies and human clinicalexperience, we believe that we can commence further clinical studies in thenear future.  Our initial developmentstrategy will be to evaluate PH-50 in Phase 1 studies for cardiovascular andblood pool imaging using advanced CT and PH-50 as a contrast agent.  We plan to conduct Phase 1 trials to assesssafety and patient tolerance of PH-50 as a cardiovascular imaging agent throughintravenous administration in the fourth quarter of 2003.  As part of the original acquisition and ourfurther research, we have a substantial body of safety information in bothanimals and humans.  Pre-clinicaltoxicology and pharmacology data for PH-50/N1177 includes testing in multipleanimal models including studies in several models utilizing intravenousadministration, which is the route of administration to be utilized in thecardiovascular indications.  In animalexperiments, our investigators from Stanford University have shown that PH-50can be used as an effective imaging agent to visualize cardiac structures aftera single, low-dose intravenous injection/infusion.  We have an open investigational new drug application (“IND”) withthe FDA for the product in the lymphography indication.  We intend to file an amendment to thisapplication for the intravenous administration of PH-50 for use as a blood poolagent.

 

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Scaled-up manufacturingof PH-50/N1177 is currently being performed for us by Elan through itsNanosystems division.  Over the past twoyears, Nanosystems has undertaken substantial work to manufacture PH-50 incompliance with the FDA’s current Good Manufacturing Procedures (“GMP”)regulations and in a scalable process sufficient to support commercialquantities.  Currently, Nanosystems isour sole supplier of the raw materials necessary to produce PH-50 andN1177.  There can be no assurance thatNanosystems will continue to supply us with the raw materials we need on termsthat are acceptable to us.

* *

*Competition for PH-50*

 

The existing market forradiopaque contrast agents is estimated to be approximately $3.4 billionworldwide.  The dominant uses of media,totaling 86 percent, are those employed in conjunction with CT or x-ray scans.  Approximately half of the usage is in theU.S.  We believe that Omnipaque®,marketed by a unit of Amersham, is the leading agent utilized in coronaryangiography.  Other companies marketingcontrast agents include Mallinckrodt, Inc. (a unit of Tyco International Ltd.),Berlex Laboratories, Inc. (a subsidiary of Schering AG (“Schering”)) andBracco.  Physicians also use othermodalities, such as MRI and ultrasound, to image internal vasculature andorgans.  These modalities, including CTimaging, each have particular attributes that may make their use applicable toany particular situation.

 

##### ***Lymphography***

 

Lymphography is aprocedure used to determine if a patient’s cancer has spread to the lymphnodes.  The presence or absence ofcancer in the lymph nodes is an important indication of whether the disease hasspread from the original tumor and the seriousness of the disease.  It also provides oncologists with criticalinformation to help determine the stage of the disease and the appropriatecourse of treatment.

 

It is generally acceptedthat breast cancer and melanoma spread by way of the lymph system as do cancersof the lung, prostate and many other cancers. Clinical studies have demonstrated that patients with cervical cancer havean increased survival rate if lymph nodes with cancerous tissue areremoved.  Effective treatment of thesecancers can be aided by an early assessment of the presence or absence ofdisease (micro-metastases) in the lymph nodes.

 

Patients believed to havecancer currently are subjected to injections of blue dye or radioactiveparticles that track the materials to the general area of the lymph node.  In some of these diseases, the location ofthe lymph node is difficult to access. In the case of breast cancer, oncologists may remove 15-30 underarmlymph nodes for biopsy.  Additionaltreatment will be required if cancer is discovered.  Approximately 80% of the patients diagnosed with breast cancer ormelanoma who undergo these painful procedures are found to have no sign ofdisease in their nodes.

 

The particular propertiesof N1177 enable it to travel through the lymph system to the lymph nodes mostlikely to be affected if the cancer has spread.  It is recognized by the body’s immune system as being a foreignbody and thus is normally ingested by macrophage (cells that engulph foreignmaterial in the body for eventual elimination).  It is a particular characteristic of tumors that they contain noor a minimal number of macrophage. N1177 is radiopaque, and thus is seen on a CT scan as white areas.Tumors within a node, as they would not have retained N1177, are seen as darkareas.  The difference in contrastcreated by the presence or absence of the imaging agent serves as the basis todetermine the presence or absence of disease. We expect that N1177 would remain in the node to allow for an effectiveimaging procedure with a good safety profile and acceptable clearancetimes.  A further benefit of theseminimally invasive procedures is that they could be used multiple times andtherefore provide a means to monitor the results of cancer treatment and detectrecurrence.

 

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*Development of N1177*

 

We are developing N1177through a joint venture with affiliates of Elan.  Our goal is to demonstrate that the use of N1177 will enablephysicians to precisely locate tumorous nodes by first injecting the materialin the vicinity of the tumor and then taking an image (picture) using a CTdevice.

 

Considerable preclinicaltesting of N1177 has been conducted in multiple animal models.  The results of these studies suggest afavorable safety and efficacy profile for N1177.  Phase I clinical studies to evaluate the safety of N1177 in a totalof 65 patients have been completed.  Theresults of the Phase I study involving 45 subjects indicate the safety andpharmacokinetic data are consistent with safety, pharmacokinetic and metabolicdata obtained in previous nonclinical safety and disposition studies.  In addition, the number of nodes visualizedshowed a statistically significant dose effect (an increase in the number ofnodes visualized as the dose increased).

 

We plan to commence Phase2 clinical studies for detection of cancer metastasis in lymph nodes inpatients with cervical cancer in 2003, subject to the availability ofsufficient capital.  In this patientpopulation, studies document an increase in survival when lymph nodescontaining cancer are removed.  Tumoridentification by CT imaging will be correlated to the results of biopsyresults from patients undergoing surgery to demonstrate effectiveness inlocating nodes and identifying those with cancer in them.

* *

*Competition for N1177*

 

As with PH-50, N1177 willbe subject to competition with other companies marketing contrast agents suchas Amersham, Mallinckrodt, Inc. (a unit of Tyco International Ltd.), BerlexLaboratories, Inc. (a subsidiary of Schering), and Bracco, and with othermethods of imaging, such as MRI and ultrasound.

** **

**Sentigen Ltd. -Joint Venture with Elan Corporation**

 

In October, 1999, weentered into a joint venture with affiliates of Elan.  The joint venture company, Sentigen Ltd., is developing N1177, ananoparticulate agent used to image lymph nodes to detect cancer.  We own 80.1 percent of Sentigen with thebalance being owned by affiliates of Elan. We licensed to Sentigen certain methods and other proprietary technologyfor use in lymphography, and we sub-licensed to Sentigen proprietary compoundswe had obtained by license from Massachusetts General Hospital and NycomedImaging AS.  Elan, through its drugdelivery division, Elan Pharmaceutical Technologies, licensed to Sentigen itsNanoCrystalTM stabilized nanoparticulate formulation technology to develop thediagnostic imaging agents.

 

To finance the initialcapital requirements of Sentigen, including the licensing by Sentigen ofcertain technology, we sold to a unit of Elan $12,015,000 of our Series AConvertible Preferred Stock (the “Series A Preferred Stock”).  Elan may exchange the Series A Preferred Stockfor a number of shares of Sentigen stock that will enable Elan to increase itsownership of Sentigen up to 50 percent. Alternatively, Elan may convert the Series A Preferred Stock intoPhotogen common stock at a conversion price of $84.68 per share.

 

As part of the jointventure agreement, Elan provided us with a $4.8 million credit facility to fundour share of the then anticipated development costs of the joint venture.  On November 12, 2002, all of the thenoutstanding principal and interest ($3,082,487) was converted at a price of$24.00 per share into 128,437 shares of our common stock and the line of creditwas cancelled.

 

Our agreement with Elanprovides that Elan has the right to nominate a member to our Board of Directorsuntil October, 2004 or as long as Elan owns 10% of our common stock (Elancurrently owns less

 

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than 10% of our commonstock).  Elan also has a preemptiveright to participate in our future equity offerings to maintain its pro ratainterest in Photogen.  Elan agreed notto exercise this preemptive right in connection with our recent sale of commonstock to certain institutional and accredited investors.

###### ** **

###### **RECENT DEVELOPMENTS**

 

**Split Off Transaction**

 

From our inception, wewere involved in two lines of business:

 

•                                          Diagnosis of diseased tissue

 

•                                          Treatment of diseased tissue

 

In the past, our researchand development efforts followed this dual focus.  We worked to develop therapies to treat cancer, pre-cancerousconditions, psoriasis and other dermatological conditions, using ourproprietary multi-photon laser technologies, or using an agent called PH-10with a variety of energy sources in a regimen called photodynamic therapy, orthe activation of a substance by an energy source to achieve a therapeuticeffect.  We have also been developingproducts, N1177 and PH-50, to diagnose the spread of cancer to a patient’slymph nodes and to diagnose cardiovascular disease, respectively.

 

Our pursuit of bothdiagnostic and therapeutic lines of businesses led to a number of challenges.  We found it increasingly difficult to raisecapital with such a diverse product pipeline and to concentrate our efforts ona particular application from inception through development.  In order to attract capital investment andto take advantage of what we perceived to be the best market opportunities forour proposed products, we concluded that it was necessary to devote our effortsand resources to the development of our medical imaging diagnostic technologiesrather than the therapeutic technologies.

 

We believe the medicalneed and economic potential of both PH-50 (for cardiovascular diagnostics) andN1177 (for lymphography) is of such significance that we decided to focussubstantially all of our development efforts and resources in this area for theforeseeable future.  We entered into aSeparation Agreement with the Tennessee Stockholders in order to enhance ourability to secure additional financing and pursue market opportunities, toenable the Tennessee Stockholders to focus on the development of therapeutictechnologies arising from their inventions, and to resolve any differences ofopinion with them as to how to allocate financial and management resources.

 

We separated thetherapeutic and diagnostic lines of business by first transferring substantiallyall assets and liabilities associated with the diagnostic business to PhotogenTechnologies, Inc. and retaining substantially all assets and liabilitiesassociated with the therapeutic business in Photogen, Inc.  Then, Photogen Technologies, Inc., Photogen,Inc. and the Tennessee Stockholders engaged in a “split off” transaction inwhich the Tennessee Stockholders transferred all of their common stock ofPhotogen Technologies, Inc. to the company for redemption in exchange for allof the common stock of Photogen, Inc. The Tennessee Stockholders beneficially owned 5,137,109 shares ofPhotogen Technologies, Inc. common stock (approximately 52.9% of theoutstanding shares), and those shares were subsequently cancelled by PhotogenTechnologies, Inc.

 

Aidan King, who waspreviously appointed to our Board of Directors by Elan, declined to serve onour Board of Directors in November, 2002. Dr. Wachter, one of the Tennessee Stockholders, resigned as a directorand officer of Photogen upon the effectiveness of the split offtransaction.  Dr. Scott, also aTennessee stockholder, resigned as an officer of Photogen upon theeffectiveness of the split off transaction.

 

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**Financing Transaction**

 

In November, 2002, wesold $9,000,000 of our common stock at a price of $1.08 per share to a group ofinstitutional investors which included Mi3, L.P. (“Mi3”), Oxford BioSciencePartners IV L.P. and MRNA Fund II L.P. (collectively, the “InstitutionalInvestors”).  In this offering, wereceived $6,500,000 in cash and Tannebaum, LLC’s $2,500,000 credit facility waseliminated and converted into 2,314,815 shares of common stock at $1.08 pershare.  Tannebaum, LLC was at that timecontrolled in part by Dr. Weinstein, one of our directors.

 

In December, 2002, weconsummated a second closing of the financing transaction and sold anadditional 2,804,539 shares of our common stock at $1.08 per share for anaggregate of $3,028,902 to a group of institutional investors and individualaccredited investors.  The final closingof the financing took place in January, 2003 at which time we sold anadditional 27,778 shares of our common stock at $1.08 per share for anaggregate of $30,000 to two individual accredited investors.

 

As part of the financingtransaction, we entered into a Registration Rights Agreement requiring us tofile a registration statement with the SEC within 45 days of the closing of thefinancing transaction to cover the Institutional Investors’ sales of theshares.** **The Institutional Investors inthe financing transaction have deferred the implementation of this requirement.

 

As part of the financingtransaction, the Institutional Investors entered into a Voting, Drag-Along andRight of First Refusal Agreement (“Voting Agreement”) with Dr. Weinstein,Stuart Levine (individually and as co-trustees of the Theodore Tannebaum Trust)and Tannebaum, LLC (collectively, the “Chicago Stockholders”).  The Voting Agreement provides, among other things,that each of its parties will vote all shares of which it is the beneficialowner as follows:

 

•                                          To maintain the total number of directors at seven.

 

•                                          To amend our Articles of Incorporation or Bylaws inaccordance with the recommendation of five of the seven directors.

 

•                                          For the election of the following directors:

 

•                  One person nominated by Mi3 (William D. McPhee);

 

•                  One person nominated by the holders of 80% of the shares owned by theInstitutional Investors (Alan Watson, Ph.D.);

 

•                  One person nominated by the holders of 80% of the shares owned by theChicago Stockholders (Dr. Weinstein);

 

•                  One person appointed by our Board of Directors as the Chief ExecutiveOfficer (Taffy Williams, Ph.D.)

 

•                  One person nominated by Elan International Services, Ltd. (“EIS”) inaccordance with and subject to our October 20, 1999 Securities PurchaseAgreement with EIS (this position is currently vacant); and

 

•                  Two persons (or three if EIS’s right to nominate a director expires)with industry experience in the healthcare, biotech or pharmaceutical industries,as nominated by our Board of Directors and approved by the holders of 80% ofthe shares

 

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beneficially owned by the Institutional Investors(Gene Golub and Lester McKeever, Jr.).

 

•                                          To maintain an Audit Committee and CompensationCommittee of the Board, each with three members, and to appoint one director toserve on each Committee nominated by the holders of 80% of the shares owned bythe Institutional Investors (Mr. McPhee).

 

The Voting Agreement alsoprovides that none of its parties will sell, transfer, pledge, grant any optionfor, or otherwise dispose of any of their shares of company stock except incompliance with the Voting Agreement. Following the closing of the financing, Mr.  McPhee was appointedto the Photogen Board of Directors in accordance with our bylaws.

 

As a condition to theclosing of the financing transaction:

 

•                  All of our Series B Convertible Preferred Stock (the “Series BPreferred Stock”) was converted into common stock at the initial closing of thefinancing transaction.  In exchange forthis conversion we agreed that the conversion ratio of the Series B PreferredStock would change from 1.44703 (the conversion ratio after taking into considerationall issuances of common stock before the institutional financing) to 4.25(pre-reverse split).  The result wasthat all of the Series B Preferred Stock was converted into a total ofapproximately 422,316 shares of common stock; the Series B Preferred Stock isno longer outstanding, nor is there any liquidation preference associated withthe Series B Preferred Stock.

 

•                  All of the outstanding principal and accrued interest under the Elanline of credit was converted into a total of 128,437 shares of our commonstock.

 

**One-for-Four Reverse Stock Split**

 

In connection with theclosing of the financing transaction, we were required to make a one-for-fourreverse stock split of our outstanding common stock.  The reverse split was accomplished by amending our Articles ofIncorporation.  The reverse split waseffective in November, 2002.

 

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**Amendment of the 2000 Long Term Incentive Compensation Plan**

 

We adopted the 2000 LongTerm Incentive Compensation Plan (the “2000 Plan”) at our annual meeting ofstockholders held in May, 2000.  As ofJuly 15, 2002, 500,000 shares were reserved for issuance under the 2000 Planand options covering 133,750 of these shares of common stock had been granted.  Our Board of Directors believed that theavailability of additional options to purchase common stock was necessary toenable us to continue to provide our key employees with equity ownership as anincentive to contribute to our success. Also, increasing the number of shares subject to the 2000 Plan was acondition to the closing of the institutional financing required by theInstitutional Investors.  Thus, ourCompensation Committee voted to amend the 2000 Plan to increase the sharescovered by the 2000 Plan by 4,068,750 shares from 500,000 to 4,568,750; and tomodify the definition of “cause” in the 2000 Plan to coordinate with employmentagreements.  The stockholders approvedthe amendment of the 2000 Plan to increase the aggregate number of shares ofcommon stock issuable under the 2000 Plan from 500,000 to 4,568,750 andapproved the amendment of the definition of the term “cause” at our annualmeeting of the stockholders held on October 31, 2002.  In addition, the Compensation Committed approved a reduction inthe shares reserved under our Senior Executive Long Term Incentive CompensationPlan by 250,000 shares (the total number reserved is now capped at 1,000,000shares which was effective concurrently with the increase under the 2000 Plan).

 

**Elan Agreement with the Institutional Investors**

 

We are parties to a jointventure with affiliates of Elan to develop lymphography technologies carriedout through Sentigen, Ltd.  As part ofthe joint venture arrangements, among other things, we issued EIS (i) 115,385shares of our common stock and a warrant to acquire additional shares of commonstock, (ii) 12,015 shares of our Series A Preferred Stock, and (iii) aconvertible note in the original principal amount of $4,806,000.  After issuance, the Series A Preferred Stockwas transferred to Elan Pharmaceutical Investments II, Ltd. (“EPI”).  The principal and interest outstanding underthe promissory note ($3,082,487.30) were converted into 128,437 shares of ourcommon stock in connection with the November, 2002 financing.

 

The Certificate ofDesignations, Rights and Preferences (the “Certificate of Designations”) of theSeries A Preferred Stock provides that upon liquidation, dissolution or windingup of the company (whether voluntary or involuntary), the holder of the SeriesA Preferred Stock is entitled to a liquidation preference (the “Series ALiquidation Preference”) of cash or other property out of funds legallyavailable for distribution to our stockholders, before any distribution is madeto the holders of common stock or other securities ranking junior to the SeriesA Preferred Stock.  The amount of theSeries A Liquidation Preference is $1,000 per share.  As of November 12, 2002, the total Series A LiquidationPreference was $15,892,220.

 

One of the conditions tothe closing of the financing transaction was that the holder of our Series APreferred Stock amend the Certificate of Designations to eliminate the Series ALiquidation Preference.  Inconsideration of eliminating the Series A Liquidation Preference, the Series Aconversion price would have been lowered to $12.00 from $84.68 per share.

 

Immediately before our2002 annual meeting of stockholders, we were informed that the holder of theSeries A Preferred Stock could not proceed with these amendments to the termsof the Series A Preferred Stock.  To inducethe Institutional Investors to proceed with the closing of the financing, onNovember 12, 2002, Elan entered into an agreement (the “Elan Agreement”) withthe Institutional Investors.  The ElanAgreement provides that Elan will pay the Institutional Investors an amount incash (or the fair market value of other property) distributed to the holder ofthe Series A Preferred Stock on account of the Series A Liquidation Preferencethat, in the absence of the Series A Liquidation Preference, would have

 

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been paid to thoseInstitutional Investors in accordance with applicable law, up to a maximum of$16,000,000.  Only the InstitutionalInvestors are beneficiaries of the Elan Agreement.  The Elan Agreement was ratified, adopted and approved by thePhotogen common stockholders on January 24, 2003.  The Series A Liquidation Preference remains in effect and theconversion price for the Series A Preferred Stock is still $84.68 per share.

 

**Potential Acquisition of Certain Assets of AlliancePharmaceutical Corp.**

 

On November 21, 2002, weexecuted a term sheet with Alliance giving us an exclusive option to acquirethe *Imagent*business.  *Imagent®* is Alliance’sultrasound contrast agent that was approved by the FDA for marketing in theU.S. in June, 2002.

 

The acquisition issubject to completion of due diligence, negotiation of definitive agreementsand other contingencies, including our obtaining financing for theacquisition.  Under certaincircumstances, if the acquisition does not occur, Alliance may be required topay a break-up fee to us.  The financingstructure contemplated by the term sheet includes our providing bridgefinancing for *Imagent®* activities prior to the acquisition, our payment toAlliance of cash and Photogen common stock at closing and future royaltypayments based upon product sales.

* *

*Imagent®* is an intravenous contrast agent for usewith ultrasound imaging equipment to improve visualization of blood vessels forbetter diagnosis of disease and assessment of organ function.  *Imagent®*consists ofperfluorochemical-based “microbubbles” that reflect ultrasound signals stronglyin the bloodstream and thereby enhance ultrasound images). The initialindication is for use in patients with suboptimal echocardiograms to opacifythe left ventricular chamber and to improve the delineation of the leftventricular endocardial border. Follow-on indications, if approved by the FDA, potentially include usefor body imaging for detection of cancer in solid organs (liver, kidney,prostate, etc.), as well as for perfusion (i.e., the measurement of bloodflow).  Additional clinical studies areplanned by Alliance to support these additional indications.  Currently, *Imagent®* qualifies forreimbursement by the Centers for Medicare & Medicaid Services in allmedical settings for cardiology at rates ranging from $95-$150 per vial.

 

Through March 20, 2003,we have provided bridge financing to Alliance of an aggregate of $2,458,000evidenced by 8% convertible secured promissory notes (the “Alliance Notes”)issued pursuant to the Convertible Secured Note Purchase Agreement dated as ofOctober 4, 2002 (the “Note Purchase Agreement”).

 

Together with any otherholders of notes issued pursuant to the Note Purchase Agreement, we have lienson certain of the assets of Alliance. Our lien on the *Imagent®*-related assets is subordinate inpriority to liens held by Xmark Fund, L.P. and Xmark Fund, Ltd.  As of March 31, 2003, there wasapproximately $4,750,000 of debt outstanding subject to the Xmark liens.  The collateral covered by the prior Xmarkliens includes:  intellectual property,license rights, accounts, contract rights and general intangibles arising underor relating to license rights and certain other contracts, all equipmentlocated at Alliance’s San Diego manufacturing facility, the approved new drugapplication relating to**the *Imagent®* business, all cash held as cashcollateral, and all inventory related to the *Imagent®*business.  Our lien on the assets related to Alliance’sOxygent product is subordinate to a lien held by PFC Therapeutics, LLC(“PFC”).  PFC is a joint venture betweenAlliance and Baxter Healthcare Corporation. The collateral covered by the prior PFC lien includes:  intellectual property, income, royalties andpayments related to Alliance’s Oxygent product.

 

Our other liens on theassets of Alliance are first priority liens and give us, together with anyother noteholders under the Note Purchase Agreement, a security interest in allequipment, inventory, goods,

 

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accounts, generalintangibles, fixtures, documents, deposit accounts, instruments and investmentproperties, proceeds not covered by the Xmark****and PFC prior liens.

 

Alliance has the right tomake payments of interest under the Alliance Notes in shares of its commonstock.  We have the right to convert theoutstanding principal and interest under the Alliance Notes into shares ofAlliance common stock at the conversion price of $0.35 per share.  Any shares of Alliance common stock wereceive in lieu of cash interest payments may have a value less than the cashthat we would otherwise be owed.  Anyshares of Alliance common stock that we receive from Alliance will berestricted securities and subject to Rule 144 trading restrictions.  We have certain demand and piggybackregistration rights with respect to any shares of Alliance common stock that wereceive under the terms of the Note Purchase Agreement.

 

The *Imagent®* business ofAlliance we may acquire includes:

 

•                  *Imagent®*, an FDA-approved product with anexpected launch in the third quarter of 2003;

•                  an FDA-approved manufacturing facility;

•                  $2 million, in sales value, of inventory;

•                  the right to hire a 45-person operating organization; and

•                  a portfolio of intellectual property in imaging technology andultrasound imaging contrast agents, including over 30 patents.

 

Alliance has a worldwidedevelopment and commercialization agreement for *Imagent®* with Schering thatwas amended in February, 2002 to give Alliance exclusive rights to market theproduct in the U.S. until February, 2007, with Schering to be paid a nominalroyalty on such sales.  Alliance mayalso obtain exclusive rights to market the product internationally in exchangefor the payment of additional royalties to Schering.  At the expiration of the period, Alliance has the right to payall of any remaining royalty obligation to Schering and thus retain all rightsto the product on a worldwide basis, or alternatively, to allow Schering theopportunity to obtain co-promotion rights along with Alliance.  It is anticipated that the Scheringagreement would be assigned to us if we consummate the acquisition of the *Imagent®*business.

 

Our ability to consummatethe acquisition of the Alliance assets is subject, among other conditions, toour ability to raise funds for the acquisition.  We are seeking to raise $15 to $20 million through the sale ofour common stock or other securities in a private placement to fund the closingdate cash payment for the acquisition of the *Imagent®* business and toprovide working capital for future operating expenses.

 

Our exclusive option toacquire the medical imaging assets of Alliance expires on April 19, 2003.  If we obtain the necessary financing priorto the expiration of the exclusive option we intend to proceed to close thetransaction, subject to Photogen shareholder approval of the issuance ofadditional shares of our common stock in connection with the financing andother conditions.  We are in activediscussions with several financing sources, but we cannot give assurances thatwe will obtain the necessary financing. There also can be no assurance that:

 

•                  we will be able to obtain an extension of our exclusive option onacceptable terms if we do not obtain the necessary financing by April 19, 2003;

 

•                  Alliance will be in a financial position to repay us in full theoutstanding amounts due under the terms of the Alliance Note if we do notconsummate a transaction; and

 

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•                  Alliance’s employees will agree to become employees of Photogen if weconsummate a transaction with Alliance and offer employment to those employeesor that the *Imagent®*business will be profitable to us.

 

###### **DEVELOPMENT ANDCOMMERCIALIZATION STRATEGY**

 

Our overall strategy isto leverage our proprietary technologies through contractual collaborationswith third parties.  In particular, weplan to:

 

**•****                 **Utilize the company as a platform for theacquisition and/or licensing of technologies in related fields.

 

•                  Conduct preclinical research studies of our products using third partylaboratories and/or clinicians to conduct preclinical trials.  We intend to use the expertise of thesethird party clinicians to collect data necessary to obtain IND’s (anInvestigational New Drug application with the FDA) required to begin humantrials.

 

•                  Utilize our clinical development team and contractual collaborativearrangements with third parties to access the skills and resources required todesign, test, obtain regulatory approval and manufacture our potentialproducts.

 

•                  Market potential products through the use of an internal sales force orstrategic or distribution collaborations as determined by the specificcharacteristics of each product application.

 

We currently do notgenerate any revenues from operations. If we develop a saleable product, we expect to generate revenues fromproduct sales or licensing fees and royalties. Currently, we have not developed any products that are available tomanufacture or sell to the public nor do we have a pricing structure for anypotential products; however, we have an exclusive option to acquire *Imagent*®from Alliance, which is expected to be ready to launch for sale to the publicin the third quarter of 2003 and we may generate revenues from thosesales.  See “Risk Factor – We are adevelopment stage company, we have conducted only limited studies on ourproducts in development and we do not have any revenues from sales,” below.

 

Our ability to developand manufacture any product successfully is subject to numerous contingenciesand uncertainties, including certain “Risk Factors” described below.  Our objectives, business strategy andproduct development efforts are subject to change based on numerous factors,including the results of preclinical and clinical testing, the availability ofsuitable collaborative relationships, the nature of competition, regulatoryrequirements and the availability of capital. The description of our business and business strategy containsforward-looking statements that should be read in conjunction with the “RiskFactors” described below.

###### ** **

###### **PATENTS**

 

We are continuing topursue patent protection for our proprietary technologies with the U.S. Patentand Trademark Office and in various foreign jurisdictions.  We plan to prosecute, assert and defend ourpatent rights whenever appropriate. However, securing patent protection does not necessarily assure us ofcompetitive success.  See “Risk Factors- If we do not obtain and maintain patent or other protection of our coretechnologies (namely PH-50 for cardiovascular imaging and N1177 for ourlymphography materials and methods), we may have difficulty commercializingproducts using these technologies,” below. We currently own two patents issued by the U.S. Patent and TrademarkOffice that are summarized generally below and sixteen patents issued invarious foreign jurisdictions:

 

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•                  Method of diagnosing disease of the lymph nodes through indirectlymphography (U.S. Patent No. 5,114,703)

 

•                  Method of diagnosing disease of the lymph nodes through indirectlymphography using ultrasound or MRI (U.S. Patent No. 5,496,536)

 

These patents expire onMay 30, 2009 and March 15, 2013, respectively. We currently have two patent applications pending in the U.S. and oneapplication filed under the Patent Cooperation Treaty (“PCT”) which aredirected to the use of nanoparticulates including PH-50 for cardiovascularimaging and for delivery of pharmacologically active substances.

 

We have an exclusivelicense (subject to certain limitations) from Massachusetts General Hospitaland Nycomed Imaging AS for the world-wide right to make, market, distribute andsell products using (i) the subject matter covered in pending U.S. and foreignpatent applications relating to the research, development, manufacture andcommercialization of diagnostic imaging agents for medical location, treatmentand diagnosis of tumors and other diseased tissues or other material and (ii)the patent rights related to N1177****in the research, development, manufactureand commercialization of human ethical pharmaceutical products containing thediagnostic imaging compound N1177.

 

In addition, through ourjoint venture with affiliates of Elan, we have granted Sentigen a license ofcertain methods we had previously acquired from Alliance and a sublicense ofour MGH/Nycomed license for use in the research, development, manufacture andcommercialization of nanoparticulate x-ray, CT and/or MRI diagnostic imagingagents using radio-opaque molecules containing iodine that passively targetlymph nodes involved in a diseased state following parenteral administration toa mammal to locate, diagnose and/or treat cancer and/or other diseases.

 

We are continuing topursue patent protection for our other proprietary technologies with the U.S.Patent and Trademark Office, under the Patent Cooperation Treaty and in variousforeign jurisdictions.

 

Some of our patented orlicensed technology arose from research that was partially funded by the U.S.Government (“Government”).  As withother entities whose research is sponsored in any manner by the Government,certain patents that we own or license are subject to Confirmatory Licenses infavor of the Government, as required by applicable federal regulations.  These regulations require us or the patentowner to agree to convey to the Government, upon the Government’s request,rights in the technology if we decide not to continue prosecution of the patentapplications or if the patent owner does not wish to retain title to theinventions covered in the patents.  TheGovernment also retains certain “march in rights” that permit the Government touse the technology under certain circumstances, including if that action isnecessary because we or the patent owner have not taken or are not expected totake effective steps to achieve practical application of the inventions; it isnecessary to alleviate health or safety needs not being met by us or the patentowner; or to meet the requirements for public use specified in certain federalregulations and those requirements are not being met by us or the patentowner.  We intend to prosecute patentapplications and in other respects develop patents we own so that the Governmentwill not exercise its rights under these Confirmatory Licenses.

 

“Photogen” is a trademarkof Photogen. We have filed an application for registration of the mark Photogenin the U.S.  This application ispending.  All other trademarks or tradenames used in this Form 10-K are trademarks or trade names of their respectiveowners.

 

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###### **GOVERNMENT REGULATIONS**

 

All of the products wecurrently contemplate developing require approval by the FDA prior to salesbeing made within the U.S. and by comparable foreign agencies prior to salesbeing made outside the U.S.  The FDA andcomparable regulatory agencies impose substantial requirements on themanufacturing and marketing of pharmaceutical products and medical devices.  These agencies and other entitiesextensively regulate, among other things, research and development activitiesand the testing, manufacturing, quality control, safety, effectiveness,labeling, storage, record keeping, approval, advertising and promotion of ourproposed products.  See “Risk Factors —Our proposed products are subject to extensive testing and government approval,and we may not obtain the approvals necessary to sell our proposed products,”below.

 

The regulatory processrequired by the FDA through which our products must successfully pass beforethey may be marketed in the U.S. generally involves the following:

 

•                  Preclinical laboratory and animal testing;

 

•                  Submission of an application that must become effective before clinicaltrials may begin;

 

•                  Adequate and well-controlled human clinical trials to establish thesafety and efficacy of the product for its intended indication; and

 

•                  FDA approval of the application to market a given product for a givenindication.

 

For imaging andpharmaceutical products, preclinical tests include laboratory evaluation of theproduct, its chemistry, formulation and stability, as well as animal studies toassess the potential safety and efficacy of the product.  Where appropriate (for example, for humandisease indications for which there exist inadequate animal models), we willattempt to obtain preliminary data concerning safety and efficacy of proposedproducts using carefully designed human pilot studies. We will requiresponsored work to be conducted in compliance with pertinent local andinternational regulatory requirements, including those providing forInstitutional Review Board approval, national governing agency approval andpatient informed consent, using protocols consistent with ethical principlesstated in the Declaration of Helsinki and other internationally recognizedstandards.  We expect any pilot studiesto be conducted outside the U.S.; but if any are conducted in the U.S., theywill comply with applicable FDA regulations. Data obtained through pilotstudies will allow us to make more informed decisions concerning possibleexpansion into traditional FDA-regulated clinical trials.

 

If the FDA is satisfiedwith the results and data from preclinical tests, it will authorize humanclinical trials.  Human clinical trialsare typically conducted in three sequential phases, which may overlap.  Each of the three phases involves testingand studying specific aspects of the effects of the pharmaceutical on humansubjects, including testing for safety, dosage tolerance, side effects, absorption,metabolism, distribution, excretion and clinical efficacy.

 

Data from preclinical andclinical trials are submitted to the FDA in an NDA for marketing approval andto foreign regulatory authorities under applicable requirements.  Preparing an NDA or foreign applicationinvolves considerable data collection, verification, analyses and expense, andthere can be no assurance that the applicable regulatory authority will acceptthe application or grant an approval on a timely basis, if at all.  The marketing of pharmaceuticals in the U.S.may not begin without FDA approval.  Theapproval process is affected by a number of factors, including primarily thesafety and efficacy demonstrated in clinical trials and the severity of thedisease.  Regulatory authorities maydeny an application in their sole discretion, if they determine that applicableregulatory criteria have not been satisfied or if additional testing orinformation is required.  One of theconditions for initial marketing

 

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approval, as well ascontinued post-approval marketing, is that a prospective manufacturer’s qualitycontrol and manufacturing procedures conform to the GMP regulations of theregulatory authority.  In complying withthese regulations, a manufacturer must continue to expend time, money andeffort in the area of production, quality control and quality assurance toensure full compliance.  Manufacturingestablishments, both foreign and domestic, also are subject to inspections byor under the authority of the FDA and by other federal, state, local or foreignagencies.  Discovery of previouslyunknown problems with a product or manufacturer may result in restrictions onsuch product or manufacturer, including withdrawal of the product from themarket.

 

We have established acore clinical development team and have been working with outside regulatoryconsultants to assist us in developing product-specific development andapproval strategies, preparing the required submittals, guiding us through theregulatory process, and providing input to the design and site selection ofhuman clinical studies.  The testing andapproval process requires substantial time, effort and financial resources, andwe may not obtain FDA approval on a timely basis, if at all.  Success in preclinical or early-stageclinical trials does not assure success in later stage clinical trials.  The FDA or the research institution sponsoringthe trials may suspend clinical trials or may not permit trials to advance fromone phase to another at any time on various grounds, including a finding thatthe subjects or patients are being exposed to an unacceptable health risk.  Once issued, the FDA may withdraw a productapproval if we do not comply with pertinent regulatory requirements andstandards or if problems occur after the product reaches the market.  If the FDA grants approval of a product, theapproval may impose limitations, including limits on the indicated uses forwhich we may market a product.  Inaddition, the FDA may require additional testing and surveillance programs tomonitor the safety and/or effectiveness of approved products that have beencommercialized, and the agency has the power to prevent or limit furthermarketing of a product based on the results of these post-marketingprograms.  Further, later discovery ofpreviously unknown problems with a product may result in restrictions on theproduct, including its withdrawal from the market.  Marketing our products abroad will require similar regulatoryapprovals by equivalent national authorities and is subject to similar risks.

 

In the ordinary course ofbusiness, we must also comply with a variety of other federal and stategovernmental regulations.  Theseregulations impose, among other things, standards of conduct, record keeping,labeling and reporting.

 

Specific regulationsaffecting our current and proposed operations include: environmental-typedischarge requirements, good laboratory practices governing animal testing,good manufacturing practices regarding the manufacture of drugs and otherFDA-regulated products, animal care and use regulations, laws and regulationsrelating to labor, and required general business practices.  We do not currently anticipate that the costof compliance in these areas, other than obtaining FDA approval, will present amajor obstacle to achieving our goals.

 

Another area ofregulation that will impact our business is the recent developments in healthcare reimbursement and delivery practices as a means to better control healthcare costs.  See “Risk Factors — Changesin health care reimbursement policies or legislation may make it difficult forpatients to use or receive reimbursement for using our products, which couldreduce our revenues,” below.

** **

**COMPETITION**

 

The industry in which weoperate is intensely competitive, and subject to significant change withrespect to technology for the diagnosis and treatment of disease.  Existing or future pharmaceutical and devicecompanies, government entities and universities may create developments thataccomplish similar functions to our technologies in ways that are lessexpensive, receive faster regulatory approval or receive greater marketacceptance than our potential products. See “Risk Factors — Our potential markets are

 

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extremely competitive,and many of our competitors have greater resources and have products that arein more advanced stages of development,” below.

 

Our competitors have, ingeneral, been in existence for considerably longer than we have, and may havegreater capital resources and access to capital; greater internal resources foractivities in research and development, clinical testing and trials, productionand distribution; and existing collaborative relationships with thirdparties.  See “Risk Factors — We have torely on third parties and collaborative relationships for the manufacture,clinical testing and marketing for our proposed products, and it may be difficultto implement our business development plans without these collaborations,”below.

 

The existing market forradiopaque contrast agents is estimated by Frost & Sullivan to beapproximately $3.4 billion worldwide. The dominant uses of media, totaling 86 percent, are those employed inconjunction with CT or x-ray scans. Approximately half of the usage is in the U.S. Omnipaque®, marketed by aunit of Amersham, is believed to be the leading agent utilized in coronaryangiography.  Other companies marketingcontrast agents include Mallinckrodt, Inc. (a unit of Tyco International Ltd.),Berlex Laboratories, Inc. (a subsidiary of Schering) and Bracco.

 

In addition to CT orx-ray scans, other modalities, such as MRI and ultrasound, are also used byphysicians to image internal vasculature and organs.  These modalities, including CT imaging, each have particularattributes that may make their use applicable to any particular situation.

 

**RISK FACTORS**

 

This Form 10-K contains(and press releases and other public statements we may issue from time to timemay contain) a number of forward-looking statements regarding our business andoperations.  Statements that are nothistorical facts are forward-looking statements.  Such forward-looking statements include those relating to:

 

•                                          our current business and productdevelopment plans,

 

•                                          our future business, product developmentand acquisition plans,

 

•                                          the timing and results of regulatoryapproval for proposed products, and

 

•                                          projected capital needs, working capital,liquidity, revenues, interest costs and income.

 

Examples offorward-looking statements include predictive statements, statements thatdepend on or refer to future events or conditions and statements that mayinclude words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“estimates,” “should,” “may,” or similar expressions or statements that implyuncertainty or involve hypothetical events.

 

Forward-lookingstatements involve known and unknown risks and uncertainties that may cause ouractual results in future periods to differ materially from what is currentlyanticipated.  We make cautionarystatements in certain sections of this Form 10-K, including under “RiskFactors.”  You should read thesecautionary statements as being applicable to all related forward-lookingstatements wherever they appear in this Form 10-K, in the materials referred toin this Form 10-K, in the materials incorporated by reference into this Form10-K, or in our press releases and other public statements we may issue fromtime to time.  In light of these risks,uncertainties and assumptions, the forward-looking events discussed in thisForm 10-K or other documents incorporated by reference might not occur.  No forward-looking statement is a guaranteeof future performance and you should not place undue reliance on anyforward-looking statement.  We do

 

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not undertake anyobligation to release publicly any revisions to these forward lookingstatements, to reflect events or circumstances after the date of this Form10-K, or to reflect the occurrence of unanticipated events, except as may berequired under applicable securities laws.

 

The following are some ofthe key risk factors that may affect our future results:

 

**We are a development stage company, we have conducted onlylimited studies on our products in development and we do not have any revenuesfrom sales.**

 

Our company and ourtechnologies are in early stages of development.  We began our business as a biopharmaceutical company in1997.  We have not generated revenuesfrom sales or operations, and we do not expect to generate sufficient revenuesto enable us to be profitable for at least several years, if at all.

 

The drug products wecurrently contemplate developing will require costly and time-consuming researchand development, preclinical and clinical testing and regulatory approvalbefore they can be commercially sold. We may not be able to develop our technology into marketable products ordevelop our technology so it is effective for diagnosis or treatment of humandiseases.  As a result of changingeconomic considerations, market, clinical or regulatory conditions, or clinicaltrial results, we may shift our focus or determine not to continue one or moreof the projects we are currently pursuing.

 

**We have a history of losses and we may not achieve ormaintain profitability in the future or pay cash dividends.**

 

We have incurred lossessince the beginning of our operations. As of December 31, 2002, we have incurred cumulative net losses (beforedividends on preferred stock) of approximately $28,745,194.  We expect our losses to increase in thefuture as our financial resources are used for research and development,preclinical and clinical testing, regulatory activities, manufacturing,marketing and other related expenses. We may not be able to achieve or maintain profitability in thefuture.  We have never declared or paidany cash dividends to stockholders and do not expect to do so in theforeseeable future.

 

**We must raise additional financing in the future and ourinability to do so will prevent us from implementing our business developmentplan.**

 

During 2002, we sold$12,028,902 of our common stock to certain institutional investors and a groupof individual accredited investors at a price per share of $1.08 ($2,500,000 ofwhich was from the conversion of our outstanding note payable to TannebaumLLC).  Our cash and securities on handat December 31, 2002, following the repayment of certain liabilities, was approximately$6.1 million.  We expect to havesufficient cash resources for our current commitments through the third quarterof 2003 (depending on the pace of our spending for preclinical and clinicaltesting and other commitments, which, to an extent, we can adjust to preservecash).  We will need substantialadditional financing for our research, clinical testing, product developmentand marketing programs.

 

Through March 20, 2003,we have provided bridge financing to Alliance of an aggregate of$2,458,000.  Together with any otherholders of notes issued pursuant to the Note Purchase Agreement, we have lienson certain of the assets of Alliance. Our lien on the *Imagent®*-related assets is subordinate inpriority to liens held by Xmark Fund, L.P. and Xmark Fund, Ltd.  As of March 31, 2003, there wasapproximately $4,750,000 of debt subject to the Xmark liens.  Our lien related to Alliance’s Oxygentproduct is subordinate to a lien held by PFC. Our other liens on the assets of Alliance are first priority liens andgive us a security interest in collateral not covered by the Xmark and PFCprior liens.  Alliance has the right tomake payments of interest under the Alliance Notes in shares of its commonstock.  We have the right to convert theoutstanding principal and interest under the Alliance Notes into shares ofAlliance common stock at the conversion price of $0.35 per share.  Any shares of Alliance common stock wereceive

 

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in lieu of cash interestpayments may have a value less than the cash that we would otherwise be owedand those shares may not be readily marketable.  Consequently, there is a risk that we may not be able to be fullyrepaid the bridge financing we provided to Alliance.

 

We cannot accuratelyestimate the amount of additional financing required to develop our products;however, the amount could be an additional $30 million or more over the nextseveral years.  In particular, we arecurrently seeking to raise $15 to $20 million to acquire the *Imagent®*businessfrom Alliance through a private placement to accredited investors.  Additional funds may not be available onacceptable terms, if at all, and existing stockholders may be diluted as aresult of those offerings.  The pricingof our common stock, or other securities convertible into common stock, in anysuch transaction may also result in an increase in the number of shares ofcommon stock issuable upon exercise of warrants in accordance with theanti-dilution provisions in the instruments governing those securities.

 

**Our proposed products are subject to extensive testing andgovernment approval, and we may not obtain or maintain the approvals necessaryto sell our proposed products.**

 

None of our proposedimaging products has received the FDA’s approval.  An extensive series of clinical trials and other associatedrequirements must be completed before our proposed products can be approved andsold in the U.S. or other countries. Requirements for FDA approval of a product include preclinical andclinical testing for effective use and safety in animals and humans, which canbe extremely costly.  The time framenecessary to perform these tasks for any individual product is long anduncertain, and we may encounter problems or delays that we cannot predict atthis time.  Even if testing issuccessful, our proposed products may not demonstrate sufficient effectivenessor safety to warrant approval by the FDA or other regulatory authorities.  Any regulatory approval may not cover theclinical symptoms or indications that we may seek.  We must also obtain regulatory approvals comparable to thoserequired in the U.S. to market our products in other countries.

 

Our proposed technologiesand products generally must complete preclinical tests in animals and threephases of tests (also called clinical trials) in humans before we can marketthem for use.  Use of our technology hasbeen limited primarily to laboratory experiments and animal testing, only N1177has completed Phase 1 human clinical trials. We have not yet conducted substantive studies on the effectiveness ofour compounds on human subjects.

 

Our results from earlyclinical trials may not predict results that we will obtain in large scaleclinical trials, as a number of companies have suffered significant setbacks inadvanced clinical trials, even after promising results in early trials.

 

We may not conductadditional Phase 2 or Phase 3 clinical trials for our products and such trials,if begun, may not demonstrate any efficacy or may not be completed successfullyin a timely manner, if at all.

 

The rate of completion ofour clinical trials depends upon, among other things, the rate of patientenrollment.  Patient enrollment is afunction of many factors, including the size of the patient population for a particularindication, the nature of the clinical protocol under which our products willbe studied, the proximity of the patient to a clinical site and the eligibilitycriteria for the study.  Delays inplanned patient enrollment may result in increased costs, regulatory filingdelays, or both.

 

Furthermore, we, the FDAor other regulatory authorities may alter, suspend or terminate clinical trialsat any time.  If we do not successfullycomplete clinical trials and obtain regulatory approval for a product, we willnot be able to market that product.

 

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**Any products approved by the FDA will be subject topostmarket requirements of the FDA.**

 

Approved products aresubject to numerous postmarket requirements by regulatory authorities.  We will be subject to inspection andmarketing surveillance by the FDA to determine our compliance with regulatoryrequirements with respect to any approved products.  If the FDA finds that we have failed to comply, it can institutea wide variety of enforcement actions, ranging from a public warning letter tomore severe sanctions such as:

 

•                  fines, injunctions and civil penalties;

 

•                  recall or seizure of our products;

 

•                  operating restrictions, partial suspension or total shutdown ofproduction; and

 

•                  criminal prosecution.

 

Any enforcement action bythe FDA may also affect our ability to commercially distribute our products inthe U.S.

 

**Product liability claims could increase our costs andadversely effect our results of operations.**

 

The clinical testing,manufacturing and marketing of our product candidates may expose us to productliability claims, and we may experience material product liability losses inthe future.  We maintain certain levelsof product liability insurance for the use of our product candidates inclinical research, but our coverage may not continue to be available on termsacceptable to us or adequate for liabilities we actually incur.  A successful claim brought against us inexcess of available insurance coverage, or any claim or product recall thatresults in significant adverse publicity against us, may have a materialadverse effect on our business and results of operations.

 

**If we do not obtain and maintain patent or other protectionof our core technologies (namely PH-50 for cardiovascular imaging and N1177 forour lymphography materials and methods), we may have difficulty commercializingproducts using these technologies.**

 

Our success depends inpart on our ability to obtain, assert and defend our patents, protect tradesecrets and operate without infringing the intellectual property ofothers.  Among the important risks inthis area are that:

 

•                  Our patent applications may not result in issued patents.  Moreover, any issued patents may not provideus with adequate protection of our intellectual property or competitiveadvantages, and the law on the scope of patent coverage is continuallychanging.

 

•                  Various countries limit the subject matter that can be patented andlimit the ability of a patent owner to enforce patents in the medical field.  This may limit our ability to obtain orutilize those patents internationally.

 

•                  Existing or future patents or patent applications (and the products ormethods they cover) of our competitors (or others, such as researchinstitutions or universities) may interfere, invalidate, conflict with orinfringe our patents or patent applications. Similarly, the use of the methods or technologies contained in ourpatents, patent

 

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applications and otherintellectual property may conflict with or infringe the rights of others.

 

•                  If an advance is made that qualifies as a joint invention, the jointinventor or his or her employer may have rights in the invention.

 

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that these rights are covered by valid and enforceable patents oreffectively maintained as trade secrets. We own two patents in the U.S., and sixteen other patents in foreigncountries including Australia, Canada, Japan and Germany.  These patents relate to methods forperforming lymphography.  We have filedpatent applications in the U.S. and under the PCT covering a number of foreigncountries.  These patent applicationsrelate to the use of nanoparticulates, including PH-50, as cardiovascularimaging agents and to deliver pharmacologically active substances for treatmentof various diseases.  We are also theexclusive licensee of a group of patented proprietary compounds known as“nanoparticulates,” including N1177 and PH-50 from Nycomed Imaging AS.  We are the exclusive licensee of U.S. andforeign patent applications from Massachusetts General Hospital which relate todiagnostic imaging agents and methods for using the diagnostic imaging agents formedical location, treatment and diagnosis of tumors and other diseased tissues.

 

Additional patents maynever be issued on any of the patent applications we own or license from thirdparties.  Furthermore, even if suchpatents are issued, the validity of the patents might successfully bechallenged by a third party.  Thepatents might not provide protection against competitive products or otherwisebe commercially valuable, or the applications filed by others might result inpatents that would be infringed by the manufacture, use or sale of ourproducts.

 

The patent position ofbiopharmaceutical companies involves complex legal and factual questions andtherefore we cannot assure the enforceability of these patents.  Litigation over patents and other intellectualproperty rights occurs frequently in our industry and there is a risk that wemay not prevail in disputes over the ownership of intellectual property.  Further, an interference proceeding with thePatent and Trademark Office may be instituted over the rights to certaininventions and there is a risk that we may not prevail in such an interferenceproceeding.  Those disputes can beexpensive and time consuming, even if we prevail.  Intellectual property disputes are often settled throughlicensing arrangements that could be costly to us.  In any intellectual property litigation, it is possible thatlicenses necessary to settle the dispute would not be available on commerciallyreasonable terms or that we would not be able to redesign our technologies toavoid any claimed infringement.

 

Confidentialityagreements covering our intellectual property may be violated and we may nothave adequate remedies for any violation. Third parties may challenge our existing patents and seek to hold theminvalid or unenforceable.  Also, ourintellectual property may in other ways become known or be independentlydiscovered by competitors.

 

To the extent we useintellectual property through licenses or sub-licenses (as is the case for someof our lymphography technology), our rights are subject to us performing theterms of the license or sub-license agreement with third parties.  Our rights are also subject to the actionsof third parties we may not be able to control, such as our sub-licensorcomplying with the terms of its license with the patent owner and the patentowner maintaining the patent.

 

Where intellectualproperty results from a research project supported by Government funding, theGovernment has limited rights to use the intellectual property without payingus a royalty.

 

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**We are highly dependent upon a small number of employees andconsultants who provide management expertise, and it may be difficult toimplement our business development plans without this expertise.**

 

These individuals haveentered into employment or consulting agreements, confidentiality and/ornon-competition agreements with us.  Wecould suffer competitive disadvantage, loss of intellectual property or other materialadverse effects on our business and results of operations if any employee orconsultant violates or terminates these agreements or terminates his or herassociation with us.  Our growth andfuture success also depends upon the continued involvement and contributionfrom these individuals, as well as our ability to attract and retain highlyqualified personnel now and in the future.

 

We currently employ threesenior executive officers, including Dr. Williams (our Chief ExecutiveOfficer), Mr. Boveroux (our Chief Financial Officer) and Dr. Reinhard Koenig(Senior Vice President of Medical and Regulatory Affairs).  We also have retained consultants to adviseus in regulatory affairs and product development matters.  If we lost the services of our executiveofficers or outside consultants, we could experience a delay in theimplementation of our business plan until we arranged for another individual orfirm to fulfill the role.

 

**The raw materials necessary for the manufacture of PH-50 andN1177 are supplied by one supplier and an interruption in availability of thosematerials may impair our ability to test and market those products.**

 

We currently rely onNanosystems, a division of Elan, as the sole supplier of the nanoparticulatesused to manufacture PH-50 and N1177. There can be no assurance that Nanosystems will continue to supply uswith the raw materials that we need in a timely manner on conditions that areacceptable to us.

 

**We have to rely on third parties and collaborativerelationships for the manufacture, clinical testing and marketing of ourproposed products, and it may be difficult to implement our businessdevelopment plans without these collaborations.**

 

We have had and expect tocontinue in the future to have a variety of research agreements withuniversities and other research institutions to investigate specificprotocols.  We also contract and expectto continue to contract with research organizations and other third parties tomanage clinical trials of our proposed products in development.  We must continue to enter into collaborativerelationships with third parties for additional research and development,preclinical and clinical testing, marketing and distribution of our proposedproducts.

 

We are currently involvedin a joint venture with affiliates of Elan, called Sentigen, Ltd., to developand commercialize materials in the field of lymphography.  Collaborative relationships may limit orrestrict our operations or may not result in an adequate supply of necessaryresources.  Our collaborative partnercould also pursue alternative technologies as a means of developing ormarketing products for the diseases targeted by our collaborative program.  If a third party we are collaborating withfails to perform under its agreement or fails to meet regulatory standards, thiscould delay or prematurely terminate clinical testing of our proposed products.

 

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**Our potential markets are extremely competitive, and many ofour competitors have greater resources and have products that are in moreadvanced stages of development.**

 

We face substantialcompetition from competitors with greater financial, technical and humanresources and with greater experience in developing products, conductingpreclinical or clinical testing, obtaining regulatory approvals, manufacturingand marketing.  We understand that theexisting market for radiopaque contrast agents is estimated to be approximately$3.4 billion worldwide.  The dominantuses of media are those employed in conjunction with CT/x-ray scans.  Approximately half of the usage is in theU.S. Omnipaque®, marketed by a unit of Amersham and is estimated to be theleading agent utilized in coronary angiography.  Other companies marketing contrast agents include Mallinckrodt,Inc. (a unit of Tyco International Ltd.), Berlex Laboratories, Inc. (asubsidiary of Schering) and Bracco.

 

Some of these firms havedrugs or devices that have completed or are in advanced stages of clinicaltrials and regulatory approvals.  Othersmay develop technologies and obtain patent protection that could render ourtechnologies or products obsolete or less competitive or our patents invalid orunenforceable.  Due to the inherent riskof failure associated with the testing, development and production of new andinnovative technologies, our technologies and products may be found to beineffective, have unanticipated limitations or otherwise be unsuccessful in themarketplace.  Also, although we believeour estimates of the possible size of markets for our potential products arebased on information we consider reliable (including data from the AmericanHeart Association, American Cancer Society and similar sources in the publicdomain), that data or our analysis of the data could prove incorrect.

 

**Our products may not be fully accepted by physicians,laboratories and health insurance providers which would reduce our revenue andlimit our ability to raise capital.**

 

Our growth and successwill depend upon market acceptance by physicians, laboratories and healthinsurance providers of our products. This requires acceptance of our products as clinically useful andcost-effective alternatives to other medical imaging methods.  In addition, physicians may utilize imagingtechniques other than those for which our products are being developed (such asMRIs) to image internal vasculature and organs and therefor, our products maynot be utilized.

 

**Changes in health care reimbursement policies or legislationmay make it difficult for patients to use or receive reimbursement for using ourproducts, which could reduce our revenues.**

 

Our success will depend,in part, on the extent to which health insurers, managed care entities andsimilar organizations provide coverage or reimbursement for using the medicalprocedures and devices we plan to develop. These third-party payers are increasingly challenging the price ofmedical procedures and services and establishing guidelines that may limitphysicians’ selections of innovative products and procedures.  We also cannot predict the effect of anycurrent or future legislation or regulations relating to third-party coverageor reimbursement on our business.  Wemay not be able to achieve market acceptance of our proposed products ormaintain price levels sufficient to achieve or maintain any profits on ourproposed products if adequate reimbursement coverage is not available.  Failure by physicians, hospitals and otherusers of our products to obtain sufficient reimbursement from third-partypayors for the procedures in which our products would be used or adversechanges in governmental and private third-party payors’ policies towardreimbursement for such procedures would have a material adverse effect on ourbusiness.

 

**A small group of stockholders controls Photogen, which maymake it difficult for stockholders who are not in that group to influencemanagement.**

 

As of December 31, 2002,a small group of stockholders control approximately****70.4% of our outstandingcommon stock.  Several of our principalstockholders are also parties to the Voting Agreement

 

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concerning the electionof certain designees to the Board of Directors.  The Voting Agreement requires these stockholders to vote theirshares for the election of certain individuals nominated by parties to theVoting Agreement.  This concentration ofownership and control may delay or prevent a change in control of Photogen, andmay also result in a small supply of shares available for purchase in the publicsecurities markets.  These factors mayaffect the market and the market price for our common stock in ways that do notreflect the intrinsic value of the stock.

 

**The price and trading volume of our common stock fluctuatessignificantly, like that of many biopharmaceutical companies, which may make itdifficult for us or a stockholder to sell our common stock at a suitable priceand may cause dilution for existing stockholders when we issue additionalshares.**

 

During the period fromJanuary 1, 2002 through December 31, 2002 the trading price of our common stockranged from $8.38 to $1.00 per share. Daily trading volume ranged from zero shares to approximately 41,000shares during that period.

 

The market prices forsecurities of biopharmaceutical companies in general have been highly volatileand may continue to be highly volatile in the future.  The following factors may have an impact on the price of ourcommon stock:

 

**•**                  Announcements by us or others regarding scientificdiscoveries, technological innovations, commercial products, patents or proprietaryrights;

 

•                  Announcements by us concerning the licensing or other transactions ofour products or technologies;

 

•                  Private sale of a significant block of our common stock at a pricebelow the then current market price of our common stock and the subsequentregistration and sale of those shares;

 

•                  The progress of preclinical or clinical testing;

 

•                  Developments or outcome of litigation concerning proprietary rights,including patents;

 

•                  Changes in government regulation;

 

•                  Public concern about the safety of devices or drugs;

 

•                  Limited coverage by securities analysts;

 

•                  The occurrence of any of the risk factors described in this section;

 

•                  Sales of large blocks of stock by an individual or institution;

 

•                  Changes in our financial performance from period to period, securitiesanalysts’ reports, and general market conditions; and

 

•                  Economic and other external factors or a disaster or crisis.

 

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**Our common stock could be delisted from the NASDAQ SmallCapMarket, which would make trading in our stock more difficult.**

 

Since November, 1999, ourcommon stock has been quoted in the Nasdaq SmallCap Market.  We received a letter dated September 25,2002 from Nasdaq notifying us that our stock had traded at less than $1 for aperiod of 30 consecutive trading days and that we had until March 4, 2003 toregain compliance with Marketplace Rule 4310(c)(4).  On December 12, 2002, we received notice from Nasdaq that we areagain in compliance with the Marketplace Rule. Our shares could be delisted if we fail to meet the listing requirementsof the Nasdaq SmallCap Market, which would force us to list our shares on theOTC Bulletin Board or some other quotation medium, such as pink sheets,depending upon our ability to meet the specific listing requirements of thosequotation systems.  As a result, aninvestor might find it more difficult to dispose of, or to obtain accurateprice quotations for, our shares. Delisting might also reduce the visibility, liquidity and price of ourcommon stock.

 

If our common stock weredelisted from the Nasdaq SmallCap Market and were not traded on anothernational securities exchange, we could become subject to penny stockregulations that impose additional sales practice disclosure and market makingrequirements on broker/dealers who sell or make a market in our stock.  The rules of the SEC generally define “pennystock” to be common stock that has a market price of less than $5.00 per shareand is not traded on a national exchange. If our stock became subject to penny stock regulations, it couldadversely affect the ability and willingness of broker/dealers who sell or makea market in our common stock and of investors to purchase or sell our stock inthe secondary market.

 

**If stockholders holding substantial amounts of our commonstock should sell their stock in the public market, the price of our stockcould fall and it may be more costly for us to raise capital.**

 

As of December 31, 2002:

 

•                  We had reserved approximately 7,062,401 shares of common stock forfuture issuance upon grants of options, or exercise or conversion ofoutstanding options and warrants and convertible securities.

 

•                  We had approximately 2,343,366****shares eligible for sale in the publicmarket free of restriction under Rule 144 of the Securities Act.

 

•                  Approximately 11,912,779 shares of common stock are subject toagreements requiring us to permit the holders of the shares, under certaincircumstances, to join in a public offering of our stock or to demand that weregister their shares for resale.

 

If our options andwarrants are all issued and exercised, investors may experience significantdilution in the voting power of their common stock.  The sale of these shares could place downward pressure on theoverall market price of our stock.

 

###### **ITEM 2.  PROPERTIES.**

 

We have a three-yearlease agreement for approximately 6,164 square feet of office space located inNew Hope, Pennsylvania.  The initialterm of the lease expires in August, 2004. The lease permits us to extend the lease for two additional three-yearterms.  This space is being used for ourexecutive offices and headquarters and for our clinical development group.

 

To our knowledge, theproperty and equipment in our New Hope location is in good condition.  In the opinion of management, our interestin this facility is adequately covered by insurance.

 

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###### **ITEM 3.  LEGAL PROCEEDINGS.**

 

None.

 

###### **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

During the fourth quarterof the 2002 fiscal year the following matters were submitted to ourstockholders for a vote:

 

•                  At our annual meeting of stockholders initially held on September 13,2002 and adjourned until reconvened on October 31, 2002, we submitted the followingmatters to our common stockholders and holders of Series B Preferred Stock forapproval.  The votes were tabulated asfollows (the number of shares in the “Vote” column are given prior to ourone-for-four reverse split):

 
| **Matter Voted Upon**                                                                                                                                                                                                              |   | **Vote**                                                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                               |   |                                                                                                                              |
| A corporate separation  involving a split off of the company’s therapeutic line of business to our  five founding stockholders in exchange for and in redemption of all of their  common stock of Photogen Technologies, Inc. |   | *All Shares*:  For: 31,002,377  Against: 1,787  Abstaining, including Broker Non-Votes: 6,840                                     |
|                                                                                                                                                                                                                               |   |                                                                                                                              |
|                                                                                                                                                                                                                               |   | *Excluding the shares of the interested parties*:  For: 10,703,942  Against: 1,787  Abstaining, including Broker Non-Votes: 6,840 |
|                                                                                                                                                                                                                               |   |                                                                                                                              |
| The amendment of our  restated articles of incorporation to effect a one-for-four reverse split of  our outstanding common stock.                                                                                                  |   | For: 31,245,497  Against: 13,370  Abstaining, including Broker Non-Votes: 1,617                                                   |

 

The election of thefollowing five directors:

 
| Taffy J. Williams,  Ph.D.  |   | For: 31,244,239  Against: 0  Abstaining, including Broker Non-Votes: 16,245 |
|----------------------------|--------|-----------------------------------------------------------------------------|
|                       |   |                                                                        |
| Robert J. Weinstein,  M.D. |   | For: 21,249,239  Against: 0  Abstaining, including Broker Non-Votes: 11,190 |
|                       |   |                                                                        |
| Lester H. McKeever,        |   | For: 31,254,244  Against: 0  Abstaining, including Broker Non-Votes: 6,240  |
|                       |   |                                                                        |
| Gene Golub                 |   | For: 31,250,244  Against: 0  Abstaining, including Broker Non-Votes: 10,240 |
|                       |   |                                                                        |
| Eric Wachter, Ph.D.        |   | For: 31,255,294  Against: 0                                                 |

 

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|                                                                                                                                                                                                                             |   | Abstaining, including  Broker Non-Votes: 5,190                                  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|
|                                                                                                                                                                                                                             |   |                                                                            |
| The issuance of more than  20% of our outstanding voting stock resulting from the sale of not less than  $9 million and not more than $15 million of common stock in a financing  transaction with certain accredited investors. |   | For: 30,996,584  Against: 1,367  Abstaining, including Broker Non-Votes: 12,533 |
|                                                                                                                                                                                                                             |   |                                                                            |
| The amendment of our  2000 Long Term Incentive Compensation Plan to increase the number of shares  of common stock reserved for issuance from 500,000 to 4,568,750 (post-split  shares).                                         |   | For: 31,235,234  Against: 24,623  Abstaining, including Broker Non-Votes: 627   |
|                                                                                                                                                                                                                             |   |                                                                            |
| The ratification of the  appointment of BDO Seidman, LLP as our independent certified public  accountants for 2002.                                                                                                              |   | For: 31,255,502  Against: 95  Abstaining, including Broker Non-Votes: 4,887     |

 

•                  By written consents the holders of the Series B Preferred Stockconsented to the conversion of all of the issued and outstanding shares ofSeries B Preferred Stock into shares of common stock at the conversion ratio of4.25 (pre-reverse split) shares of common per share of Series B PreferredStock.  The conversion was approved byapproximately 98% of the holders of the Series B Preferred Stock.  On November 7, 2002, we sought ratificationof the consent to convert the Series B Preferred Stock into common stockbecause new information regarding the transactions became available and wasdistributed to the holders of the Series B Preferred Stock.  The consent to convert the Series BPreferred Stock into common stock was ratified by approximately 74% of theholders of the Series B Preferred Stock.

 

##### ***PART II.***

 

###### **ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS.**

 

Our common stock istraded from time to time on the Nasdaq SmallCap Market under the symbol “PHGN.”

 

**Common Stock**

 

As of****March 5, 2003, there were17,114,868 shares of our common stock outstanding and held by approximately 412stockholders of record.  Holders of ourcommon stock are entitled to receive such dividends as may be declared by theBoard of Directors.  We have notdeclared or paid cash dividends on our common stock and we do not anticipatepaying any cash dividends in the foreseeable future.

 

The high and low tradingprices (adjusted to reflect our one-for four reverse split) for our commonstock during each quarter of the last two fiscal years are set forth below.

 

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|         |   | **Year Ended  December 31, 2001** |   | **Year Ended  December 31, 2002** |   |
|--------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|         |   | **(Amounts in $)**                |   | **(Amounts in $)**                |   |
|         |   | **High**                          |   | **Low**                           |   | **High** |   | **Low** |   |
| 1st  Quarter |   | 28.50                             |   | 6.00                              |   | 6.36 |   | 2.52 |   |
|         |   |                              |   |                              |   |   |   |   |   |
| 2nd  Quarter |   | 8.00                              |   | 3.72                              |   | 5.20 |   | 3.12 |   |
|         |   |                              |   |                              |   |   |   |   |   |
| 3rd  Quarter |   | 9.40                              |   | 4.00                              |   | 4.20 |   | 1.32 |   |
|         |   |                              |   |                              |   |   |   |   |   |
| 4th  Quarter |   | 6.08                              |   | 4.00                              |   | 2.64 |   | 1.00 |   |

 

For the period January 1,2003 through March 10, 2003, the high and low trading prices for our commonstock were $2.78 and $0.90, respectively. Aggregate trading volume for the period January 1, 2003 through March10, 2003, was approximately 217,210****shares. The foregoing information was obtained from the National Association ofSecurities Dealers as reported on the Nasdaq SmallCap Market.  The quotations generally reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot represent actual transactions.  Theforegoing information for 2001 and 2002, however, reflects trade prices, andnot bid or ask prices and has been adjusted to reflect our one-for-four reversesplit.  See “Risk Factors – A smallgroup of stockholders control Photogen, which may make it difficult forstockholders who are not in that group to influence management” and “The priceand trading volume of our common stock fluctuates significantly, like that ofmany biopharmaceutical companies, which may make it difficult for us or astockholder to sell our common stock at a suitable price and may cause dilutionfor existing stockholders when we issue additional shares,” above, regardingthe possible effects of the concentrated ownership of our stock on the marketand price of the stock.

 

In 2002, we grantedqualified and non-qualified stock options pursuant to our 2000 Plan to purchasean aggregate of 2,523,800 shares of common stock each at an exercise price of$1.08 per share.  The options vest atvarious times up to four years from the date of the grant.

 

During November andDecember 2002, we sold an aggregate of 11,137,873 shares of common stockwithout registration under the Securities Act of 1933 (the “Securities Act”) tocertain institutional investors and other accredited investors at $1.08 preshare.  These securities were offered andsold by us in reliance upon exemptions from the registration requirementsprovided by Section 4(2) of the Securities Act and Regulation D under theSecurities Act relating to sales not involving any public offering.

 

We are subject to****sixsets of registration rights agreements. In the aggregate, these agreements cover approximately 11,912,779 sharesof common stock and require us to register those shares under various terms andsubject to specific conditions in the agreements.

 

Pursuant to the terms ofthe Securities Purchase Agreement dated as of October 20, 1999 between Photogenand EIS, EIS has the right to participate in any equity financing consummatedby us in order to maintain its pro rata interest in the company.  EIS waived this right in connection with theshares of common stock that we sold to a group of institutional and individualaccredited investors in November 2002 through January 2003.  This right expires on October 20, 2003.

 

As of March 5, 2003,approximately 14,527,705 shares of our common stock are “restricted stock” orare beneficially owned by persons who as of March 5, 2003 were affiliates ofthe company as defined in Rule 144 under the Securities Act.  This excludes 128,437 shares of common stockheld by EIS, 115,360

 

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shares of common stockheld by EPI and 15,157.2 shares of Series A Preferred Stock issued or accruedto EPI.  Although Elan has the right toelect one director, they have chosen not to place anyone on the current boardof directors at this time.  For purposesof this calculation only (and the comparable disclosure on the cover page ofthis Form 10-K) we have assumed that officers, directors and 10% stockholdersare affiliates of the company,****that stock held by Tannebaum, LLC as ofDecember 31, 2002 would be deemed beneficially owned by Robert J. Weinstein,M.D. (one of our directors and a co-manager of Tannebaum, LLC at that time) andstock held by Mi3 would be deemed beneficially owned by William D. McPhee, oneof our directors (although both Dr. Weinstein and Mr. McPhee disclaimbeneficial ownership of those respective shares for all other purposes), andthat a person beneficially owns stock subject to an option, warrant orconvertible instrument that is exercisable or convertible within 60 days fromMarch 5, 2003.  A portion of thoseshares would be eligible for resale by company affiliates and others who havesatisfied the requisite holding periods, subject to the volume limitations andother provisions of Rule 144 and applicable law.  As of March 5, 2003, we had approximately 2,343,366 shareseligible for sale free of restriction under Rule 144.

 

**Equity Compensation Plan Information**

 

See Part III Item 12 forinformation regarding our equity compensation plans.

** **

**Series AConvertible Preferred Stock**

 

On October 20, 1999, weissued 12,015 shares of Series A Preferred Stock to EIS, an affiliate of Elan,in conjunction with the formation of Sentigen Ltd., our joint venture withElan.  After issuance, the Series APreferred Stock was transferred to EPI.

 

Under the Certificate of Designations, the holder ofSeries A Preferred Stock has a Series A Liquidation Preference entitling it tothe first $12,015,000 of funds available for distribution to stockholders uponliquidation of the company and has the right to convert shares of Series APreferred Stock into common stock at any time after October 20, 2001 at aconversion price of $84.68 per share. The conversion price is subject to adjustment for certain dilutiveevents.  Alternatively, the holder ofSeries A Preferred Stock may exchange shares of Series A Preferred Stock forcommon shares of Sentigen so that the holder of Series A Preferred Stock owns50% of the equity of Sentigen.

 

Elan entered into anAgreement dated November 12, 2002 with the Institutional Investors in thefinancing which closed on November 12, 2002 which provides that Elan will paythe Institutional Investors an amount in cash (or the fair market value ofother property) distributed to the holder of the Series A Preferred Stock onaccount of the Series A Liquidation Preference that, in the absence of theSeries A Liquidation Preference would have been paid to those InstitutionalInvestors in accordance with applicable law, up to a maximum of $16,000,000.

 

Each share of Series APreferred Stock will be paid a mandatory payment-in-kind dividend equal to 7%(i.e., 0.07 additional shares of Series A Preferred Stock).  The payment-in-kind dividend is cumulative,compounds on a semi-annual basis and is payable twice a year, beginning April2000.  Pursuant to this dividendrequirement, 982.03 shares of Series A Preferred Stock accrued in 2002 and asof March 5, 2003, there were approximately 12,856 shares of Series A PreferredStock issued and outstanding and 2,301.2 shares accrued as payment-in-kinddividends.  The holder of Series APreferred Stock is only entitled to vote on matters that adversely affect orchange the rights of holders of Series A Preferred Stock.  The holder of Series A Preferred Stock doesnot have the right to vote on the election of directors of the company.

 

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**Series BConvertible Preferred Stock**

 

In February, 2000, weissued 327,240 shares of Series B Preferred Stock to 32 accredited investors ina private placement, for a purchase price of $16.88 per share and 9,816 sharesto the placement agent in connection with services rendered in our privateplacement of Series B Preferred Stock. In November, 2002, a majority of the holders of the Series B PreferredStock consented to the conversion of all of the issued and outstanding sharesof Series B Preferred Stock into shares of common stock at the conversion ratioof 4.25 (pre-reverse split) shares of common per share of Series B PreferredStock.  In November, 2002, an aggregateof 422,316 shares of common stock were issued to the former holders of theSeries B Preferred Stock and (available to common shareholders) the Series BPreferred Stock is no longer outstanding.

 

###### **ITEM 6.   SELECTED FINANCIAL DATA.**

 

The following informationis qualified by reference to and should be read in conjunction with ourConsolidated Financial Statements and the Notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded below. The selected financial data presented below for the years endedDecember 31, 1998, 1999, 2000, 2001 and 2002 have been derived from our auditedfinancial statements.

 
|                                                                                                    |   | **1998** |      | **1999** |   | **2000**   |   | **2001** |       | **2002** |   |
|---------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|------------|--------|----------|------------|----------|--------|
| Net  income (loss) from continuing operations                                                           |   | $        | (615,972  | )        | $      | (4,252,841 | )      | $        | (8,144,199 | )        | $      | (6,813,196 | ) | $ | (9,935,203 | )  |
| Basic  and diluted loss per common share from continuing operations (available to  common shareholders) |   | $        | (0.07     | )        | $      | (0.48      | )      | $        | (1.16      | )        | $      | (1.03 | ) | $ | (1.17 | ) |
| Total  assets                                                                                           |   | $        | 8,060,585 |     | $      | 23,304,829 |   | $        | 19,652,037 |     | $      | 14,202,639 |   | $ | 16,738,414 |   |
| Total  liabilities                                                                                      |   | $        | 952,007   |     | $      | 872,667    |   | $        | 1,239,527  |     | $      | 4,379,693 |   | $ | 2,322,463 |   |
| Total  long-term obligations                                                                            |   | $        | 35,990    |     | $      | 18,356     |   | $        | 1,554      |     | $      | 3,063,165 |   | $ | 401,664 |   |
|                                                                                                         |        |          |           |          |        |            |        |          |            |          |        |  |  |  |  |  |  |

 

###### **ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

Portions of thediscussion in this item contain forward-looking statements and are subject tothe “Risk Factors” described above.

 

The accompanyingfinancial statements have been prepared assuming we are a going concern. Managementbelieves it lacks sufficient working capital to fund operations for the entirefiscal year ending December 31, 2003 without additional debt or equityfinancing. The 2002 financial statements do not include any adjustment toreflect the possible future effects on the recoverability and classification ofassets or the amount and classification of liabilities that may result fromthis uncertainty.

 

We are an emerging,development-stage biopharmaceutical company focused on developing a novelcontrast agent with potential applications (1) as a blood pool agent, todiagnose diseased tissue in the cardiovascular system and other organs, and (2)to diagnose cancer metastasizing into the lymphatic system.  We are the exclusive licensee of a group ofproprietary materials, the lead compound of which is a contrast agent we referto as PH-50 or N1177.  The productdesignations PH-50 and N1177 refer to the same

 

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chemical entity.  We established the two names to distinguishcommercialization rights between cardiovascular imaging (and all otherindications) (PH-50) to which we retain rights, and the field of lymphography(N1177), which we licensed to our joint venture (Sentigen, Ltd.) withaffiliates of Elan.

 

In December 2001, weannounced positive preclinical results of PH-50.  Based on these studies, the extensive preclinical toxicology andother study work, including the product’s use in approximately 65 patients forlymphography, we shifted the strategic direction of Photogen to focus on thecardiovascular and lymphography applications. We plan to focus our efforts on these high value opportunities.  We have not completed development of anydiagnostic product or process at this time and have no revenue from operations.  We have entered into a term sheet withAlliance which gives us the exclusive option to acquire all of the medicalimaging assets of Alliance, including *Imagent*®, an FDA approved intravenouscontrast agent for use with ultrasound imaging equipment.

 

As of April 8, 2002, weentered into a credit facility that provided us with a $2,500,000 revolvingline of credit, bearing interest at 4.65%, for a period of five years.  The loan was secured by a lien on all of ourassets.  The amount outstanding underthe credit facility ($2,500,000) was converted into our common stock at $1.08per share on November 12, 2002.  Inaggregate, from November 12, 2002 through January 2, 2003, we consummated theclosings of a financing in which we sold 11,165,651 shares of our common stockto a group of institutional investors and individual accredited investors at$1.08 per share, for an aggregate of $12,058,902, including the aboveconversion of $2.5 million of debt outstanding under the revolving credit line.

 

Without additionalfinancing we may not have sufficient cash resources for our current commitmentsbeyond the third quarter of 2003 (depending on the pace of our spending forpreclinical and clinical testing and other commitments, which, to an extent, wecan adjust to preserve cash).  We willneed substantial additional financing for our research, clinical testing,product development and marketing programs. We cannot accurately estimate the amount of additional financingrequired; however, the amount could be an additional $30 million or more overthe next several years.  In particular,we are currently seeking to raise $15 to $20 million to acquire assets fromAlliance through the sale of stock to accredited investors.  See “Risk Factors — We must raise additionalfinancing in the future and our inability to do so will prevent us fromimplementing our business plan,” above.

 

In addition, throughMarch 20, 2003, we have loaned Alliance an aggregate of $2,458,000 evidenced bythe Alliance Notes.   Together with anyother holders of notes issued pursuant to the Note Purchase Agreement, we haveliens on certain of the assets of Alliance. Our lien on the *Imagent®*-related assets is subordinate inpriority to liens held by Xmark Fund, L.P. and Xmark Fund, Ltd.  As of March 31, 2003, there wasapproximately $4,750,000 of debt subject to the Xmark liens.  Our lien related to Alliance’s Oxygentproduct is subordinate to a lien held by PFC. Our other liens on the assets of Alliance are first priority liens.  Alliance has the right to make payments ofinterest under the Alliance Notes in shares of its common stock.  We have the right to convert the outstandingprincipal and interest under the Alliance Notes into shares of Alliance commonstock at the conversion price of $0.35 per share.  Any shares of Alliance common stock we receive in lieu of cashinterest payments may have a value less than the cash that we would otherwisebe owed.  Any shares of Alliance commonstock that we receive from Alliance will be restricted securities and subjectto Rule 144 trading restrictions.  Wehave certain demand and piggyback registration rights with respect to anyshares of Alliance common stock that we receive under the terms of the NotePurchase Agreement.

 

As of December 31, 2002,we recorded $1,255,000 of notes receivable in connection with advances that wemade to Alliance in exchange for the Alliance Notes.  As described above, the Notes are collateralized by certainassets of Alliance, some of which are subject to prior liens held by XmarkFund, L.P., Xmark Fund, Ltd. and PFC. Based upon our security interest in the Alliance assets and theestimated

 

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value of those assets,management believes that a reserve for the value of the notes receivable is notcurrently necessary.   However, this isa significant estimate and it is subject to change based on Alliance’s activityand its ability to continue operations or its ability to liquidate theunderlying collateral.

 

We operate with a smallstaff of managers to oversee and direct third party contractors and performadministrative functions.  We contractwith third party consultants having expertise in clinical development andregulatory matters to supplement our internal capabilities.  We also contract with third party researchlaboratories, contract research organizations and manufacturers for clinicalmaterial supplies and the management of clinical trials.  We also contract with academic and otherinstitutions to conduct specified research projects.

 

We expect that ourquarterly and annual results of operations will fluctuate based on severalfactors including, the timing and amount of expenses involved in conducting ourresearch programs, particularly the conduct of clinical trials, the cost ofclinical material used in those trials and required for compliance with FDAregulations and the amount, if any, of fees, milestone payments and researchsupport payments received from potential strategic partners.

 

We consider ourinvestment in the joint venture with affiliates of Elan to be subject to asignificant estimate.  The carryingvalue of our 80.1% equity interest in Sentigen, Ltd., the joint venture entity,at December 31, 2002 was $8,192,452. ** **Sentigen’smanagement reviewed its financial projections and has concluded that givendelays in the development of N1177, resulting from capital constraints, thecarrying value of the intangible assets in the joint venture should be reducedby $2,500,000.  The assumptionsunderlying the financial forecasts were based on currently availableinformation, including estimates of development costs, pricing, operatingexpenses and market sizes and penetration. These estimates may change and any such changes may impact futureestimates of appropriate carrying values. Currently, we do not believe any further impairment to our investment isnecessary.

###### ** **

###### **Results of Operations**

 

Our efforts have beenfocused on the development and clinical testing of diagnostic products.  To date, we have not generated revenues fromthe sale of any proposed diagnostic products or other operations.  Net loss applicable to common shareholders(after preferred dividends) was $13,491,813, $12,666,771 and $1,649,604 for theyears ended December 31, 2000, 2001 and 2002, respectively, and our cumulativelosses since inception, including “in-kind” preferred stock and beneficialconversion dividends totaling $7,646,229, are approximately $36,391,423.

 

Since inception, Photogenhad been developing products for both therapeutic and medical imagingapplications.  As one of a series oftransactions on November 12, 2002, we split off our therapeutic business tocertain founding shareholders. Accordingly, the expenses associated with that business have beenreclassified as discontinued operations.

 

Research and developmentexpenses for the years ended December 31, 2000, 2001 and 2002 were $1,665,450,$437,958 and $1,227,897, respectively. These expenses include personnel costs, fees and other compensation paidto outside consultants, and costs associated with conducting preclinicalstudies and manufacturing product to be used in these studies.

 

Research expenses in 2001decreased by $1,227,492 to $437,958. The reduction was due principally to lower expense levels following theclosing of our Westborough, MA facility in October 2000, including the one-timecredit in 2000 of $810,000 to Sentigen.

 

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Research expenses in 2002increased by $789,939 to $1,227,897 primarily due to the shift in researchspending to the development of PH-50, a product having greater market potentialthan N1177.  Expenses associated withthe development of PH-50 are borne completely by Photogen, whereas expensesassociated with the development of N1177 are charged to our joint venture.

 

General andadministrative expenses were $5,095,442, $3,220,584****and $4,030,083****forthe years ended December 31, 2000, 2001, and 2002, respectively.  These expenses include costs associated withobtaining patent protection for our intellectual property, costs associatedwith administrative personnel and corporate management, the amortization ofwarrants granted to a service provider, legal and related expenses andfacilities expenses.

 

In 2001, general andadministrative expenses were reduced by $1,874,858 primarily due to thecompletion of the amortization of warrants granted to a service provider.

 

In 2002, expensesincreased by $809,499 to $4,030,083.  Aspart of the November, 2002 restructuring and financing, stock options weregranted to the remaining employees of Photogen with an exercise price equal tothe price at which common stock was sold to the new institutionalinvestors.  As the exercise price wasbelow the closing price of the company’s common stock at the date of grant, werecorded an expense of approximately $988,000 reflecting the differentialbetween those two prices.

 

In September, 2000, weinitiated a restructuring of our clinical development operations. We closed ourWestborough, Massachusetts office and delivered notices of material breachesand/or dissatisfaction pursuant to the employment agreements with threeemployees who worked there at that time. Clinical development activities formerly carried on in Westborough wereassumed by outside consultants and other company employees.  We initially took a charge against earningsof $597,025 for termination of our office lease and associated expenses andtermination costs associated with the employees at that location.  During 2002, we recorded an additionalcharge of $807,483 all of which was related to the valuation of certain stockoptions granted to one of the Westborough employees as part of a settlement ofcertain litigation.  At December 31,2002, none of this charge was remaining.

 

In the fourth quarter of1999, we entered into a joint venture with affiliates of Elan for thedevelopment of N1177, a potential product to identify and diagnose lymph nodesfor the presence of cancer. We own 80.1% of the joint venture entity, Sentigen,Ltd., with the balance owned by Elan. During 2000, 2001, and 2002 we recorded losses from the joint venture of$1,203,392, $1,952,758 and $3,452,837 respectively.  These losses resulted from our share of development expensesincurred in the joint venture by the two participants, including personnelexpenses and costs associated with developing a manufacturing process,including the purchase of drug substance and other materials.  As there have been delays, principally dueto capital constraints, on the development of N1177, Sentigen recorded in 2002a $2.5 million charge, of which our 80.1% share is approximately $2.0 million,as an impairment to the carrying value of the Sentigen license.

 

In accordance with thejoint venture agreement between Photogen and Elan, we charged certain researchand development work performed at the Westborough facility to Sentigen.  As part of the restructuring of our clinicaldevelopment operations, we conducted an internal review of the activitiesconducted at Westborough during 2000 and concluded that the joint venture shouldnot be charged for those activities. Accordingly, in the third quarter of 2000, we reversed the billingspreviously made to Sentigen and recorded the entire amount of research anddevelopment costs on our financial statements. The effect on us was an increase in research and development costs for2000 of $810,000 less a decrease in the loss from Sentigen of $649,000.

 

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Investment income for theyears ended December 31, 2000, 2001 and 2002 was $417,110, $110,741 and $1,563,respectively.  Investment income isgenerated by the amount of capital in our investment portfolio prior to itbeing used to fund our operations and the rate of interest earned on thatcapital.  We invest funds in theinvestment portfolio in U.S. Government obligations.  In the first quarter of 2000, we raised a total of $5,276,340from the issuance of Series B Preferred Stock to qualified investors.  In the first half of 2001, we received atotal of $1,068,723****in net proceeds of common stock sold underour shelf registration statement that was declared effective in February, 2001.** **Investment income declined in2001 due primarily to the decline in the average balances of our investmentportfolio as funds were used to support operations and, to a lesser extent, thegeneral decline in short term interest rates. In 2002, investment income declined to $1,563 as the entire portfoliowas used to support operating expenses**.**** **Weexpect investment income to continue to fluctuate both as the size of theinvestment portfolio decreases or increases and as the rate of interest earnedby the portfolio varies due to shifts in short term interest rates.

 

As one of a series oftransactions on November 12, 2002, we split off our therapeutic business to certainfounding shareholders.  Accordingly, theexpenses associated with that business have been reclassified as discontinuedoperations.  Our therapeutic businesshad been focused on the development of certain photodynamic therapy products,in particular a compound we call PH-10. In the years ended December 31, 2000, 2001 and 2002, we incurred lossesrelated to these operations of $2,642,863, $2,909,820 and $1,496,430,respectively.  On November 12, 2002 thisbusiness was split off to certain founding shareholders in exchange for all oftheir 52.9% ownership interest in Photogen resulting in a gain from the splitoff of $11,779,752 based upon the market value of our common stock on thatdate, net of the net assets that were split off.

 

Purchases of equipmentand leasehold improvements for the years ended December 31, 2000, 2001 and 2002were $516,186, $45,938 and $0, respectively. These purchases were primarily for the acquisition of laboratory andother equipment necessary to conduct pre-clinical and clinical studies andleasehold improvements in the Knoxville and Westborough offices.  During the next twelve months we expectcapital expenditures for equipment to be insignificant.

 

During 2001, as a resultof the closing of the Westborough facility and the shift in the researchpriorities, we determined that certain equipment we were leasing would nolonger be useful in our research. Accordingly, we recorded provisions for future lease payments totaling$1,264,208 representing the remaining lease obligations.  While we will pursue opportunities tosublease or otherwise mitigate these obligations, there can be no assurance ofany success in this regard.

 

We had two series ofconvertible preferred stock outstanding: Series A, issued in October 1999 andSeries B Preferred Stock, issued in February 2000.  The holder of Series A Preferred Stock is entitled to amandatory, cumulative, semi-annual payment-in-kind dividend of 7% (i.e., 0.07additional shares of Series A Preferred Stock).  On November 12, 2002, the holders of Series B Preferred Stockconverted all of their issued and outstanding shares (including accrued andunpaid dividends) for shares of our common stock at an exchange rate of 4.25(pre-reverse split) shares of common for each share of Series B PreferredStock.  Additionally, the terms of theSeries A Preferred Stock and the Series B Preferred Stock create additionalpreferred returns for the holders.  TheSeries A Preferred Stock was issued with detachable warrants. The valueallocated to those warrants caused the preferred shareholders to receive anadditional return. That additional return has been amortized over the periodfrom issuance through October 2001, when the stock was first convertible.  The additional return related to the SeriesA Preferred Stock recorded was $480,928 in 2000 and $345,199 in 2001.  The Series B Preferred contained beneficialconversion features.  Emerging IssuesTask Force Issue 98-5, “Accounting for Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratios,” requires theissuer to assume that the holder will not convert the instrument until the timeof the most beneficial conversion which would occur after January 1, 2002.Using the conversion ratio at January 1, 2002 of 1.4 shares of common stock andthe stock price at the date

 

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of issuance, the maximumbeneficial conversion amount was $2,322,316. This amount was recorded asadditional preferred stock dividends over the period from issuance untilJanuary 1, 2002.  As a result of thecombination of the mandatory dividends, the preferential value amortizationand, in 2002, deemed dividends for our Series B Preferred Stock associated withthe beneficial conversion rates offered to holders of these instruments as partof our November 12, 2002 financing, we recorded preferred stock dividends of$2,704,751, $2,943,755 and $1,997,723 in 2000, 2001 and 2002 for Series APreferred Stock and Series B Preferred Stock.

 

As a result of the abovefactors, the net loss applicable to common stockholders (after preferreddividends) was $13,491,813, $12,666,771 and $1,649,604 for the years endedDecember 31, 2000, 2001 and 2002 respectively. Basic and diluted loss per common share was $1.44, $1.33 and $0.16,respectively, for these periods.

 

###### **Liquidity; CapitalResources**

 

At December 31, 2002, wehad cash and cash equivalents totaling approximately $6,090,904.  We had $2.0 million available under a $4.8million credit line from Elan under which we could borrow to fund our portionof the losses incurred by the joint venture.  Borrowings under this facility bore interest at 8% per annum, and wereeither repayable in 2005 or convertible, at Elan’s election, into our commonstock.  On April 8, 2002, we enteredinto a credit facility that provided us with a $2,500,000 revolving line ofcredit, bearing interest at 4.65%, for a period of five years.  The loan was secured by a lien on all of ourassets.  In connection with ouragreement to sell shares of our common stock to a group of institutionalinvestors, both the amount outstanding, including accrued and unpaid interest,under the Elan credit line ($3,082,487.30) (at a conversion rate of $24.00 pershare) and the $2,500,000 credit facility (at a conversion rate of $1.08 pershare) were converted into shares of our common stock on November 12, 2002.

 

With the proceeds of thefinancing we closed in November and December 2002 and January 2003, we believewe have sufficient capital to carry out planned activities into the thirdquarter of 2003.  Our ability to conductoperations beyond that date is entirely dependent on our ability to obtainadditional capital.  If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders may result.  However, therecan be no assurance that such capital will be available under acceptable terms,if at all.  See “RiskFactors — We must raise additional financing in the future and ourinability to do so will prevent us from implementing our business developmentplan,” above.

 

We have used, and expectover the next 12 months to use the capital available from sales of commonstock, for general corporate purposes, including activities related topreparing for and conducting clinical trials, purchase and preparation ofclinical material, conduct of preclinical studies, administrative expenses tosupport our research and development activities, capital expenditures and tomeet working capital needs.  Proceedsfrom the sale of our common stock to the institutional investors in 2002 mustbe used for the following purposes (including related general andadministrative costs) in the following order or priority, unless otherwiseauthorized by a majority of our Board:

 

•                  To seek FDA approval for the use of PH-50 (our cardiovasculardiagnostic technology) as a CT contrast agent.

 

•                  To seek FDA approval for the use of N1177 (being developed through ourjoint venture with Elan) as a lymphography contrast agent.

 

•                  To perform pre-clinical exploration of the use of PH-50 to identifyvulnerable plaque.

 

•                  To acquire or license compounds to build a product pipeline for thecompany.

 

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$1,500,000 of theproceeds raised in our sale of common stock in 2002 will be used in connectionwith the possible acquisition of certain assets of Alliance.  The remaining $1,558,902 raised fromindividual accredited investors in December 2002 and January 2003 will be usedfor general corporate purposes, including loans and additional bridge financingto Alliance.

 

We plan to raise $15 to$20 million of capital in order to acquire certain assets of Alliance,including *Imagent*®and to provide the working capital necessary to launch *Imagent*® and finance ouroperations.  We engaged Thomas WeiselPartners LLC to assist us in our efforts to privately place our securities toraise such funds.  In addition, weexpect to evaluate from time to time the acquisition or license of businesses,technologies or products.  The purchaseof any such licenses or technologies would be funded by a portion of any netproceeds of future offerings or the issuance of debt or equity securitiesspecifically for that purpose.  We alsoexpect our use of capital to increase as we conduct further clinical trials.

 

Our only long-termcommitment that is not recorded on our financial statements is for our officespace in Pennsylvania.  Annual rent forthis lease, which expires in 2004, is approximately $190,765.

 

###### **Plan of Operation**

 

Management believes itlacks sufficient working capital to fund operations for the entire fiscal yearending December 31, 2003. Therefore, substantial additional capital resourceswill be required to fund the ongoing operations related to our research andbusiness development activities.  As notedin the report of our independent auditors, the report includes a paragraph thatnotes that the company’s financial condition raises substantial doubt about itsability to continue as a going concern. We believe there are a number of potential alternatives available tomeet the continuing capital requirements such as public or private financingsor collaborative agreements.  We aretaking continuing actions to reduce our ongoing expenses.  If adequate funds are not available, we willbe required to significantly curtail our operating plans and may have to sellor license out significant portions of our technology or potentialproducts.  The 2002 financial statementsdo not include any adjustment to reflect the possible future effects on therecoverability and classification of assets or the amount and classification ofliabilities that may result from the outcome of this uncertainty.

 

During the next twelvemonths, depending on the availability of sufficient capital, we will focus ourefforts primarily on the development of PH-50 and N1177 and the possibleacquisition of the medical imaging assets of Alliance.  Specifically we expect to conductpreclinical and human clinical studies, prepare required filings to the FDA andas required to foreign regulatory bodies and acquire quantities of clinicalgrade drug formulations of these products. We expect to continue to incur increasing losses for at least the nextthree years as we intensify research and development, preclinical and clinicaltesting and associated regulatory approval activities and engage in or providefor the manufacture and/or sale of any products that we may develop.  If we acquire the medical imaging assets ofAlliance, including *Imagent*®, we would devote a substantialportion of our efforts to the marketing, sale and manufacturing of *Imagent*®.

 

Greater capital resourceswould enable us to quicken and expand our research and development activities,and our failure to raise additional capital will (absent a suitablecollaborative agreement providing for a third party to take over thesefunctions) significantly impair or curtail our ability to conduct furtherresearch and development activities and our ability to seek regulatory approvalfor any possible product resulting from that research.  In any event, complete development andcommercialization of our technology will require substantial additionalfunds.  See “Risk Factors — We mustraise additional financing in the future and our inability to do so willprevent us from implementing our business plan,” above.  We are actively seeking to raise $15 to $20million through the sale of our common stock or other securities in a privateplacement to fund the acquisition of Alliance’s medical imaging assets and toprovide working capital necessary to fund our operations.

 

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**Recent Accounting Pronouncements**

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to Be Disposed of,” and theaccounting and reporting provisions of APB Opinion No. 30, “Reporting theResults of Operations, Reporting the Effects of Disposal of a Segment of aBusiness and Extraordinary, Unusual and Infrequently Occurring Events andTransactions,” for the disposal of a segment of a business.  The provisions of SFAS 144 are effective forfiscal years beginning after December 15, 2001.  The company has recorded the split-off of its therapeuticbusiness as a discontinued operation in accordance with SFAS 144.

 

In June 2002, the FASBissued Statement No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  The standardrequires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of commitment to anexit or disposal plan.  Examples ofcosts covered by the standard include lease termination cost and certainemployee severance costs that are associated with a restructuring, discontinuedoperation, plant closing, or other exit or disposal activity. Previousaccounting guidance provided by EITF Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring) is replaced by this Statement.Statement 146 is to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002. Management does not anticipate that theadoption of this Statement will have a significant effect on the company’sfinancial statements.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, including Indirect Guarantees of Indebtedness ofOthers” (“Interpretation”).  This Interpretationelaborates on the existing disclosure requirements for most guarantees,including loan guarantees such as standby letters of credit.  It also clarifies that at the time a companyissues a guarantee, the company must recognize an initial liability for thefair market value of the obligations it assumes under that guarantee and mustdisclose that information in its interim and annual financial statements.  The initial recognition and measurementprovisions of the Interpretation apply on a prospective basis to guaranteesissued or modified after December 31, 2002.

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities.”  The objective of thisinterpretation is to provide guidance on how to identify a variable interestentity (“VIE”) and determine when the assets, liabilities, noncontrollinginterests and results of operations of a VIE need to be included in a company’sconsolidated financial statements.  Acompany that holds variable interests in an entity will need to consolidate theentity if the company’s interest in the VIE is such that the company willabsorb a majority of the VIE’s expected losses and/or receive a majority of theentity’s expected residual returns, if they occur.  Interpretation No. 46 also requires additional disclosures byprimary beneficiaries and other significant variable interest holders.  The provisions of this interpretation becameeffective upon issuance.  The companybelieves that Sentigen will be considered a VIE; however, the company does notexpect its accounting for its interest in Sentigen to change.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transitionand Disclosure.”  SFAS No. 148 amendsSFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based compensation and requires pro formadisclosures of the effect on net income and earnings per share had the fairvalue method been used to be included in annual and interim reports anddisclosure of the effect of the transition method used if the accounting methodwas changed, among other things.  SFASNo. 148 is effective for annual reports of fiscal years beginning afterDecember 15, 2002 and interim reports ending after December 15, 2002.  The company plans to continue

 

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using the intrinsic valuemethod of accounting for stock-based compensation and, therefore, the new rulewill have no effect on the company’s financial condition or results ofoperations.  The company adopted the newstandard related to disclosure effective December 15, 2002.

 

###### **ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISKS.**

 

The primary market riskthat could impact us is the fluctuation in interest rates related to ourinvestments in Government bonds.  As ourinvestments all have short-term maturities, the investment return reflects thecurrent market rates.  To date, we havenot engaged in any derivative or hedging activities.

 

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###### **ITEM 8. FINANCIALSTATEMENTS.**

 

**Reportof Independent Certified Public Accountants**

 

 

Board of Directors

Photogen Technologies,Inc.

New Hope, Pennsylvania

 

We have audited the accompanyingconsolidated balance sheets of Photogen Technologies, Inc., a development stagecompany, as of December 31, 2001 and 2002, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for the periodfrom November 3, 1996 (inception) to December 31, 2002 and for each of thethree years in the period ended December 31, 2002.  These financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

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

 

In our opinion, theconsolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Photogen Technologies, Inc. at December 31,2001 and 2002, and the results of its operations and its cash flows for theperiod from November 3, 1996 (inception) to December 31, 2002 and for each ofthe three years in the period ended December 31, 2002, in conformity withaccounting principles generally accepted in the United States.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed inNote 1 to the financial statements, the Company has reported accumulated lossesof $28,745,194, which raises substantial doubt about its ability to continue asa going concern.  Management’s plans inregard to these matters are described in Note 1.  The financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

 

 

/s/ BDO Seidman, LLP

Chicago, Illinois

March 7, 2003

 

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**PhotogenTechnologies, Inc.**

 

**ConsolidatedBalance Sheets**

** **
| **December 31,**                                                                                             |   | **2001**   |       | **2002**      |       |
|--------------------------------------------------------------------------------------------------------------|--------|------------|------------|---------------|------------|
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Assets**                                                                                                   |   |       | ** ** |          | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Current Assets**                                                                                           |   |       | ** ** |          | ** ** |
| Cash  and cash equivalents                                                                                   |   | $          | 1,352,904  | ** **    | **$**      | **6,090,904** | ** ** |
| Deposits  (Note 5(a))                                                                                        |   | 474,580    | ** ** | **98,721**    | ** ** |
| Prepaid  expenses                                                                                            |   | 29,775     | ** ** | **693,313**   | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Total Current Assets**                                                                                     |   | 1,857,259  | ** ** | **6,882,938** | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Equipment and Leasehold Improvements,** less accumulated depreciation of  $1,059,997 and $12,739 (Note 13) |   | 882,220    | ** ** | **36,000**    | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Patent Costs,** net of amortization of $100,693 and $142,359,  respectively                                |   | 399,307    | ** ** | **357,641**   | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Deposits**(Note 5(a))                                                                                      |   | 69,173     | ** ** | **14,383**    | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Notes Receivable** (Note 11)                                                                               |   | —     | ** ** | **1,255,000** | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
| **Investment in and Advances to Affiliates**(Note 3)                                                         |   | 10,994,680 | ** ** | **8,192,452** | ** ** |
|                                                                                                         |   |       | ** ** |          | ** ** |
|                                                                                                         |   | $          | 14,202,639 |          | **$**      | **16,738,414** | ** ** |

 

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| **December 31,**                                                                                                                                                                                    |   | **2001**    |       | **2002**        |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-----------------|------------|
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Liabilities and Shareholders’ Equity**                                                                                                                                                       |   |        | ** ** |            | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Current Liabilities**                                                                                                                                                                             |   |        | ** ** |            | ** ** |
| Accounts  payable                                                                                                                                                                                   |   | $           | 373,774    | ** **      | **$**      | **835,003** | ** ** |
| Accrued  expenses (Note 4)                                                                                                                                                                          |   | 568,174     | ** ** | **34,132**      | ** ** |
| Accrued  equipment lease (Note 5(a))                                                                                                                                                                |   | 374,580     | ** ** | **401,664**     | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Total Current Liabilities**                                                                                                                                                                       |   | 1,316,528   | ** ** | **1,270,799**   | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Accrued Equipment Lease**(Note 5(a))                                                                                                                                                              |   | 749,160     | ** ** | **401,664**     | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Long-Term Debt** (Note 3)                                                                                                                                                                         |   | 2,314,005   | ** ** | **—**      | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Shares Subject to Rescission** (Note 6(f))                                                                                                                                                        |   | 650,000     | ** ** | **650,000**     | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Shareholders’ Equity** (Notes 1, 2, 3, 6 and 7)                                                                                                                                              |   |        | ** ** |            | ** ** |
| Preferred  stock; par value $.01 per share; 5,000,000 shares authorized including:                                                                                                                  |   |        | ** ** |            | ** ** |
| Series  A Preferred Stock; 12,856 shares authorized, issued and outstanding,  liquidation preference $1,000 per share (in aggregate $12,856,000)                                                    |   | 128         | ** ** | **128**         | ** ** |
| Series  B Preferred Stock; 402,000 shares authorized; 357,280 issued and outstanding  at December 31, 2001, liquidation preference $16.88 per share (in aggregate  $6,030,886 at December 31, 2001) |   | 3,572       | ** ** | **—**      | ** ** |
| Common  stock; par value $.001 per share; 150,000,000 shares authorized; 9,585,948  and 16,137,465 shares issued and outstanding, respectively                                                      |   | 9,586       | ** ** | **16,137**      | ** ** |
| Additional  paid-in capital                                                                                                                                                                         |   | 38,252,973  | ** ** | **43,144,880**  | ** ** |
| Deficit  accumulated during the development stage                                                                                                                                                   |   | (29,093,313 | )          | **(28,745,194** | **)**      |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
| **Total Shareholders’ Equity**                                                                                                                                                                 |   | 9,172,946   | ** ** | **14,415,951**  | ** ** |
|                                                                                                                                                                                                |   |        | ** ** |            | ** ** |
|                                                                                                                                                                                                |   | $           | 14,202,639 |            | **$**      | **16,738,414** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements.*

 

40

----

 

**PhotogenTechnologies, Inc.**

 

**ConsolidatedStatements of Operations**

 
|                                                                               |   | **Year Ended  December 31,  2000** |        | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2002** |       | **Cumulative  Amounts  From  November 3,  1996 (Inception) to  December 31,  2002** |           |
|------------------------------------------------------------------------------------|--------|------------------------------------|-------------|------------------------------------|--------|------------------------------------|------------|-------------------------------------------------------------------------------------|----------------|
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Operating Expenses**(Notes 5, 6 and 9)                                           |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Research  and development                                                          |   | $                                  | 1,665,450   |                               | $      | 437,958                            |       | **$**                                                                               | **1,227,897**  | ** ** | $ | 4,356,637 |   |
| General  and administrative                                                        |   | 5,095,442                          |        | 3,220,584                          |   | **4,030,083**                      | ** ** | 16,647,522                                                                          |           |
| Restructuring  charges                                                             |   | 597,025                            |        | —                             |   | **807,483**                        | ** ** | 1,404,508                                                                           |           |
| Provision  for future lease payments                                               |   | —                             |        | 1,264,208                          |   | **—**                         | ** ** | 1,264,208                                                                           |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Total  operating expenses                                                          |   | 7,357,917                          |        | 4,922,750                          |   | **6,065,463**                      | ** ** | 23,672,875                                                                          |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Loss  From Joint Venture (Note 3)                                                  |   | (1,203,392                         | )           | (1,952,758                         | )      | **(3,452,837**                     | **)**      | (6,915,016                                                                          | )              |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Investment Income**                                                              |   | 417,110                            |        | 110,741                            |   | **1,563**                          | ** ** | 1,208,941                                                                           |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Interest Expense**                                                               |   | —                             |        | (48,429                            | )      | **(418,466**                       | **)**      | (466,895                                                                            | )              |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Loss  from continuing operations                                                   |   | (8,144,199                         | )           | (6,813,196                         | )      | **(9,935,203**                     | **)**      | (29,845,845                                                                         | )              |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Discontinued Operations**(Note 13)                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Loss  from operations of discontinued therapeutic business                         |   | (2,642,863                         | )           | (2,909,820                         | )      | **(1,496,430**                     | **)**      | (10,679,101                                                                         | )              |
| Gain  from split-off of therapeutic business                                       |   | —                             |        | —                             |   | **11,779,752**                     | ** ** | 11,779,752                                                                          |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| Income  (loss) from discontinued operations                                        |   | (2,642,863                         | )           | (2,909,820                         | )      | **10,283,322**                     | ** ** | 1,100,651                                                                           |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Net Income (Loss)**                                                              |   | (10,787,062                        | )           | (9,723,016                         | )      | **348,119**                        | ** ** | $                                                                                   | (28,745,194    | ) |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Dividends on Preferred Stock**(Notes 3, 6  and 8)                                |   | (2,704,751                         | )           | (2,943,755                         | )      | **(1,997,723**                     | **)**      |                                                                                |           |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Net Loss Applicable to Common Shareholders**                                     |   | $                                  | (13,491,813 | )                                  | $      | (12,666,771                        | )          | **$**                                                                               | **(1,649,604** | **)** |   |   |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Basic and Diluted Loss Per Common Share from Continuing  Operations**            |   | $                                  | (1.16       | )                                  | $      | (1.03                              | )          | **$**                                                                               | **(1.17**      | **)** |   |   |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Basic and Diluted Income (Loss) Per Common Share from  Discontinued Operations** |   | $                                  | (0.28       | )                                  | $      | (0.30                              | )          | **$**                                                                               | **1.01**       | ** ** |   |   |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Basic and Diluted Loss Per Common Share**                                        |   | $                                  | (1.44       | )                                  | $      | (1.33                              | )          | **$**                                                                               | **(0.16**      | **)** |   |   |
|                                                                               |   |                               |        |                               |   |                               | ** ** |                                                                                |           |
| **Weighted Average Number of Common Shares Outstanding –  Basic and Diluted** |   | 9,345,847                          |        | 9,507,693                          |   | **10,187,619**                     | ** ** |                                                                                |           |

 

*Seeaccompanying notes to consolidated financial statements.*

 

41

----

 

**PhotogenTechnologies, Inc.**

 

**ConsolidatedStatement of Shareholders’ Equity**

 
|                                                       |   | **Preferred Stock  Series A** |   | **Preferred Stock  Series B** |   | **Common Stock** |   | **Members’** |   | **Additional  Paid-in** |   | **Deficit  Accumulated  During the  Development** |   | **Total**   |   |
|------------------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|------------------|--------|-------------------|--------|-------------------------|--------|---------------------------------------------------|--------|-------------|--------|
|                                                       |   | **Shares**                    |   | **Amount**                    |   | **Shares**       |   | **Amount**        |   | **Shares**              |   | **Amount**                                        |   | **Capital** |   | **Capital** |   | **Stage** |   |   |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Contribution of capital                                    |   | —                        |   | $                             | — |             | — |              | $      | —                  |   | —                                            |   | $           | — |   | $ | 7,268 |   | $ | — |   | $ | — |   | $ | 7,268 |   |
| Net loss for the period ended December 31, 1996            |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | (1,779      | )      | — |   | — |   | (1,779 | ) |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Balance, at May 15, 1997                                   |   | —                        |   | $                             | — |             | — |              | $      | —                  |   | —                                            |   | $           | — |   | $ | 9,000 |   | $ | — |   | $ | (3,511 | ) | $ | 5,489 |   |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Issuance of common stock                                   |   | —                        |   | —                        |   | —           |   | —            |   | 1,578,208               |   | 1,578                                             |   | —      |   | 1,801,872 |   | — |   | 1,803,450 |   |
| Effect of recapitalization and merger                      |   | —                        |   | —                        |   | —           |   | —            |   | 7,421,792               |   | 7,422                                             |   | (9,000      | )      | 1,203,765 |   | 1,732 |   | 1,203,919 |   |
| Cost associated with recapitalization and merger           |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | (371,111 | ) | — |   | (371,111 | ) |
| Net loss for the period May 16, 1997 to December  31, 1997 |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | — |   | (554,702 | ) | (554,702 | ) |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Balance, at December 31, 1997                              |   | —                        |   | —                        |   | —           |   | —            |   | 9,000,000               |   | 9,000                                             |   | —      |   | 2,634,526 |   | (556,481 | ) | 2,087,045 |   |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Issuance of common stock                                   |   | —                        |   | —                        |   | —           |   | —            |   | 218,755                 |   | 219                                               |   | —      |   | 6,999,781 |   | — |   | 7,000,000 |   |
| Costs associated with common stock issuance                |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | (50,000 | ) | — |   | (50,000 | ) |
| Options issued to consultants                              |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | 45,446 |   | — |   | 45,446 |   |
| Net loss for the year ended December 31, 1998              |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | — |   | (1,973,913 | ) | (1,973,913 | ) |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Balance, at December 31, 1998                              |   | —                        |   | —                        |   | —           |   | —            |   | 9,218,755               |   | 9,219                                             |   | —      |   | 9,629,753 |   | (2,530,394 | ) | 7,108,578 |   |
|                                                       |   |                          |   |                          |   |             |   |              |   |                    |   |                                              |   |        |   |   |   |   |   |   |   |
| Exercise of stock options                                  |   | —                        |   | —                        |   | —           |   | —            |   | 1,125                   |   | 1                                                 |   | —      |   | 50,062 |   | — |   | 50,063 |   |
| Issuance of warrants and options                           |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | 3,664,749 |   | — |   | 3,664,749 |   |
| Issuance of common stock                                   |   | —                        |   | —                        |   | —           |   | —            |   | 125,967                 |   | 126                                               |   | —      |   | 6,082,528 |   | — |   | 6,082,654 |   |
| Issuance of preferred stock                                |   | 12,015                        |   | 120                           |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | 11,578,839 |   | — |   | 11,578,959 |   |
| Net loss for the year ended December 31, 1999              |   | —                        |   | —                        |   | —           |   | —            |   | —                  |   | —                                            |   | —      |   | — |   | (6,052,841 | ) | (6,052,841 | ) |

 

42

----

 
|                                                                                        |   | **Preferred Stock  Series A** |       | **Preferred Stock  Series B** |    | **Common Stock** |       | **Members’** |   | **Additional  Paid-in** |       | **Deficit  Accumulated  During the  Development** |       | **Total**   |       |
|---------------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------------------|---------|------------------|------------|-------------------|--------|-------------------------|------------|---------------------------------------------------|------------|-------------|------------|
|                                                                                        |   | **Shares**                    |       | **Amount**                    |    | **Shares**       |       | **Amount**        |   | **Shares**              |       | **Amount**                                        |       | **Capital** |       | **Capital** |   | **Stage** |   |   |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| **Balance,** at December  31, 1999                                                          |   | 12,015                        |       | $                             | 120     |             | —     |              | $      | —                  |       | 9,345,847                                         |       | $           | 9,346      |   | $ | — |   | $ | 31,005,931 |   | $ | (8,583,235 | ) | $ | 22,432,162 |   |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Stock option compens132

ation                                                              |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 125,020 |   | — |   | 125,020 |   |
| Issuance of warrants and options                                                            |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 1,366,050 |   | — |   | 1,366,050 |   |
| Issuance of preferred stock dividend                                                        |   | 841                           |       | 8                             |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | (8 | ) | — |   | — |   |
| Issuance of preferred stock                                                                 |   | —                        |       | —                        |    | 337,056          |       | 3,370             |   | —                  |       | —                                            |       | —      |       | 5,272,970 |   | — |   | 5,276,340 |   |
| Net loss for the year ended December 31, 2000                                               |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | — |   | (10,787,062 | ) | (10,787,062 | ) |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Balance, at December 31, 2000                                                               |   | 12,856                        |       | 128                           |    | 337,056          |       | 3,370             |   | 9,345,847               |       | 9,346                                             |       | —      |       | 37,769,963 |   | (19,370,297 | ) | 18,412,510 |   |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Stock option compensation                                                                   |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 64,729 |   | — |   | 64,729 |   |
| Issuance of common stock for cash                                                           |   | —                        |       | —                        |    | —           |       | —            |   | 49,245                  |       | 49                                                |       | —      |       | 418,674 |   | — |   | 418,723 |   |
| Issuance of common stock in satisfaction of  anti-dilution provision                        |   | —                        |       | —                        |    | —           |       | —            |   | 190,856                 |       | 191                                               |       | —      |       | (191 | ) | — |   | — |   |
| Issuance of preferred stock dividend                                                        |   | —                        |       | —                        |    | 20,224           |       | 202               |   | —                  |       | —                                            |       | —      |       | (202 | ) | — |   | — |   |
| Net loss for the year ended December 31, 2001                                               |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | — |   | (9,723,016 | ) | (9,723,016 | )  |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Balance, at December 31, 2001                                                               |   | 12,856                        |       | 128                           |    | 357,280          |       | 3,572             |   | 9,585,948               |       | 9,586                                             |       | —      |       | 38,252,973 |   | (29,093,313 | ) | 9,172,946 |   |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Stock option compensation                                                                   |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 73,870 |   | — |   | 73,870 |   |
| Issuance of warrants for services                                                           |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 322,000 |   | — |   | 322,000 |   |
| Issuance of options in settlement of lawsuit                                                |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 806,415 |   | — |   | 806,415 |   |
| Employee compensation from stock options                                                    |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 988,184 |   | — |   | 988,184 |   |
| Issuance of preferred stock dividend                                                        |   | —                        |       | —                        |    | 40,194           |       | 402               |   | —                  |       | —                                            |       | —      |       | (402 | ) | — |   | — |   |
| Conversion of Series B to common stock                                                      |   | —                        |       | —                        |    | (397,474         | )          | (3,974            | )      | 422,316                 |       | 422                                               |       | —      |       | 3,552 |   | — |   | — |   |
| Beneficial inducement costs for convertible debt  converted                                 |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | 206,348 |   | — |   | 206,348 |   |
| Conversion of line of credit with Elan to common  stock                                     |   | —                        |       | —                        |    | —           |       | —            |   | 128,437                 |       | 128                                               |       | —      |       | 3,082,359 |   | — |   | 3,082,487 |   |
| Conversion of line of credit with entity  controlled by director of company to common stock |   | —                        |       | —                        |    | —           |       | —            |   | 2,314,815               |       | 2,315                                             |       | —      |       |  2,497,685 |   | — |   | 2,500,000 |   |
| Retirement of common stock returned in shareholder  transaction (Note 6(f))                 |   | —                        |       | —                        |    | —           |       | —            |   | (5,137,109              | )          | (5,137                                            | )          | —      |       | (12,221,182 | ) | — |   | (12,226,319 | ) |
| Issuance of common stock for cash                                                           |   | —                        |       | —                        |    | —           |       | —            |   | 8,823,058               |       | 8,823                                             |       | —      |       | 9,133,078 |   | — |   | 9,141,901 |   |
| Net income for the year ended December 31, 2002                                             |   | —                        |       | —                        |    | —           |       | —            |   | —                  |       | —                                            |       | —      |       | — |   | 348,119 |   | 348,119 |   |
|                                                                                        |   |                          |       |                          |    |             |       |              |   |                    |       |                                              |       |        |       |   |   |   |   |   |   |
| Balance, at December 31, 2002                                                               |   | **12,856**                    | ** ** | **$**                         | **128** | ** **       | **—** | ** **        | **$**  | **—**              | ** ** | **16,137,465**                                    | ** ** | **$**       | **16,137** | ** ** | **$** | **—** | ** ** | **$** | **43,144,880** | ** ** | **$** | **(28,745,194** | **)** | **$** | **14,415,951** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements.*

 

43

----

 

**PhotogenTechnologies, Inc.**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                              |   | **Year Ended  December 31,  2000** |        | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2002** |       | **Cumulative  Amounts  From  November 3,  1996  (Inception) to  December 31,  2002** |          |
|-------------------------------------------------------------------|--------|------------------------------------|-------------|------------------------------------|--------|------------------------------------|------------|--------------------------------------------------------------------------------------|---------------|
|                                                              |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| **Cash Flows From Operating Activities**                          |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| Net  income (loss)                                                |   | $                                  | (10,787,062 | )                                  | $      | (9,723,016                         | )          | **$**                                                                                | **348,119**   | ** ** | $ | (28,745,194 | ) |
| Loss  from discontinued operations                                |   |                               | 2,642,863   |                               |   | 2,909,820                          |       |                                                                                 | **1,496,430** |   |   | 10,679,101 |   |
| Depreciation  and amortization                                    |   | 416,511                            |        | 442,191                            |   | **371,319**                        | ** ** | 1,677,904                                                                            |          |
| Loss  (gain) on disposal of equipment and leasehold improvements  |   | 43,041                             |        | (4,617                             | )      | **—**                         | ** ** | 38,424                                                                               |          |
| Gain  on sale of marketable securities                            |   | —                             |        | —                             |   | **—**                         | ** ** | (18,503                                                                              | )             |
| United  States Treasury Notes amortization                        |   | (41,437                            | )           | (1,029                             | )      | **—**                         | ** ** | 12,586                                                                               |          |
| Gain  on sale of therapeutic business                             |   | —                             |        | —                             |   | **(11,779,752**                    | **)**      | (11,779,752                                                                          | )             |
| Stock  option compensation                                        |   | 125,020                            |        | 64,729                             |   | **1,062,054**                      | ** ** | 1,678,570                                                                            |          |
| Beneficial  inducement costs for convertible notes                |   | —                             |        | —                             |   | **206,348**                        | ** ** | 206,348                                                                              |          |
| Issuance  of warrants in exchange for services rendered           |   | 2,191,262                          |        | 760,363                            |   | **322,000**                        | ** ** | 4,317,091                                                                            |          |
| Issuance  of stock options in settlement of lawsuit               |   | —                             |        | —                             |   | **806,415**                        | ** ** | 806,415                                                                              |          |
| Loss  from investment in affiliate                                |   | 1,203,392                          |        | 1,952,758                          |   | **3,452,837**                      | ** ** | 6,915,016                                                                            |          |
| Changes  in operating assets and liabilities                      |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| Prepaid  expenses                                                 |   | 408,595                            |        | 152,340                            |   | **(663,538**                       | **)**      | (693,313                                                                             | )             |
| Interest  receivable                                              |   | (8,892                             | )           | 93,219                             |   | **—**                         | ** ** | —                                                                               |          |
| Accounts  payable                                                 |   | (141,444                           | )           | (267,945                           | )      | **531,229**                        | ** ** | 905,003                                                                              |          |
| Accrued  expenses                                                 |   | 579,452                            |        | (11,278                            | )      | **(298,465**                       | **)**      | 269,709                                                                              |          |
| Accrued  equipment lease                                          |   | —                             |        | 1,123,740                          |   | **10,237**                         | ** ** | 1,133,977                                                                            |          |
|                                                              |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| Net  cash used in continuing operating activities                 |   | (6,011,562                         | )           | (5,418,545                         | )      | **(5,631,197**                     | **)**      | (23,275,719                                                                          | )             |
| Net  cash used in discontinued operations                         |   | (2,642,863                         | )           | (2,909,820                         | )      | **(1,496,430**                     | **)**      | (10,679,101                                                                          | )             |
|                                                              |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| **Cash Flows From Investing Activities**                          |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| Sale  of marketable securities                                    |   | —                             |        | —                             |   | **—**                         | ** ** | 2,164,464                                                                            |          |
| Purchases  of marketable securities                               |   | —                             |        | —                             |   | **—**                         | ** ** | (2,182,967                                                                           | )             |
| Purchases  of United States Treasury Notes                        |   | (11,749,970                        | )           | (4,870,000                         | )      | **—**                         | ** ** | (38,656,973                                                                          | )             |
| Sales  of United States Treasury Notes                            |   | 12,320,000                         |        | 9,815,000                          |   | **—**                         | ** ** | 39,778,548                                                                           |          |
| Purchase  of equipment and leasehold Improvements                 |   | (516,186                           | )           | (45,938                            | )      | **—**                         | ** ** | (636,927                                                                             | )             |
| Proceeds  from sale of equipment                                  |   | —                             |        | 145,551                            |   | **—**                         | ** ** | 145,551                                                                              |          |
| Costs  to acquire patent                                          |   | (50,000                            | )           | —                             |   | **—**                         | ** ** | (237,335                                                                             | )             |
| Investment  in and advances to affiliate                          |   | 93,548                             |        | (2,245,948                         | )      | **(650,609**                       | **)**      | (15,107,468                                                                          | )             |
| Increase  in note receivable                                      |   | —                             |        | —                             |   | **(1,255,000**                     | **)**      | (1,255,000                                                                           | )             |
| Decrease  in restricted cash                                      |   | 100,000                            |        | —                             |   | **—**                         | ** ** | —                                                                               |          |
| Decrease  (increase) in deposit                                   |   | (500,000                           | )           | (14,383                            | )      | **100,000**                        | ** ** | (443,753                                                                             | )             |
|                                                              |   |                               |        |                               |   |                               | ** ** |                                                                                 |          |
| Net  cash provided by (used in) investing activities              |   | (302,608                           | )           | 2,784,282                          |   | **(1,805,609**                     | **)**      | (17,738,486                                                                          | )             |
| Net  cash used in investing activities of discontinued operations |   | —                             |        | —                             |   | **—**                         |       | (1,306,626                                                                           | )             |

 

44

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|                                                     |   | **Year Ended  December 31,  2000** |    | **Year Ended  December 31,  2001** |       | **Year Ended  December 31,  2002** |       | **Cumulative  Amounts  From  November 3,  1996  (Inception) to  December 31,  2002** |          |
|----------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------|---------------|
|                                                     |   |                               |    |                               |       |                               |       |                                                                                 |          |
| **Cash Flows From Financing Activities**                 |   |                               |    |                               |       |                               |       |                                                                                 |          |
| Principal  payments on capital leases                    |   | $                                  | (21,148 | )                                  | $          | (18,356                            | **)**      | **$**                                                                                | **—**    |   | $ | (291,704 | ) |
| Net  proceeds from issuance of equity                    |   | 5,276,340                          |    | 1,068,723                          | ** ** | **9,141,901**                      |       | 40,509,340                                                                           |          |
| Proceeds  from capital contributions by shareholders     |   | —                             |    | —                             | ** ** | **—**                         |       | 1,911,674                                                                            |          |
| Proceeds  from issuance of debt                          |   | —                             |    | 2,314,005                          | ** ** | **3,032,905**                      |       | 5,346,910                                                                            |          |
| Cost  of recapitalization                                |   | —                             |    | —                             | ** ** | **—**                         |       | (371,111                                                                             | )             |
|                                                     |   |                               |    |                               |       |                               |       |                                                                                 |          |
| Net  cash provided by financing activities               |   | 5,255,192                          |    | 3,364,372                          | ** ** | **12,174,806**                     |       | 47,105,109                                                                           |          |
|                                                     |   |                               |    |                               |       |                               |       |                                                                                 |          |
| **Net Increase (Decrease) in Cash and Cash Equivalents** |   | (1,058,978                         | )       | 730,109                            | ** ** | **4,738,000**                      |       | 6,090,904                                                                            |          |
|                                                     |   |                               |    |                               |       |                               |       |                                                                                 |          |
| **Cash and Cash Equivalents,** at beginning of year      |   | 1,681,773                          |    | 622,795                            | ** ** | **1,352,904**                      |       | —                                                                               |          |
|                                                     |   |                               |    |                               |       |                               |       |                                                                                 |          |
| **Cash and Cash Equivalents,** at end of year            |   | $                                  | 622,795 |                               | $          | 1,352,904                          | ** ** | **$**                                                                                | **6,090,904** |   | $ | 6,090,904 |   |

 
| **Supplemental  Schedule of Noncash Investing and Financing Activities**                                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2002                                                                                                                                                                                                            |
| Payments due on  the accrued equipment lease were made through a reduction in deposits due to  the Company in the amount of $330,649.                                                                           |
|                                                                                                                                                                                                            |
| Debt of  $5,346,910 and accrued interest of $235,577 were converted to common stock.                                                                                                                            |
|                                                                                                                                                                                                            |
| Split-off of the  therapeutic business which included equipment and leasehold improvements of  $516,567 and accounts payable of $70,000 in exchange for the Company’s common  stock valued at $12,226,319. |

 

*Seeaccompanying notes to consolidated financial statements.*

 

45

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**PhotogenTechnologies, Inc.**

 

**Notesto Consolidated Financial Statements**

** **
| **1.** |   | **Organization  and  Significant  Accounting Policies** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|---------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | **Nature  of Operations**                               |   | Photogen Technologies,  Inc. (the “Company”), through its subsidiary Photogen, Inc., successor to  Photogen, L.L.C., is a development stage biopharmaceutical company that is  focusing on developing a novel contrast agent with potential applications (1)  as a blood pool agent to diagnose diseased tissue in the cardiovascular  system and other organs and (2) to diagnose cancer metastasizing into the  lymphatic system.  The Company also  has in development certain minimally invasive products for the treatment of  psoriasis and other topical diseases and cancer and certain laser device  technology (the therapeutic business).   The Company also has an investment in a joint venture (Note 3).  In November 2002, the Company split off  the therapeutic business to its original shareholders (see Note 13).                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | **Principles  of Consolidation**                        |   | Intercompany balances  and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | **Liquidity  and Basis of Presentation**                |   | The accompanying  financial statements are prepared assuming the Company is a going  concern.  The Company believes it  lacks sufficient working capital to fund operations for the entire fiscal  year ending December 31, 2003.   Therefore, substantial additional capital resources will be required  to fund the ongoing operations related to the Company’s research and business  development activities.  Management  believes there are a number of potential alternatives available to meet the  continuing capital requirements such as public or private financings or collaborative  agreements.  The Company is taking  continuing actions to reduce its ongoing expenses.  If adequate funds are not available, the Company will be  required to significantly curtail its operating plans and may have to sell or  license out significant portions of the Company’s technology or potential  products.  The 2002 financial  statements do not include any adjustment to reflect the possible future  effects on the recoverability and classification of assets or the amount and  classification of liabilities that may result from the outcome of this  uncertainty. |

 

46

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|   |   | **Estimates**                             |   | The financial  statements include estimated amounts and disclosures based on management’s  assumptions about future events.   Actual results may differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Cash  Equivalents**                     |   | Highly liquid  investments with a maturity of three months or less when purchased are  classified as cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Equipment  and Leasehold Improvements** |   | Equipment and leasehold  improvements are stated at cost.   Depreciation and amortization of equipment are provided for using the  straight-line method over the estimated useful lives of the assets.  Computers and laboratory equipment are  being depreciated over five years, furniture and fixtures are being  depreciated over seven years and leasehold improvements are being amortized  over five years. Leasehold improvements are being amortized on a  straight-line basis over the lives of the respective leases or the service  lives of the improvements, whichever is shorter.  Depreciation expense was $374,845, $400,525 and $329,653 for  2000, 2001 and 2002, respectively.   All equipment and leasehold improvements, except a net amount of  $36,000, were transferred in the split-off of the therapeutic business. |
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Long-Lived  Assets**                    |   | The Company reviews the  carrying values of its long-lived assets for possible impairment whenever an  event or change in circumstances indicates that the carrying amount of the  assets may not be recoverable.  Any  long-lived assets held for disposal are reported at the lower of their  carrying amounts or fair value less cost to sell.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Patent  Costs**                         |   | Internal patent costs  are expensed in the period incurred.   Patents purchased are capitalized and amortized over the life of the  patent. Amortization expense was $41,666 for 2000, 2001 and 2002.  Amortization of patent costs is expected  to be $41,666 over the remaining life of the patent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Research  and Development**             |   | Research and  development costs are charged to expense when incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | **Income  Taxes**                         |   | The Company recognizes  deferred tax assets and liabilities for the expected future tax consequences  of temporary differences between the tax basis and financial reporting basis  of certain assets and liabilities based upon currently enacted tax rates  expected to be in effect when such amounts are realized or settled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

47

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|   |   | **Basic  and Diluted Loss Per Common Share** |   | Basic and diluted loss  per common share is computed based on the weighted average number of common  shares outstanding.  Loss per share  excludes the impact of outstanding options, warrants and convertible  preferred stock as they are antidilutive.   Potential common shares excluded from the calculation at December 31,  2002 are 4,535,481 options, 237,431 warrants and 151,819 shares issuable upon  the conversion of Series A Preferred Stock.   Basic and diluted loss per common share includes 124,627 shares of  common stock subject to rescission (Note 6(f)).                                              |
|--------|--------|----------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | **Financial  Instruments**                   |   | The carrying amounts  reported in the consolidated balance sheets for cash, accounts payable and  accrued expenses approximate fair value because of the short-term nature of  these amounts.  The Company’s note  receivable approximates fair value based on instruments with similar terms.                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | **Stock  Options**                           |   | The Company has adopted  the disclosure-only provisions of Statement of Financial Accounting Standards  No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123), but  applies the intrinsic value method set forth in Accounting Principles Board  Opinion No. 25 for stock options granted to employees and directors.  The Company expenses the fair value of  stock options granted to nonemployees.   In 2002, the Company issued stock options to employees with an  exercise price less than the market price on the date of grant.  Accordingly, compensation expense of  $988,184 has been recorded. |
|   |   |                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                         |   | For stock options  granted to employees and directors, the Company has estimated the fair value  of each option granted using the Black-Scholes option pricing model with the  following assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 
|                                             |   | **2000** |       | **2001** |   | **2002** |       |
|--------------------------------------------------|--------|----------|------------|----------|--------|----------|------------|
|                                             |   |     | ** ** |     |   |     | ** ** |
| Weighted  average fair value per options granted |   | $        | 18.68      |     | $      | 3.64     |       | **$** | **1.31** | ** ** |
|                                             |   |     | ** ** |     |   |     | ** ** |
| Significant  assumptions (weighted average)      |   |     | ** ** |     |   |     | ** ** |
| Risk-free  interest rate at grant date           |   | 6.2      | %          | 4.8      | %      | **2.8**  | **%**      |
| Expected  stock price volatility                 |   | 94.3     | %          | 95.5     | %      | **98.0** | **%**      |
| Expected  option life (years)                    |   | 5        |       | 5        |   | **5**    | ** ** |
|                                                  |        |          |            |          |        |          |            |  |  |  |

 

48

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|   |   |   |   | If the Company had  elected to recognize compensation expense based on the fair value at the  grant dates, consistent with the method prescribed by SFAS No. 123, net loss  per share would have been changed to the pro forma amount indicated below: |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|                                                                                                               |   | **2000**   |        | **2001**    |   | **2002**       |       |
|--------------------------------------------------------------------------------------------------------------------|--------|------------|-------------|-------------|--------|----------------|------------|
|                                                                                                               |   |       |        |        |   |           |       |
| Net  income (loss), as reported                                                                                    |   | $          | (13,491,813 | )           | $      | (12,666,771    | )          | **$** | **(1,649,604** | **)** |
|                                                                                                               |   |       | ** **  |        |   |           | ** ** |
| Add  stock based employee compensation expense included in reported net income                                     |   | —     |        | —      |   | **988,184**    | ** ** |
|                                                                                                               |   |       | ** **  |        |   |           | ** ** |
| Less  total stock-based employee compensation expense determined under the fair  value based method for all awards |   | (8,356,534 | )           | (11,314,458 | )      | **(6,084,842** | **)**      |
|                                                                                                               |   |       | ** **  |        |   |           | ** ** |
| Pro  forma net loss                                                                                                |   | $          | (21,848,347 | )           | $      | (23,981,229    | )          | **$** | **(6,746,262** | **)** |
|                                                                                                               |   |       | ** **  |        |   |           | ** ** |
| Basic  and diluted loss per common share, as reported                                                              |   | $          | (1.44       | )           | $      | (1.33          | )          | **$** | **(0.16** | **)** |
|                                                                                                               |   |       | ** **  |        |   |           | ** ** |
| Basis  and diluted loss per common share, pro forma                                                                |   | $          | (2.34       | )           | $      | (2.52          | )          | **$** | **(0.66** | **)** |

 
|   | **Reclassification** | Certain 2001 amounts  have been reclassified to conform with the 2002 presentation. |
|--------|----------------------|-------------------------------------------------------------------------------------|

 

49

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|   | **Recent  Accounting Pronouncements** | In October 2001, the  Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the  Impairment or Disposal of Long-Lived Assets.”  This statement addresses financial accounting and reporting for  the impairment or disposal of long-lived assets.  This statement supersedes SFAS No. 121, “Accounting for the  Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,”  and the accounting and reporting provisions of APB Opinion  No. 30,  “Reporting the Results of Operations, Reporting the Effects of Disposal of a  Segment of a Business and Extraordinary, Unusual and Infrequently Occurring  Events and Transactions,” for the disposal of a segment of a business.  The provisions of SFAS 144 are effective  for fiscal years beginning after December 15, 2001.  The Company has recorded the split-off of its therapeutic  business as a discontinued operation in accordance with SFAS 144.                                                                                                         |
|--------|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                  | In June 2002, the FASB  issued Statement No. 146, “Accounting for Costs Associated with Exit or  Disposal Activities.”  The standard  requires companies to recognize costs associated with exit or disposal  activities when they are incurred rather than at the date of commitment to an  exit or disposal plan.  Examples of  costs covered by the standard include lease termination cost and certain  employee severance costs that are associated with a restructuring,  discontinued operation, plant closing, or other exit or disposal activity.  Previous accounting guidance provided by EITF Issue No. 94-3, “Liability  Recognition for Certain Employee Termination Benefits and Other Costs to Exit  an Activity (including Certain Costs Incurred in a Restructuring)” is  replaced by this Statement. Statement 146 is to be applied prospectively to  exit or disposal activities initiated after December 31, 2002. Management  does not anticipate that the adoption of this Statement will have a  significant effect on the Company’s financial statements. |

 

50

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|   |   | In November 2002, the  FASB issued Interpretation No. 45, “Guarantor’s Accounting and  Disclosure Requirements for Guarantees, including Indirect Guarantees of  Indebtedness of Others” (“Interpretation”).   This Interpretation elaborates on the existing disclosure requirements  for most guarantees, including loan guarantees such as standby letters of  credit.  It also clarifies that at the  time a company issues a guarantee, the company must recognize an initial liability  for the fair market value of the obligations it assumes under that guarantee  and must disclose that information in its interim and annual financial  statements.  The initial recognition  and measurement provisions of the Interpretation apply on a prospective basis  to guarantees issued or modified after December 31, 2002.                                                                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | In January 2003, the  FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest  Entities.”  The objective of this  interpretation is to provide guidance on how to identify a variable interest  entity (“VIE”) and determine when the assets, liabilities, noncontrolling  interests and results of operations of a VIE need to be included in a  company’s consolidated financial statements.   A company that holds variable interests in an entity may need to  consolidate the entity if the Company’s interest in the VIE is such that the  Company will absorb a majority of the VIE’s expected losses and/or receive a  majority of the entity’s expected residual returns, if they occur.  Interpretation No. 46 also requires  additional disclosures by primary beneficiaries and other significant  variable interest holders.  The  provisions of this interpretation became effective upon issuance.  The Company believes that Sentigen will be  considered a VIE; however, the Company does not expect its accounting for its  interest in Sentigen to change. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | In December 2002, the  FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition  and Disclosure.”  SFAS No. 148 amends  SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148  provides alternative methods of transition for a voluntary change to the fair  value method of accounting for stock-based compensation and requires pro  forma disclosures of the effect on net income and earnings per share had the  fair value method been used to be included in annual and interim reports and  disclosure of the effect of the transition   method  used  if   the  accounting method was  changed, among                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

51

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|   |                              | other things.  SFAS No. 148 is effective for annual  reports of fiscal years ending after December 15, 2002 and interim reports  beginning after December 15, 2002.   The Company plans to continue using the intrinsic value method of  accounting for stock-based compensation and, therefore, the new rule will  have no effect on the Company’s financial condition or results of  operations.  The Company adopted the  disclosure requirements effective December 15, 2002.                                                                              |
|--------|-----------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **2.** | **Recapitalization  and  Merger** | On May 16, 1997, MT  Financial Group, Inc. (an inactive public company), through its wholly owned  subsidiary, effected a reverse merger with Photogen, Inc. (“Photogen”),  successor to Photogen, L.L.C.   Photogen, L.L.C. was formed on September 10, 1996 and commenced  operations November 3, 1996.  Photogen,  L.L.C. was formed to develop proprietary laser-based technologies related to  photodynamic therapy.  Legally,  Photogen was a wholly owned subsidiary of Photogen Technologies, Inc.  (formerly known as MT Financial Group, Inc.). |
|   |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                              | For financial reporting  purposes, Photogen was deemed to be the acquiring entity.  The transaction has been reflected in the  accompanying financial statements as (1) a recapitalization of Photogen  (consisting of a 48,000-for-one stock split and change in par value) and (2)  an issuance of shares by Photogen in exchange for all of the outstanding  shares of MT Financial Group, Inc.                                                                                                                                                                            |
|   |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                              | As part of the  recapitalization, the Company sold 1,578,208 shares of common stock for a  total purchase price of approximately $1,803,450.  Legal and brokerage fees of approximately $371,000 were charged  to additional paid-in capital as costs of the recapitalization and  merger.  Included in the paid-in  capital is the net cash of approximately $109,000 from MT Financial Group,  Inc.                                                                                                                                                                    |

 

52

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| **3.** | **Joint  Venture/  Investment in  Affiliate** | On October 7, 1999, the  Company formed a joint venture with Elan International Services, Ltd.  (“Elan”) to develop and commercialize nanoparticulate diagnostic imaging agents  for the detection and treatment of cancer through lymphography.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                          | Sentigen Ltd.  (“Sentigen”) was formed to hold the operations, assets and liabilities of the  joint venture.  Elan purchased 2,980  shares of Sentigen nonvoting convertible preferred stock for $2,985,000  representing a 19.9% ownership interest.   Elan also purchased 12,015 shares of the Company’s Series A  convertible exchangeable preferred stock for $12,015,000.  In connection with the issuance of the  preferred stock to Elan, the Company granted warrants to Elan to purchase  100,000 shares of the Company’s common stock at $84.68 per share which was  valued at $678,000.  As a result, a  preferred stock dividend of $436,041 was recorded for the accretion of the  preferred stock to its face value of $12,015,000 over the period until it is  first convertible.  Beginning in 2000,  in accordance with EITF 00-27, the Company recorded an additional preferred  stock dividend to represent the beneficial conversion feature associated with  the intrinsic value of the Series A Preferred conversion option.  As a result, an additional preferred stock  dividend of $436,041 was recorded over the period until it is first  convertible.  As of December 31, 2001,  the beneficial conversion feature was fully recorded. |
|   |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                          | The Company purchased  12,000 shares of Sentigen’s common stock for $12,015,000 representing an  80.1% ownership interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                          | Sentigen used the  $15,000,000 received from the Company and Elan to purchase from Elan a  worldwide license to certain patented Elan technology related to the joint  venture.  Expenses incurred by the  Company and Elan, which relate to the development of the diagnostic imaging  agents, are charged to Sentigen.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

53

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|   |   | Elan granted the Company  a line of credit of $4,806,000 to be used by the Company to fund their  portion of Sentigen’s research and development.  Principal and interest under the line of credit, if any, become  due and payable in 2005 or, at the option of Elan, can be converted into the  Company’s common stock at $72.60 per share.   Any borrowings under the line of credit would bear interest at  8%.  At December 31, 2001, borrowings  on this line of credit were $2,314,005 and accrued interest was $48,429.  During 2002, the Company borrowed an  additional $532,905 and incurred additional accrued interest of  $187,148.  On November 12, 2002, the  total borrowings of $2,846,910 and accrued interest of $235,577 were  converted to common stock at a conversion price of $24 per share.  A beneficial conversion amount of $206,348  was recorded as a result of the decrease in the original conversion price. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | In connection with the  joint venture agreement, Elan also purchased 115,385 shares of the Company’s  common stock for $6,000,000.  If in the  Company’s next third-party offering after the issuance of the Series A  Preferred, it sells common stock at a price less than $52 per share, the  Company must issue additional shares to Elan so that Elan’s overall price for  its common stock equals the effective price in that third-party  offering.  During 2001, the Company  issued 190,857 shares of common stock to satisfy this requirement.

                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | The total cash proceeds  from the equity issuance to Elan of $18,015,000 were allocated to the common  stock, preferred stock and the warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | Elan has substantive  participating rights in Sentigen, including the requirement for approval of  the business plan and budgets and equal representation on the management  committee which decides all day-to-day functions.  As a result, the Company’s investment in Sentigen is recorded  under the equity method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

54

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|   |   | Following is summarized  financial information for Sentigen at December 31, 2001 and 2002: |
|--------|--------|--------------------------------------------------------------------------------------------|

 
|                                                                                          |   | **2001**   |       | **2002**       |       |
|-----------------------------------------------------------------------------------------------|--------|------------|------------|----------------|------------|
|                                                                                          |   |       |       |           | ** ** |
| Cash                                                                                          |   | $          | 9,345      |           | **$**      | **410** | ** ** |
| License  purchased from Elan, net of amortization of $1,222,829 and $2,201,093,  respectively |   | 13,777,171 |       | **10,298,907** | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Total  assets                                                                                 |   | $          | 13,786,516 |           | **$**      | **10,299,317** | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Due  to affiliates                                                                            |   | $          | 210,596    |           | **$**      | **378,099** | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Total  shareholders’ equity                                                              |   | 13,575,920 |       | **9,921,218**  | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Total  liabilities and equity                                                                 |   | $          | 13,786,516 |           | **$**      | **10,299,317** | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Research  and development expense                                                             |   | $          | 1,450,291  |           | **$**      | **823,409** | ** ** |
| General  and administrative expense                                                           |   | —     |       | **18,329**     | ** ** |
| Amortization  of license                                                                      |   | 978,264    |       | **978,264**    | ** ** |
| Impairment  of license                                                                        |   | —     |       | **2,500,000**  | ** ** |
|                                                                                          |   |       |       |           | ** ** |
| Net  loss                                                                                     |   | $          | (2,428,555 | )              | **$**      | **(4,320,002** | **)** |

 
| **4.** | **Accruals** | Accrued expenses  consist of the following: |
|--------|--------------|---------------------------------------------|

 
| **December 31,**                |   | **2001** |       | **2002**   |       |
|---------------------------------|--------|----------|------------|------------|------------|
|                            |   |     | ** ** |       | ** ** |
| Accrued  salaries               |   | $        | 93,963     | ** ** | **$**      | **—** | ** ** |
| Accrued  bonuses                |   | 251,850  | ** ** | **—** | ** ** |
| Accrued  interest (Note 3)      |   | 48,429   | ** ** | **—** | ** ** |
| Accrued  restructuring (Note 9) |   | 173,932  | ** ** | **—** | ** ** |
| Payroll  liabilities            |   | —   | ** ** | **34,132** | ** ** |
|                            |   |     | ** ** |       | ** ** |
|                            |   | $        | 568,174    |       | **$**      | **34,132** | ** ** |

 

55

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| **5.** | **Commitments** | (a)          At December 31, 2002, the Company has a lease for  office space in New Hope, Pennsylvania, expiring in August 2004.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |            | The Company also  has an operating lease for laboratory equipment expiring in 2004.  During 2001, the Company determined that  equipment leased by the Company under this operating lease would no longer be  used by the Company in its research.   As a result, in 2001, the Company recorded a provision for all future  lease payments of $1,264,208.   $568,138 of this provision was recorded in the fourth quarter.  At December 31, 2002, $803,328 remains to  be paid.  In conjunction with this  operating lease, the Company provided $500,000 as cash collateral to be  refunded over the term of the lease.   In 2002, $100,000 was refunded and, accordingly, this amount was  recorded as a current deposit at December 31, 2001.  The Company and the lessor agreed to offset certain remaining  lease payments with the remaining $400,000 deposit.  In 2002, lease payments of approximately $331,000 were offset  with the deposit. |
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |            | Total rental  expense charged to operations for the years ended December 31, 2000, 2001 and  2002 aggregated approximately $352,000, $358,000 and $227,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |            | Minimum future rental payments under these leases  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 
| **Year ending December 31,** |   | **Operating  Leases** |      |
|------------------------------|--------|-----------------------|-----------|
|                         |   |                  |      |
| 2003                         |   | $                     | 574,000   |   |
| 2004                         |   | 502,000               |      |
|                         |   |                  |      |
| Total                        |   | $                     | 1,076,000 |   |

 
|   |   | (b)                              The Company has entered into employment  agreements with certain officers and employees.  The officers and employees are each entitled to severance  ranging from six months to one year of their annual salary if terminated  without cause.  Total severance  commitments are $500,000 under these agreements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

56

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| **6.** | **Equity  Transactions** | (a)                               The Company applies the recognition  provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in  accounting for stock options issued to nonemployees.  The Company has issued options and  warrants in exchange for consulting services rendered.  The Company issued 10,000 options in 1998,  2,500 options and 125,500 warrants in 1999, 5,250 options and 128,750  warrants in 2000, 7,500 options in 2001 and 200,000 warrants in 2002.  In addition, there were 190,000 contingent  warrants issued for which no expense has been recognized as of December 31,  2002.  As the fair market value of  these services was not readily determinable, these services were valued based  on the fair market value, determined using the Black-Scholes option pricing  model.   Fair market value for options  and warrants ranged from $5.36 to $38.04 in 2000, $3.08 in 2001 and $1.01 to  $1.81 in 2002.  Consulting costs  charged to operations were $2,316,282 in 2000, $825,092 in 2001 and $395,870  in 2002.  In 2002, the Company also  issued 390,556 options in settlement of a lawsuit associated with  restructuring costs (Note 9).  The  value of these options was $806,415 which was recorded as restructuring  charges in 2002. |
|--------|--------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                     | (b)                              In August 1999, the Company purchased  patents for $500,000 which were satisfied by the issuance of 10,832 shares of  the Company’s common stock valued at $300,000 and cash of $200,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                     | (c)                               In 1999, the Company issued 185,000  variable stock options to employees which would vest upon completion of  performance milestones.  Exercise  prices ranged from $37.52 to $72.52 and expired in 10 years.  As of December 31, 1999, 18,750 of these  shares had vested.  Compensation  charged to operations was $225,000 in 1999.   In 2000, all of these variable stock options were cancelled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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|   |   | (d)                              Series A Preferred Stock – The Company  originally designated 12,015 shares of preferred stock as Series A Preferred  Stock (“Series A Preferred”).  For the  first six years from issuance, the preferred stock has a mandatory dividend  of 7%.  Such dividends are cumulative  and compound on a semiannual basis and are payable semiannually solely by the  issuance of additional preferred Series A stock.  The Company has a deficit and, as a result, the dividends have  been recorded against paid-in capital.     In accordance with the provisions of the agreement, the Company issued  additional preferred shares of 841 in 2000 in settlement of dividend  requirements.  Therefore, at December  31, 2002, there were 12,856 shares of Series A Preferred outstanding.  The Company has accrued and will issue  1,914 preferred shares in fulfillment of the 2001 and 2002 dividend  requirement.  The Series A Preferred  shall rank senior to any future series of preferred stock unless the majority  of the Series A shareholders agree to rank pari passu with any future  issuances.  The liquidation preference  is $1,000 per share.  The Series A  Preferred is convertible, after two years but before six years from issuance,  into common stock of the Company with an    initial conversion price of $84.68.   The conversion price is subject to adjustment for certain dilutive  events.  Alternatively, the holder of  the Series A Preferred can elect to exchange the Series A preferred shares  for the number of shares in Sentigen which   would  allow  the   Series A  holder  to   then own a total of 50% of Sentigen.   The Series A holder is currently the minority shareholder in Sentigen.  The exchange right is not available for  any shares which have been converted to common stock.  The exchange right terminates six years  from the issuance of the Series A Preferred.   The Series A Preferred was issued in October 1999. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | The holder of  Series A Preferred is only entitled to vote on matters that adversely affect  or change the rights of holders of Series A Preferred and does not have the  right to vote on the election of directors of the Company. The holder of  Series A Preferred also has a preemptive right until October 2003 to  participate in any offering of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

58

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|   |   | (e)                               Series B Preferred Stock - In February  2000, the Company completed a private placement of its Series B Convertible  Preferred Stock (“Series B Preferred”). The Company received cash proceeds,  net of related expenses, of $5,276,340 in exchange for 337,056 shares of the  Series B Preferred. The Series B Preferred has an annual dividend rate of 6%.  Such dividends are cumulative, shall compound on an annual basis and are  payable annually by the issuance of additional preferred Series B stock. The  Company has a deficit and, as a result, the dividends will be recorded  against paid-in capital. In accordance with the provisions of the agreement,  the Company issued additional preferred shares of 20,224 in 2001 and 40,194  in 2002 in settlement of dividend requirements.                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | Subject to the  senior liquidation preference of the Series A Preferred stockholder, and the  liquidation preference of any senior or pari passu securities created by the  Company in the future with the requisite consent of the holders of Series B  Preferred, each share of Series B Preferred is entitled to a liquidation  preference equal to $16.88 per share, before any amounts are paid on the  common stock on liquidation. If the Company is acquired by another entity or  sells all or substantially all of its assets, and if it pays an amount equal  to the liquidation preference of the Series A Preferred and any other senior  security, holders of Series B Preferred will be entitled to receive the  liquidation preference unless the stockholders prior to the transaction hold  at least 50% of the voting power of the surviving or acquiring entity or if  the holders of a majority of Series B Preferred agree by vote or written  consent to exclude the acquisition or sale from this provision. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | Each share of  Series B Preferred has the number of votes equal to the number of shares of  common stock into which the share of Series B Preferred would be convertible,  and is entitled to vote together with the common stock. Certain matters, such  as an amendment to the terms of the Series B Preferred Certificate of  Designation or a change in the preferences or any relative or other rights of  the Series B Preferred (except for issuance of a special senior security),  may have to be approved by a majority of the holders  of Series B Preferred voting as a separate  class. This right                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |

 

59

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|   |   | is subject to  the Company’s ability to require mandatory conversion of Series B Preferred  if a special senior security (discussed below) is not approved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | Holders of  Series B Preferred may convert shares of Series B Preferred into 0.36 shares  of common stock at any time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The Series B  Preferred contains beneficial conversion features.  Emerging Issues Task Force Issue 98-5, “Accounting for  Convertible Securities with Beneficial Conversion Features or Contingently  Adjustable Conversion Ratios,” requires the issuer to assume that the holder  will not convert the instrument until the time of the most beneficial  conversion, which would occur after January 1, 2002.  Using the conversion ratio at January 1,  2002 of 0.36 shares of common stock and the stock price at the date of  issuance, the maximum beneficial conversion amount is $2,322,316.  This amount was recorded as additional  preferred stock dividends over the period from issuance until January 1,  2002.  Through December 31, 2001, this  full amount has been recorded as additional dividends. |

 
|   |   | The conversion  ratio is subject to adjustment for certain dilutive events, including  issuance of common stock or equivalent securities at less than $16.88 per  share.  In 2001, the Company issued  common stock at less than $16.88.  As  a result, the revised conversion ratio for the number of shares of common  stock issuable upon conversion of Series B Preferred is 0.36175. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | The Company may  require holders of Series B Preferred to convert their shares into common  stock (at the same ratios that would apply for a voluntary conversion, except  as described in the second and third bullet points below) in connection with  any of the following events:                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | •                        If the holders of a majority of the Series B  Preferred approve a mandatory conversion;                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | •                        Immediately prior to a firm commitment, underwritten  public offering of the Company’s common stock in which they receive $20  million or more in gross proceeds;                                                                             |

 

60

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|   |   | •                        If the holders of a majority of Series B Preferred  do not approve any transaction to issue a security senior or pari passu to  the Series B Preferred in a transaction involving any vendor, licensor or  joint venturer or other commercial transaction (a “special senior security”),  the purpose of which is not solely to provide financing, and which the Board  has approved and recommended; o                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | •                        At any time after January 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | In conjunction  with the financing on November 12, 2002 (see Note 6(f)), all of the Series B  Preferred was converted into common stock.   In exchange for this conversion, the conversion ratio of 0.36175 was  changed to 1.0625.  As a result, the  Series B Preferred was converted into 422,316 shares of common stock and a  beneficial conversion amount of $668,464 has been recorded.  The Series B Preferred is no longer  outstanding, nor is there any liquidation preference associated with the  Series B Preferred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | (f)                           Common Stock - The Company is subject  to six sets of registration rights agreements covering an aggregate of  11,912,779 shares of the Company’s common stock, warrants that have vested  covering the Company’s common stock and common stock issuable upon conversion  of the Company’s Series A Preferred. All of the agreements contain piggyback  registration rights and two contain demand registration rights upon the  occurrence of certain events and subject to various terms and conditions. Of  the 11,912,779 shares, 1,000,000 shares are entitled to piggyback  registration only, 50,000 shares are entitled to both demand and piggyback  registration and 10,862,779 shares will be registered by the Company within  the time frames set forth in the respective registration agreements. Warrants  that have vested covering 237,431 shares of the Company’s common stock have  weighted average anti-dilution rights. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | On March 13,  1998, the Company completed a private placement of 218,755 shares of common  stock for $32 per share to a number of accredited investors.  The Company received $7,000,000 in gross  proceeds from this offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

61

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|   |   | On February 9,  2001, the Company’s shelf registration on Form S-3 was declared  effective.  Under the shelf  registration, the Company could have issued up to $40,000,000 of common  stock.  As of December 31, 2002,  173,872 shares have been issued under the shelf registration for cash  proceeds of $1,068,723, net of related expenses of $56,252.  The Company’s registration statement is no  longer effective.                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | As of April 2,  2001, the Company no longer met the eligibility requirements to continue selling  shares under the S-3.  Prior to  realizing it was ineligible to continue using the S-3, the Company sold  124,627 shares of common stock for $650,000.   This amount has been reclassified from permanent equity to mezzanine  equity as the Company could be required to repay a portion of this amount to  the purchaser.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | On November 12,  2002, the Company completed a private placement of 8,333,334 shares of common  stock for $1.08 per share to a number of accredited investors.  The Company received proceeds of  $8,677,000, net of related expenses of $387,000.  Proceeds included cash of $6,113,000 and the conversion of a  credit facility with an entity controlled by a director of the Company with  borrowings of $2,500,000 which converted into 2,314,815 shares of common  stock.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | In December 2002, the  Company completed a second closing of the November 12, 2002 private placement  in which 2,804,539 shares of common stock were sold for $1.08 per share for  proceeds of $3,028,902.                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | On November 12, 2002,  the Company also effected the split-off of Photogen, Inc. and the assets and  liabilities related to the Company’s therapeutic line of business to the five  founding stockholders of the Company (the “Tennessee Stockholders”) in  exchange for all of their common stock in the Company.  The Tennessee Stockholders owned 5,137,109  shares of the Company and those shares were cancelled prior to December 31,  2002.  The market value of the 5,137,109  shares on the date of the split-off was $12,226,319. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | In conjunction with  the November 12, 2002 transactions, the Company implemented a one-for-four  reverse split of its common stock.   All amounts have been retroactively stated to reflect this reverse  stock split.                                                                                                                                                                                                                                                                                                                                          |

 

62

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| **7.** | **Stock  Incentive Plans  and Warrants** | The Company  maintains three long-term incentive compensation plans, which are described  as follows:                                                                                                                                                                                          |
|--------|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                     |                                                                                                                                                                                                                                                                                           |
|   |                                     | •                     The 1998 Long-Term Incentive  Compensation Plan, which provides for the granting of up to 500,000 stock  options to key employees, directors and consultants;   |
|   |                                     |                                                                                                                                                                                                                                                                                           |
|   |                                     | •                     The 2000 Long-Term Incentive  Compensation Plan, which provides for the granting of up to 4,568,750 stock  options to key employees, directors and consultants; |
|   |                                     |                                                                                                                                                                                                                                                                                           |
|   |                                     | •                     The 2000 Senior Executive Long-Term Incentive  Compensation Plan, which provides for the granting of up to 1,000,000 stock  options to senior executives.       |
|   |                                     |                                                                                                                                                                                                                                                                                           |
|   |                                     | Options granted  under these plans may be either “incentive stock options” within the meaning  of Section 422A of the Internal Revenue Code, or nonqualified options.                                                                                                                |
|   |                                     |                                                                                                                                                                                                                                                                                           |
|   |                                     | The stock  options are exercisable over a period determined by the Board of Directors  (through its Compensation Committee), but generally no longer than 10 years  after the date they are granted.                                                                                           |

 

63

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| Information with  respect to the plans follows: |   |
|-------------------------------------------------|--------|

 
| **Year  ended December 31,**               |   | **2000**  |          | **2001**  |       | **2002**      |       |
|--------------------------------------------|--------|-----------|---------------|-----------|------------|---------------|------------|
|                                       |   |      | ** **    |      | ** ** |          | ** ** |
| Options  outstanding at beginning of year  |   | 301,375   |          | 1,411,000 | ** ** | **1,629,750** | ** ** |
| Options  granted                           |   | 1,386,500 |          | 218,750   | ** ** | **2,914,356** | ** ** |
| Options  forfeited                         |   | (276,875  | )             | —    | ** ** | **(8,625**    | **)**      |
|                                       |   |      | ** **    |      | ** ** |          | ** ** |
| Options  outstanding at end of year        |   | 1,411,000 |          | 1,629,750 | ** ** | **4,535,481** | ** ** |
|                                       |   |      | ** **    |      | ** ** |          | ** ** |
| Option  prices per share granted           |   | $         | 11.00 - 60.00 |      | $          | 4.56 - 21.24  | ** ** | **$** | **1.08  - 4.20** | ** ** |
|                                       |   |      | ** **    |      | ** ** |          | ** ** |
| Weighted  average exercise price           |   |      | ** **    |      | ** ** |          | ** ** |
| Options  granted                           |   | $         | 41.52         |      | $          | 8.12          | ** ** | **$** | **1.14** | ** ** |
| Options  granted at less than market price |   | —    |          | —    | ** ** | **1.08**      | ** ** |
| Options  granted at the market price       |   | 41.52     |          | 8.12      | ** ** | **1.55**      | ** ** |
| Options  forfeited                         |   | 47.28     |          | —    | ** ** | **18.41**     | ** ** |
| Options  outstanding at end of year        |   | 41.88     |          | 37.16     | ** ** | **14.05**     | ** ** |
| Options  exercisable at end of year        |   | 25.48     |          | 43.04     | ** ** | **19.85**     | ** ** |
| Number  of shares exercisable              |   | 28,125    |          | 458,333   | ** ** | **2,057,208** | ** ** |
|                                            |        |           |               |           |            |               |            |  |  |  |  |  |  |

 
| In 2002, all stock  options granted, except for 390,556 options granted in settlement of a  lawsuit, were granted to employees at an exercise price less than the market  value at grant date.  The weighted  average fair value of the options issued below market is $1.31. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Options Outstanding**       |   | **Options Exercisable**                        |   |
|-------------------------------|--------|------------------------------------------------|--------|
| **Range of  Exercise  Price** |   | **Number  Outstanding at  December 31,  2002** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life  (Years)** |   | **Number  Outstanding at  December 31,  2002** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                                           |   |   |   |   |   |   |   |   |   |
| $1.08                         |   | 2,876,856                                      |   | $ | 1.08 |   | 9.5 |   | 1,044,416 |   | $ | 1.08 |   |
| $4.20  - 4.56                 |   | 81,250                                         |   | $ | 4.39 |   | 7.8 |   | 71,875 |   | $ | 4.37 |   |
| $6.80  - 8.52                 |   | 157,500                                        |   | $ | 8.15 |   | 8.1 |   | 45,000 |   | $ | 7.98 |   |
| $11.00                        |   | 381,625                                        |   | $ | 11.00 |   | 7.9 |   | 200,375 |   | $ | 11.00 |   |
| $21.25  - 27.50               |   | 16,250                                         |   | $ | 22.69 |   | 8.1 |   | 6,875 |   | $ | 24.66 |   |
| $33.00  - 44.50               |   | 259,500                                        |   | $ | 33.42 |   | 7.6 |   | 176,167 |   | $ | 33.62 |   |
| $51.00  - 53.00               |   | 10,000                                         |   | $ | 52.50 |   | 5.8 |   | 10,000 |   | $ | 52.50 |   |
| $60.00  - 60.25               |   | 752,500                                        |   | $ | 60.00 |   | 7.5 |   | 502,500 |   | $ | 60.00 |   |

 

64

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| Information with  respect to the plans follows: |   |
|-------------------------------------------------|--------|

 
| **Year  ended December 31,**               |   | **2000** |        | **2001** |       | **2002**     |       |
|--------------------------------------------|--------|----------|-------------|----------|------------|--------------|------------|
|                                       |   |     | ** **  |     | ** ** |         | ** ** |
| Warrants  outstanding at beginning of year |   | 150,500  |        | 287,431  | ** ** | **287,431**  | ** ** |
| Warrants  granted                          |   | 136,931  |        | —   | ** ** | **390,000**  | ** ** |
| Warrants  forfeited                        |   | —   |        | —   | ** ** | **(250,000** | **)**      |
|                                       |   |     | ** **  |     | ** ** |         | ** ** |
| Warrants  outstanding at end of year       |   | 287,431  |        | 287,431  | ** ** | **427,431**  | ** ** |
|                                       |   |     | ** **  |     | ** ** |         | ** ** |
| Warrant  prices per share outstanding      |   | $        | 37.80-84.68 |     | $          | 37.80-84.68  | ** ** | **$** | **1.08-84.68** | ** ** |
|                                       |   |     | ** **  |     | ** ** |         | ** ** |
| Weighted  average exercise price           |   |     | ** **  |     | ** ** |         | ** ** |
| Warrants  granted                          |   | $        | 40.24       |     | $          | —       | ** ** | **$** | **1.78** | ** ** |
| Warrants  forfeited                        |   | $        | —      |     | $          | —       | ** ** | **$** | **37.80** | ** ** |
| Warrants  outstanding at end of year       |   | $        | 43.08       |     | $          | 43.08        | ** ** | **$** | **7.94** | ** ** |
| Warrants  exercisable at end of year       |   | $        | 43.08       |     | $          | 43.08        | ** ** | **$** | **12.27** | ** ** |
| Number  of warrants exercisable            |   | 287,431  |        | 287,431  | ** ** | **237,431**  | ** ** |

 
| **Warrants Outstanding**      |   | **Warrants Exercisable**                       |   |
|-------------------------------|--------|------------------------------------------------|--------|
| **Range of  Exercise  Price** |   | **Number  Outstanding at  December 31,  2002** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life  (Years)** |   | **Number  Outstanding at  December 31,  2002** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                                           |   |   |   |   |   |   |   |   |   |
| $  1.08 - 2.52                |   | 390,000                                        |   | $ | 1.78 |   | 4.5 |   | 200,000 |   | $ | 1.08 |   |
| $44.20  - 47.78               |   | 12,431                                         |   | $ | 46.67 |   | 3.8 |   | 12,431 |   | $ | 46.67 |   |
| $84.68                        |   | 25,000                                         |   | $ | 84.68 |   | 1.7 |   | 25,000 |   | $ | 84.68 |   |

 

65

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| **8.** | **Dividends** | Dividends are comprised  of the following: |
|--------|---------------|--------------------------------------------|

 
| **Year  ended December 31,**                                                                              |   | **2000**  |       | **2001**  |       | **2002**    |       |
|-----------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|-------------|------------|
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Accrual  of dividend on Series A Convertible Preferred                                                    |   | $         | 868,248    |      | $          | 930,090     | ** ** | **$** | **996,335** | ** ** |
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Deemed  dividend associated with beneficial conversion feature of Series A  Convertible Preferred         |   | 480,928   |       | 391,154   | ** ** | **—**  | ** ** |
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Accrual  of dividend on Series B Convertible Preferred                                                    |   | 296,478   |       | 359,292   | ** ** | **332,924** | ** ** |
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Deemed  dividend associated with beneficial conversion feature of Series B  Convertible Preferred         |   | 1,059,097 |       | 1,263,219 | ** ** | **—**  | ** ** |
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Deemed  dividend associated with beneficial conversion of Series B Convertible  Preferred to Common Stock |   | —    |       | —    | ** ** | **668,464** | ** ** |
|                                                                                                      |   |      | ** ** |      | ** ** |        | ** ** |
| Total                                                                                                     |   | $         | 2,704,751  |      | $          | 2,943,755   | ** ** | **$** | **1,997,723** | ** ** |

 

66

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| **9.** | **Restructuring** | In 2000, the Company  recorded a restructuring charge of $597,025, included in operating expenses,  relating to the closure of its operations in Westborough, Massachusetts. The  restructuring charge includes accruals related to estimated lease termination  costs and accruals related to employee severance and related expenses in  connection with their termination.   All employees at the Westborough facility were terminated. The  activities previously performed at the Westborough facility were continued at  other company locations or with outside consultants.  In 2002, the Company recorded an  additional restructuring charge related to additional termination costs for  one of the Westborough employees.  As  of December 31, 2002, all restructuring costs have been settled.  The restructuring charge is summarized as  follows: |
|--------|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|           |   | **Charged in  2000** |       | **Utilized in  2000** |       | **Balance  at  December 31,  2000** |       | **Utilized in  2001** |       | **Balance  at  December 31,  2001** |       | **Charged in  2002** |       | **Utilized in  2002** |       | **Balance  at  December 31,  2002** |       |
|----------------|--------|----------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|----------------------|------------|-----------------------|------------|-------------------------------------|------------|
|           |   |                 | ** ** |                  | ** ** |                                | ** ** |                  | ** ** |                                | ** ** |                 | ** ** |                  | ** ** |                                | ** ** |
| Employee costs |   | $                    | 395,223    |                  | $          | 65,223                              |       | $                     | 330,000    |                                | $          | 156,068              |       | $                     | 173,932    |                                | $          | 807,483 |   | $ | 981,415 | ** ** | **$** | **—** | ** ** |
| Lease costs    |   | 201,802              |       | 201,802               |       | —                              |       | —                |       | —                              |       | —               |       | —                | ** ** | **—**                          | ** ** |
|           |   |                 | ** ** |                  | ** ** |                                | ** ** |                  | ** ** |                                | ** ** |                 | ** ** |                  | ** ** |                                | ** ** |
| Total          |   | $                    | 597,025    |                  | $          | 267,025                             |       | $                     | 330,000    |                                | $          | 156,068              |       | $                     | 173,932    |                                | $          | 807,483 |   | $ | 981,415 | ** ** | **$** | **—** | ** ** |

 
| **10.** | **Income  Taxes** | In 2002, the Company  had taxable income due to the gain from the split-off of the therapeutic  business (Note 13).  This resulted in  current income tax expense of approximately $2,300,000 which was completely  off-set by net operating losses.                                                                                                                                                                                                                                                                |
|---------|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |              | The Company has not  recorded an income tax benefit for net operating losses remaining of  approximately $14,000,000, primarily expiring in 2018 through 2021, or for  equity losses in affiliate of approximately $7,000,000.  The Company is in the development stage  and realization of the losses is not considered more likely than not.  An income tax valuation allowance has been  provided for the deferred tax assets related to the net operating loss  carryforwards and the losses in affiliate. |
|    |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |              | A portion of the net  operating loss carryforwards will not remain with the Company as a result of  the split-off of the therapeutic business.   However, the amount of these net operating losses is not known.                                                                                                                                                                                                                                                                                                    |

 

67

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| **11.** | **Notes  Receivable**                               | The Company has  executed a term sheet with Alliance Pharmaceutical Corp. (“Alliance”) to buy  certain assets of Alliance.  As of  December 31, 2002, the Company has loaned to Alliance $1,255,000 for  Alliance’s working capital purposes.   These loans are evidenced by 8% convertible secured promissory notes  which are secured by certain assets of Alliance.  Based on the nature of the Company’s security interest in the  collateral and the estimated value of the collateral, management has  determined that a reserve for doubtful collection of the notes receivable is  not necessary at December 31, 2002. |
|---------|-----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **12.** | **Selected  Quarterly  Financial Data (Unaudited)** | Summarized  quarterly financial data for 2002 and 2001 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 
|                                                                    |   | **Quarter**    |          |
|-------------------------------------------------------------------------|--------|----------------|---------------|
| **2002**                                                                |   | **First**      |          | **Second** |   | **Third** |   | **Fourth** |   |
|                                                                    |   |           | ** **    |   | ** ** |   | ** ** |   | ** ** |
| Operating  expenses(a)                                                  |   | **$**          | **1,208,285** | ** ** | **$** | **906,957** | ** ** | **$** | **1,218,083** | ** ** | **$** | **2,732,138** | ** ** |
| Loss  from continuing operations(b)                                     |   | **(1,813,246** | **)**         | **(1,341,652** | **)** | **(1,594,897** | **)** | **(5,185,408** | **)** |
| Income  (loss) from discontinued operations(c)                          |   | **(502,449**   | **)**         | **(544,657** | **)** | **(244,719** | **)** | **11,575,147** | ** ** |
| Net  income (loss)                                                      |   | **(2,315,695** | **)**         | **(1,886,309** | **)** | **(1,839,616** | **)** | **6,389,739** | ** ** |
| Basic  and diluted loss per share from continuing operations            |   | **(0.23**      | **)**         | **(0.17** | **)** | **(0.20** | **)** | **(0.51** | **)** |
| Basic  and diluted income (loss) per share from discontinued operations |   | **(0.05**      | **)**         | **(0.06** | **)** | **(0.03** | **)** | **0.96** | ** ** |
| Basic  and diluted income (loss) per share                              |   | **(0.28**      | **)**         | **(0.23** | **)** | **(0.23** | **)** | **0.45** | ** ** |
|                                                                         |        |                |               |  |  |  |  |  |  |  |  |  |  |

 

68

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|                                                           |   | **Quarter** |      |
|----------------------------------------------------------------|--------|-------------|-----------|
| **2001**                                                       |   | **First**   |      | **Second** |   | **Third** |   | **Fourth** |   |
|                                                           |   |        |      |   |   |   |   |   |   |
| Operating  expenses                                            |   | $           | 1,930,626 |   | $ | 714,271 |   | $ | 931,288 |   | $ | 1,346,565 |   |
| Loss  from continuing operations                               |   | (2,346,978  | )         | (1,375,848 | ) | (1,264,813 | ) | (1,825,557 | ) |
| Loss  from discontinued operations                             |   | (680,134    | )         | (698,149 | ) | (738,562 | ) | (792,975 | ) |
| Net  loss                                                      |   | (3,027,112  | )         | (2,073,997 | ) | (2,003,375 | ) | (2,618,532 | ) |
| Basic  and diluted loss per share from continuing operations   |   | (0.33       | )         | (0.23 | ) | (0.31 | ) | (0.26 | ) |
| Basic  and diluted loss per share from discontinued operations |   | (0.07       | )         | (0.07 | ) | (0.08 | ) | (0.08 | ) |
| Basic  and diluted loss per share                              |   | (0.40       | )         | (0.30 | ) | (0.29 | ) | (0.34 | ) |
|                                                                |        |             |           |  |  |  |  |  |  |  |  |  |  |

 

----

|   |   | (a)                           Operating expenses for the fourth  quarter 2002 includes a charge of $988,184 from the issuance of stock options  to employees.                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | (b)                          Loss from continuing operations for the  fourth quarter 2002 includes an increase in loss from joint venture of  $2,000,000 resulting from the impairment of the joint venture’s licensed  technology.                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | (c)                           Income (loss) from discontinued  operations for the fourth quarter 2002 includes a gain of $11,779,752 from  the sale of the therapeutic business.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | (d)                         Earnings per share calculations for  each of the quarters are based on the weighted average shares outstanding for  each period.  The sum of the quarters  may not necessarily be equal to the full year earnings per share amounts. |

 

69

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| **13.** | **Discontinued  Operations** | On  November 12, 2002, the Company split off its therapeutic business to the  Tennessee Stockholders in exchange for all of the Tennessee Stockholders’  stock in the Company which totaled 5,137,109 shares.  Net assets transferred in the split-off  included fixed assets with net book value of $516,567 and accounts payable of  $70,000.  At December 31, 2001, the  net book value of the fixed assets transferred was $882,220 and the related  payable was $70,000.                                                   |
|---------|------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |                         | The  Company has reviewed the provisions of SFAS 144 and has determined that the  sale of therapeutic business meets the two conditions necessary for  presentation as discontinued operations.   Those conditions are (a) the operations and cash flow of the component  have been or will be eliminated from the ongoing operations of the entity as  a result of the disposal transaction and (b) the entity will not have any  significant continuing involvement in the operations of the component after  the disposal transaction. |
|    |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |                         | The  split-off of the therapeutic business was effective on November 12, 2002 and,  as such, the consolidated balance sheet of the Company at December 31, 2002  does not include the assets or liabilities of the therapeutic business.  The Company recorded a loss from  operations of the therapeutic business of $1,454,430 and a gain on the sale  of the therapeutic business of $11,779,752 for the year ended December 31,  2002.  There were no revenues from the  therapeutic business since its inception.               |

 

70

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**IndependentAuditors’ Report**

 

 

Board of Directors

Sentigen Ltd.

Bermuda

 

We have audited the accompanying balance sheets of Sentigen Ltd., adevelopment stage company, as of December 31, 2002 and 2001, and the relatedstatements of operations, shareholders’ equity and cash flows for the periodfrom October 7, 1999 (inception) to December 31, 2002 and for each of the threeyears in the period ended December 31, 2002. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Sentigen Ltd. atDecember 31, 2002 and 2001, and the results of its operations and its cashflows for the period from October 7, 1999 (inception) to December 31, 2002 andeach of the three years in the period ended December 31, 2002, in conformitywith accounting principles generally accepted in the United States.

 

 

/s/ BDO Seidman, LLP

Chicago, Illinois

April 8, 2003

 

71

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**SentigenLtd.**

 

**BalanceSheets**

 
| **December 31,**                                                                                |   | **2002**       |           | **2001**   |   |
|-------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                                            |   |           |           |       |   |
| **Assets**                                                                                      |   |           |           |       |   |
|                                                                                            |   |           |           |       |   |
| **Current  Assets**                                                                             |   |           |           |       |   |
| Cash                                                                                            |   | **$**          | **410**        | ** ** | $      | 9,345 |   |
|                                                                                            |   |           | ** **     |       |   |
| **License  of Elan Technology,** net of amortization of $2,201,093 and $1,222,829, respectively |   | **10,298,907** | ** **     | 13,777,171 |   |
|                                                                                            |   |           | ** **     |       |   |
|                                                                                            |   | **$**          | **10,299,317** | ** ** | $      | 13,786,516 |   |
|                                                                                            |   |           | ** **     |       |   |
| **Liabilities  and Shareholders’ Equity**                                                  |   |           | ** **     |       |   |
|                                                                                            |   |           | ** **     |       |   |
| **Current  Liabilities**                                                                        |   |           | ** **     |       |   |
| Due to  shareholders                                                                            |   | **$**          | **378,099**    | ** ** | $      | 210,596 |   |
|                                                                                            |   |           | ** **     |       |   |
| **Shareholders’  Equity**                                                                  |   |           | ** **     |       |   |
| Preferred stock;  par value $1.00 per share; 2,980 shares authorized, issued and outstanding    |   | **2,980**      | ** **     | 2,980      |   |
| Common stock;  par value $1.00 per share; 12,000 shares authorized, issued and outstanding      |   | **12,000**     | ** **     | 12,000     |   |
| Additional  paid-in capital                                                                     |   | **18,539,215** | ** **     | 17,873,915 |   |
| Deficit  accumulated during the development stage                                               |   | **(8,632,977** | **)**          | (4,312,975 | )      |
|                                                                                            |   |           | ** **     |       |   |
| **Total  Shareholders’ Equity**                                                            |   | **9,921,218**  | ** **     | 13,575,920 |   |
|                                                                                            |   |           | ** **     |       |   |
|                                                                                            |   | **$**          | **10,299,317** | ** ** | $      | 13,786,516 |   |

 

*See accompanying notes to financial statements.*

 

72

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**SentigenLtd.**

 

**Statementsof Operations**

 
|                        |   | **Year ended  December 31,  2002** |           | **Year ended  December 31,  2001** |       | **Year ended****December  31,  2000** |       | **Cumulative  Amounts From  October 7,  1999  (Inception) to  December 31,  2002** |       |
|-----------------------------|--------|------------------------------------|----------------|------------------------------------|------------|---------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|                        |   |                               | ** **     |                               | ** ** |                                  | ** ** |                                                                               | ** ** |
| **Operating  Expenses**     |   |                               | ** **     |                               | ** ** |                                  | ** ** |                                                                               | ** ** |
| Research and  development   |   | **$**                              | **823,409**    | ** **                         | $          | 1,450,291                             |       | $                                                                                  | 1,257,815  | ** ** | **$** | **3,913,555** | ** ** |
| General and  administrative |   | **18,329**                         | ** **     | —                             |       | —                                | ** ** | **18,329**                                                                         | ** ** |
| Amortization of  license    |   | **978,264**                        | ** **     | 978,264                            |       | 244,565                               | ** ** | **2,201,093**                                                                      | ** ** |
| Impairment of  license      |   | **2,500,000**                      | ** **     | —                             |       | —                                | ** ** | **2,500,000**                                                                      | ** ** |
|                        |   |                               | ** **     |                               | ** ** |                                  | ** ** |                                                                               | ** ** |
| **Net  Loss**               |   | **$**                              | **(4,320,002** | **)**                              | $          | (2,428,555                            | )          | $                                                                                  | (1,502,380 | ) | **$** | **(8,632,977** | **)** |

 

*See accompanying notes to financial statements.*

 

73

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**SentigenLtd.**

 

**Statementsof Shareholders’ Equity**

 
|                                                         |   | **Preferred  Stock** |       | **Common  Stock** |      | **Additional  Paid-in** |       | **Deficit  Accumulated  During the  Development** |   |        |       |
|--------------------------------------------------------------|--------|----------------------|------------|-------------------|-----------|-------------------------|------------|---------------------------------------------------|--------|-------------|------------|
|                                                         |   | **Shares**           |       | **Amount**        |      | **Shares**              |       | **Amount**                                        |   | **Capital** |       | **Stage** |   | **Total** |   |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| Issuance of common stock                                     |   | —               |       | $                 | —    |                    | 12,000     |                                              | $      | 12,000      |       | $ | 12,003,000 |   | $ | — |   | $ | 12,015,000 |   |
| Issuance of preferred stock                                  |   | 2,980                |       | 2,980             |      | —                  |       | —                                            |   | 2,982,020   |       | — |   | 2,985,000 |   |
| Net loss for the period October 7, 1999 to December 31, 1999 |   | —               |       | —            |      | —                  |       | —                                            |   | —      |       | (382,040 | ) | (382,040 | ) |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| **Balance,** at December 31, 1999                            |   | 2,980                |       | 2,980             |      | 12,000                  |       | 12,000                                            |   | 14,985,020  |       | (382,040 | ) | 14,617,960 |   |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| Net loss for the year ended December 31, 2000                |   | —               |       | —            |      | —                  |       | —                                            |   | —      |       | (1,502,380 | ) | (1,502,380 | ) |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| **Balance,** at December 31, 2000                            |   | 2,980                |       | 2,980             |      | 12,000                  |       | 12,000                                            |   | 14,985,020  |       | (1,884,420 | ) | 13,115,580 |   |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| Contribution of capital                                      |   | —               |       | —            |      | —                  |       | —                                            |   | 2,888,895   |       | — |   | 2,888,895 |   |
| Net loss for the year ended December 31, 2001                |   | —               |       | —            |      | —                  |       | —                                            |   | —      |       | (2,428,555 | ) | (2,428,555 | ) |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| **Balance,** at December 31, 2001                            |   | 2,980                |       | 2,980             |      | 12,000                  |       | 12,000                                            |   | 17,873,915  |       | (4,312,975 | ) | 13,575,920 |   |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| Contribution of capital                                      |   | —               |       | —            |      | —                  |       | —                                            |   | 665,300     |       | — |   | 665,300 |   |
| Net loss for the year ended December 31, 2002                |   | —               |       | —            |      | —                  |       | —                                            |   | —      |       | (4,320,002 | ) | (4,320,002 | ) |
|                                                         |   |                 |       |              |      |                    |       |                                              |   |        |       |   |   |   |   |
| **Balance,** at December 31, 2002                            |   | **2,980**            | ** ** | **$**             | **2,980** | ** **              | **12,000** | ** **                                        | **$**  | **12,000**  | ** ** | **$** | **18,539,215** | ** ** | **$** | **(8,632,977** | **)** | **$** | **9,921,218** | ** ** |

 

*Seeaccompanying notes to financial statements.*

 

74

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**SentigenLtd.**

 

**Statementsof Cash Flows**

 
|                                         |   | **Year ended  December 31,  2002** |           | **Year ended  December 31,  2001** |       | **Year ended  December 31,  2000** |       | **Cumulative  Amounts From  October 7,  1999  (Inception) to  December 31,  2002** |       |
|----------------------------------------------|--------|------------------------------------|----------------|------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Cash  Flows From Operating Activities**    |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Net loss                                     |   | **$**                              | **(4,320,002** | **)**                              | $          | (2,428,555                         | )          | $                                                                                  | (1,502,380 | ) | $ | **(8,632,977** | **)** |
| Amortization                                 |   | **978,264**                        |           | 978,264                            |       | 244,565                            | ** ** | **2,201,093**                                                                      | ** ** |
| Impairment of  license                       |   | **2,500,000**                      |           | —                             |       | —                             | ** ** | **2,500,000**                                                                      | ** ** |
| Changes in  operating assets and liabilities |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Due to  shareholders                         |   | **167,503**                        |           | (1,429,259                         | )          | 1,257,815                          | ** ** | **378,099**                                                                        | ** ** |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Net cash used in  operating activities       |   | **(674,235**                       | **)**          | (2,879,550                         | )          | —                             | ** ** | **(3,553,785**                                                                     | **)**      |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Cash  Flows From Investing Activities**    |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Cost to acquire  license                     |   | **—**                         |           | —                             |       | —                             | ** ** | **(15,000,000**                                                                    | **)**      |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Net cash used in  investing activities       |   | **—**                         |           | —                             |       | —                             | ** ** | **(15,000,000**                                                                    | **)**      |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Cash  Flows From Financing Activities**    |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Proceeds from  issuance of equity            |   | **—**                         |           | —                             |       | —                             | ** ** | **15,000,000**                                                                     | ** ** |
| Contribution of  capital                     |   | **665,300**                        |           | 2,888,895                          |       | —                             | ** ** | **3,554,195**                                                                      | ** ** |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| Net cash  provided by financing activities   |   | **665,300**                        |           | 2,888,895                          |       | —                             | ** ** | **18,554,195**                                                                     | ** ** |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Net  (Decrease) Increase in Cash**         |   | **(8,935**                         | **)**          | 9,345                              |       | —                             | ** ** | **410**                                                                            | ** ** |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Cash,** at beginning of period             |   | **9,345**                          |           | —                             |       | —                             | ** ** | **—**                                                                         | ** ** |
|                                         |   |                               | ** **     |                               | ** ** |                               | ** ** |                                                                               | ** ** |
| **Cash,** at end of period                   |   | **$**                              | **410**        |                               | $          | 9,345                              |       | $                                                                                  | —     |   | $ | **410** |   |

 

*See accompanying notes to financial statements.*

 

75

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**SentigenLtd.**

 

**Notes toFinancial Statements**

 
| **1.** | **Organization  and Significant Accounting Policies** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|-------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Nature  of Operations**                             |   | Sentigen Ltd. (the “Company”) was incorporated on  October 7, 1999 in Bermuda.  The  Company is owned jointly by Photogen Technologies, Inc. (“Photogen”) and Elan  International Services, Ltd. (“EIS”), a wholly owned subsidiary of Elan  Corporation plc (“Elan”), holding 80.1% and 19.9% (nonvoting shares) of the  shares, respectively.  The primary  objective of the Company is to develop and commercialize nanoparticulate  diagnostic imaging agents for the detection and treatment of cancer through  lymphography.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Basis  of Presentation**                            |   | The Company’s ability to continue as a going concern  is entirely dependent upon the funds it receives from its shareholders per  the Subscription, Joint Development and Operating Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Estimates**                                         |   | The financial statements include estimated amounts  and disclosures based on management’s assumptions about future events.  Actual results may differ from those  estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Research  and Development**                         |   | Research and development costs are charged to  expense when incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Income  Taxes**                                     |   | Under current Bermuda law, the Company is not  required to pay any taxes in Bermuda on either income or capital gains.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **Recent  Accounting  Pronouncements**                |   | In October 2001, the Financial Accounting Standards  Board issued SFAS 144, “Accounting for the Impairment or Disposal of  Long-Lived Assets” (“SFAS 144”).  This  statement addresses financial accounting and reporting for the impairment or  disposal of long-lived assets.  This  statement supersedes FASB Statement No. 121, “Accounting for the Impairment  of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the  accounting and reporting provisions of APB Opinion No. 30, “Reporting the  Results of Operations, Reporting the Effects of Disposal of a Segment of a  Business, and Extraordinary, Unusual and Infrequently Occurring Events and  Transactions,” for the disposal of a segment of a business.  The provisions of SFAS 144 will be  effective for fiscal years beginning after December 15, 2001.  The Company has recorded an impairment of  its Elan license in accordance with SFAS 144 (Note 3). |

 

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| **2.** | **Related  Party Transactions** |   | The amount due to shareholders represents costs for  research and development that are subcontracted to Photogen and Elan.  The amount due to shareholders is  unsecured, and interest free with no set terms of repayment.  Research and development expense  represents costs under the subcontract agreements with Photogen and  Elan.  These transactions are in the  normal course of operations and are measured at the exchange amount, which is  the amount of consideration established and agreed to by the related parties. |
|--------|---------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **3.** | **License  of Elan Technology** |   | In 1999, the Company paid a license fee to Elan in  the amount of $15,000,000 to acquire rights to certain Elan intellectual  property.  This license is being  amortized on a straight-line basis over 184 months, which is the end of the  life of the latest licensed patent.                                                                                                                                                                                                                                                                 |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                            |   | The Company reviews the carrying values of its  license for possible impairment whenever an event or change in circumstances  indicates that the carrying amount of the asset may not be recoverable.                                                                                                                                                                                                                                                                                                                                                 |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                            |   | During 2002, management  assessed the recoverability of the carrying value of the Elan license.  Based on discounted cash flows and  changing priorities of the joint venture partners, management has determined  that an impairment of $2,500,000 is appropriate.                                                                                                                                                                                                                                                                              |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **4.** | **Shareholders’  Equity**  |   | *Preferred Stock*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                            |   | In October 1999, the Company issued 2,980 shares of  nonvoting convertible preferred stock to EIS for $2,985,000 with a par value  of $1.00 per share.  At any time after  October 2002, the holder of the preferred stock has the right to convert the  preferred stock on a one-to-one basis into common shares.  Additionally, there exists an exchange  right which upon exercise, could increase EIS’s ownership to 50% of Sentigen  Ltd.                                                                                         |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                            |   | *Common Stock*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                            |   | In October 1999, the Company issued 12,000 voting  common shares to Photogen for $12,015,000 with a par value of $1.00 per  share.                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

##### ***PART III.***

 

###### **ITEM 10. DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT.**

 

**Directors. **Thetable below sets forth our six directors and information concerning their ageand position with the company as of March 30, 2003.  None of the directors, except for Mr. McKeever (a director ofPeople’s Energy Corporation and The Lou Holland Trust-Growth Fund), is adirector of any other company subject to the reporting requirements under thefederal securities laws.

 
| **Name**                         |   | **Age** |   | **Position**                                     |
|----------------------------------|--------|---------|--------|--------------------------------------------------|
| Taffy J. Williams,  Ph.D.(1)     |   | 53      |   | Director, President and  Chief Executive Officer |
| Robert J. Weinstein,  M.D.(1)(3) |   | 57      |   | Director                                         |
| Lester H. McKeever,  Jr.(2)(3)   |   | 68      |   | Director, Chairman of  the Audit Committee       |
| Gene Golub(2)                    |   | 72      |   | Director                                         |
| William D.  McPhee(1)(2)(3)      |   | 49      |   | Director                                         |
| Alan D. Watson                   |   | 50      |   | Director                                         |

 

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(1) Member of theExecutive Committee

(2) Member of the AuditCommittee

(3) Member of theCompensation Committee

 

A brief discussion of thebusiness experience of each director during the past five years is set forthbelow.

 

**Taffy J. Williams, Ph.D**. has served as our President, ChiefExecutive Officer and a director since May 17, 2000.  Prior to joining the company, Dr. Williams served as CEO andPresident of PANAX Pharmaceuticals for two and half years and President ofInKine Pharmaceuticals for two years. He received his Bachelor of Science in Chemistry from the University ofNotre Dame and his Ph.D. in Chemistry from the University of South Carolina.

 

**Robert J. Weinstein, M.D.** has served as one of our directors sinceMay 16, 1997.  He is currently a privateinvestor.  During the last five years,Dr. Weinstein served as Chief Executive Officer of HMO America, Inc. andsubsequently held the same position in United HealthCare of Illinois when UnitedHealthCare acquired HMO America in 1993. On January 1, 1996, he became a consultant to United HealthCareCorporation.  He received his medicaldegree from Chicago Medical School and received a B.A. from Hunter College inNew York.

 

**Lester H. McKeever, Jr.** has served as one of our directors sinceJune 17, 1998.  Mr. McKeever isManaging Principal of the firm of Washington, Pittman & McKeever, LLC, aChicago, Illinois firm of certified public accountants and consultantsproviding a broad range of professional services, and has held a similar positionwith that firm since 1976.  Mr. McKeeveris a former Chairman of the Federal Reserve Bank of Chicago, a position Mr.McKeever held for three years ending December 31, 1999, and he serves as adirector of MBIA Insurance Corp. of Illinois, Worldwide Broadcasting, Inc.,People’s Energy Corporation, and Printing Specialties, Inc.  Mr. McKeever also serves on severalnot-for-profit boards and councils, including the Chicago Urban League(formerly Chairman of the Board), Business Advisory Counsel University ofIllinois College of Commerce at Urbana-Champaign, and the Chicago SymphonyOrchestra

 

78

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Association.  Mr. McKeeverreceived his B.S. degree in accounting from the University of Illinois atUrbana-Champaign and his J.D. with distinction from the IIT-Chicago KentCollege of Law.

 

**Gene Golub** has served as one of our directors sinceMay 17, 2000.  Mr. Golub has also servedas Chairman of Golub & Company, a company he founded in 1961, which withits affiliates has been involved in more than $2 billion in real estatetransactions.  Under Mr. Golub’sleadership, the Golub companies have owned, developed or operated more than 25million square feet of office, residential and mixed-use properties in theUnited States and abroad. Mr. Golub is active in numerous Chicago based charitableorganizations and was inducted into the Chicago Association of Realtors Hall ofFame in 1999.

 

**William D. McPhee** has served as one of our directors sinceNovember 12, 2002.  Mr. McPhee receivedhis B.S. degree in pre-med and an L.L.B. degree in law, both from McGillUniversity.  Since 1998, he has beenManaging General Partner of Mi3, L.P. where he has been responsible formanaging the venture fund.  Prior tothat, he was Chief Executive Officer of Praxis Advisors, Inc., a strategyconsulting firm.

 

**Alan D. Watson, Ph.D.** has served as one of our directors sinceNovember 12, 2002.  Mr. Watson receivedhis B.S. from the University of N.S.W., his Ph.D. in Chemistry from AustralianNational University, and his M.B.A. from Northeastern University.  Since 2002, Mr. Watson has served asExecutive Vice President and Chief Business Officer of Elixir Pharmaceuticals,Inc.  Prior to that, he was the SeniorVice President, Corporate Development of Cubist Pharmaceuticals, Inc. from 1999to 2002.  From 1997 to 1999, he wasSenior Vice President, Licensing and Intellectual Property of Nycomed Amershamplc.

 

There is a seventhdirectorship which is currently vacant and will remain so until filled by the Boardin accordance with the Voting Agreement described in “Recent Transactions-Financing” above.  Specifically, as partof the institutional financing transaction that closed on November 12, 2002,the holders of over 61.9% (on a fully diluted basis) of our common stockentered into the Voting Agreement.  TheVoting Agreement requires the parties to vote for certain director nominees.

 

**Executive Officers and SignificantEmployees.**  The recent business experience of our otherexecutive officers and significant employees follows.

 

**Brooks Boveroux**, age 59, has served as our Senior VicePresident – Finance, Chief Financial Officer and Treasurer since August 1,2000.  He has also served as thecompany’s Secretary since November 12, 2002. For the five years prior to joining the company, Mr. Boveroux served asChief Financial Officer and Vice President of Investor Relations for TheLiposome Company, Inc., Chief Financial Officer of Synergy Pharmaceuticals,Inc. and as a consultant advising corporations in the area of corporatefinance.  He is a graduate of HamiltonCollege and received his Masters of Business Administration in Finance from theWharton School of the University of Pennsylvania.

 

**Reinhard Koenig, Ph.D., M.D., RAC**, age 42, has served as our Senior Vice Presidentof Medical and Regulatory Affairs since January 4, 2001.  He is primarily responsible for regulatoryaffairs and clinical development activities. From 1996 through 1999, Dr. Koenig held various positions at CollagenAesthetics, Inc. including Vice President - Medical Affairs, Vice President –Medical and Regulatory Affairs and Chief Scientific Officer.  From 1999 until he joined the company, Dr.Koenig was a principal in Biosciences Corporation where he provided consultingservices in Phase 2 though Phase 4 product development for pharmaceuticaldrugs, biological and medical devices. Dr. Koenig received his bachelor and doctorate degrees inToxicology and Pharmacology at Philipps University in Marburg, Germany.

 

**Compliance with Section 16(a) of theExchange Act. **Section 16(a) of the Securities ExchangeAct of 1934, as amended, requires our executive officers, directors and personswho beneficially own more than 10% of our common stock to file initial reportsof ownership and changes in ownership with the SEC.

 

79

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Those persons arerequired by SEC regulations to furnish us with copies of all Section 16(a)forms that they file.  To our knowledge,based solely on a review of the copies of those reports furnished to us duringthe fiscal year ended December 31, 2002, we believe that our executiveofficers, directors and beneficial owners of more than 10% of our common stockcomplied with all Section 16(a) filing requirements, except as follows:  Dr. Weinstein, one of our directors, and Mr.Levine inadvertently failed to timely file Form 4s reporting a transfer ofshares from the Theodore Tannebaum Trust (of which they were co-trustees) toTannebaum, LLC (of which they were co-managers) due to an oversight by companycounsel; they filed Form 4s for this transaction on October 18, 2002 and thecompany has modified its reporting compliance procedures to avoid suchoversights in the future.

 

###### **ITEM 11. EXECUTIVECOMPENSATION.**

 

**Compensation Committee Interlocks andInsider Participation. **During the 2002 fiscal year, executivecompensation was administered by the Compensation Committee comprised of threeoutside directors of the Board of Directors, Messrs. McKeever and McPhee andDr. Weinstein.

 

**Executive Compensation. **The following table sets forth compensation we paid toour executive officers (the “Named Officers”) for services rendered us in allcapacities during the year ended December 31, 2002.

 

**SUMMARY COMPENSATION TABLE**

 
|                                                      |   |                    |   |                                   |    | **Long Term  Compensation**          |   |                                        |   |
|-----------------------------------------------------------|--------|-------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|---------------------------------------------|--------|
|                                                      |   |                    |   |                                   |    |                                 |   |                                        |   | **Awards** |   | **Payouts** |   |   |   |
| **Name and  Principal Position**                          |   | **Annual Compensation** |   | **Other  Annual  Compens  ation  ($)** |    | **Restricted  Stock  Award(s)  ($)** |   | **Securities  Underlying  Options  (#)(4)** |   | **LTIP  Payouts  ($)** |   | **All  Other  Compen-  sation  ($)** |   |
| **Year**                                                  |   | **Salary  ($)**         |   | **Bonus  ($)**                         |
| Taffy J. Williams, Ph.D(1)                                |   | 2002                    |   | $                                      | 265,000 |                                 | $      | 60,000                                      |   | $ | 0 |   | 0 |   | 1,233,450 |   | 0 |   | $ | 0 |   |
| Director, President and Chief                             |   | 2001                    |   | $                                      | 260,000 |                                 | $      | 30,000                                      |   | — |   | — |   | — |   | — |   | — |   |
| Executive Officer                                         |   | 2000                    |   | $                                      | 265,000 |                                 | $      | 66,250                                      |   | — |   | — |   | 1,050,000 |   | — |   | — |   |
|                                                      |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |
| Brooks Boveroux(1)                                        |   | 2002                    |   | $                                      | 216,250 |                                 | $      | 32,250                                      |   | $ | 0 |   | 0 |   | 550,875 |   | 0 |   | $ | 0   |   |
| Senior Vice President–                               |   | 2001                    |   | $                                      | 215,000 |                                 | $      | 32,250                                      |   | — |   | — |   | — |   | — |   | — |   |
| Finance, Chief Financial Officer, Treasurer and Secretary |   | 2000                    |   | $                                      | 215,000 |                                 | $      | 32,250                                      |   | — |   | — |   | 312,500 |   | — |   | — |   |
|                                                      |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |
| Reinhard Koenig, Ph.D., M.D.(1)                           |   | 2002                    |   | $                                      | 280,625 |                                 | $      | 0                                           |   | $ | 0 |   | 0 |   | 513,375 |   | 0 |   | $ | 0 |   |
| Senior Vice President– Medical                       |   | 2001                    |   | $                                      | 200,020 |                                 | — |                                        | — |   | — |   | 100,000 |   | — |   | $ | 50,000 | (2) |
| and Regulatory Affairs                                    |   | 2000                    |   | —                                 |    | —                               |   | —                                      |   | — |   | — |   | — |   | — |   |
|                                                      |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |
| Timothy Scott, Ph.D.(3)                                   |   | 2002                    |   | $                                      | 86,300  |                                 | $      | 0                                           |   | $ | 0 |   | 0 |   | 0 |   | 0 |   | $ | 0 |   |
| Former Senior Scientist,                                  |   | 2001                    |   | $                                      | 100,000 |                                 | $      | 0                                           |   | — |   | — |   | — |   | — |   | — |   |
| Vice President–                                      |   | 2000                    |   | $                                      | 100,000 |                                 | $      | 17,000                                      |   | — |   | — |   | — |   | — |   | — |   |
| Chief Operating Officer                                   |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |
|                                                      |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |
| Eric A. Wachter, Ph.D.(3)                                 |   | 2002                    |   | $                                      | 86,300  |                                 | $      | 0                                           |   | $ | 0 |   | 0 |   | 0 |   | 0 |   | $ | 0 |   |
| Former Director,                                          |   | 2001                    |   | $                                      | 100,000 |                                 | $      | 0                                           |   | — |   | — |   | — |   | — |   | — |   |
| Vice President,                                           |   | 2000                    |   | $                                      | 100,000 |                                 | $      | 11,000                                      |   | — |   | — |   | — |   | — |   | — |   |
| Secretary, Senior Scientist                               |   |                    |   |                                   |    |                                 |   |                                        |   |   |   |   |   |   |   |   |   |

 

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(1)  Drs. Williams and Koenig and Mr.Boveroux are entitled to severance if their employment is terminated withoutcause, as discussed below.

 

(2)  Reimbursement of moving expenses.

 

(3)  Drs. Scott and Wachter resigned as officersand directors of the company in November, 2002 in connection with the corporateseparation transaction.

 

(4)  Reflects a one-for-four reverse split whichoccurred in November, 2002.

 

80

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### **Stock Options**.

 

The following tablecontains information concerning the grant of stock options during the 2002fiscal year under our 1998 and 2000 Long Term Incentive Compensation Plans tothe Named Officers.  To date, none ofthese options have been exercised.

 

**2002Stock Option Grants**

 
|                          |   | **Individual Grants**                                          |   |
|-------------------------------|--------|----------------------------------------------------------------|--------|
| **Name**                      |   | **Number of  Securities  Underlying  Options  Granted (#)(1)** |   | **% of Total  Options  Granted to  Employees  in 2002** |   | **Exercise  Price  ($/Sh)** |   | **Expiration  Date** |   | **Grant Date  Present  Value  ($)(2)** |   |
| Taffy  J. Williams, Ph.D.     |   | 1,233,450                                                      |   | 50 | % | $ | 1.08 |   | 11/12/2012 |   | $ | 1,615,820 |   |
| Brooks  Boveroux              |   | 550,875                                                        |   | 22 | % | $ | 1.08 |   | 11/12/2012 |   | $ | 721,646 |   |
| Timothy  Scott, Ph.D.         |   | 0                                                              |   | 0 |   | N/A |   | N/A |   | N/A |   |
| Eric  Wachter, Ph.D.          |   | 0                                                              |   | 0 |   | N/A |   | N/A |   | N/A |   |
| Reinhard  Koenig, Ph.D., M.D. |   | 513,375                                                        |   | 21 | % | $ | 1.08 |   | 11/12/2012 |   | $ | 672,521 |   |

 

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(1)  The options were granted at an exerciseprice equal to the purchase price paid by the institutional investors in theinstitutional financing which closed on November 12, 2002.  The market price of our common stock on thedate of the option grants was $2.52.  Aportion of the options becomes exercisable on various dates in accordance withthe terms of the respective Award Agreements covering the options.

 

(2)  In accordance with SEC rules, grant datepresent value is determined using the Black-Scholes Model.  The Black-Scholes Model is a complicatedmathematical formula widely used to value exchange-traded options.  However, stock options granted by the companyare long-term, non-transferable and subject to vesting restrictions, whileexchange-traded options are short-term and can be exercised or sold immediatelyin a liquid market.  The Black-ScholesModel relies on several key assumptions to estimate the present value ofoptions, including the market price, volatility of, and dividend yield on, thesecurity underlying the option, the risk-free rate of return on the date ofgrant and the estimated time period until exercise of the option.  The shares subject to the options grantedare identical to the publicly-traded securities of the company except forrestrictions on trading.  Due to theserestrictions the shares subject to the options granted are worth less thantheir publicly-traded counterparts.  Theactual value, if any, that an executive officer may realize will depend on hiscontinued employment through the options vesting period, and the excess of themarket price over the exercise price on the date the option is exercised sothat there is no assurance that the value realized by an executive officer willbe at or near the value estimated by the Black-Scholes Model.

 

81

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The following table setsforth information about the Named Officers concerning the exercise of optionsduring the last fiscal year and unexercised options held as of the end of the2002 fiscal year.

 

2002 OptionExercises and Year-End Values

 
| **Name**                      |   | **Shares  Acquired  On  Exercise  (#)** |            | **Value  Realized  ($)** |              | **Number of Securities  Underlying Unexercised  Options at Year End 2002 (#)** |            | **Fair Value of Unexercised  In-the-Money Options at Year  End 2002 ($)(1)** |              |
|-------------------------------|--------|-----------------------------------------|-----------------|--------------------------|-------------------|--------------------------------------------------------------------------------|-----------------|------------------------------------------------------------------------------|-------------------|
|                          |   |                                    | **Exercisable** |                     | **Unexercisable** |                                                                           | **Exercisable** |                                                                         | **Unexercisable** |   |
|                          |   |                                    |            |                     |              |                                                                           |            |                                                                         |              |   |   |   |   |
| Taffy  J. Williams, Ph.D.     |   | 0                                       |            | 0                        |              | 1,020,035                                                                      |            | 1,263,415                                                                    |              | 0 |   | 0 |   |
| Brooks  Boveroux              |   | 0                                       |            | 0                        |              | 363,180                                                                        |            | 500,195                                                                      |              | 0 |   | 0 |   |
| Timothy  Scott, Ph.D.         |   | 0                                       |            | 0                        |              | 0                                                                              |            | 0                                                                            |              | 0 |   | 0 |   |
| Eric  A. Wachter, Ph.D.       |   | 0                                       |            | 0                        |              | 0                                                                              |            | 0                                                                            |              | 0 |   | 0 |   |
| Reinhard  Koenig, Ph.D., M.D. |   | 0                                       |            | 0                        |              | 178,344                                                                        |            | 435,031                                                                      |              | 0 |   | 0 |   |

 

----

(1)  For purposes of this table, the “value” ofstock options was determined by the difference between the exercise price and$0.99, the closing price for common stock on the last business day of thefiscal year.  Shares acquired onexercise of these options are not registered under the Securities Act of 1933and are not freely saleable except in compliance with exemptions fromregistration, including the holding period and other requirements of Rule 144thereunder.  Consequently, the valuesset forth in the table are only theoretical values and may not accuratelyrepresent actual market value.

 

We have employment agreementswith Drs. Williams and Koenig and with Mr. Boveroux (the employment agreementswith Drs. Scott and Wachter were terminated in November, 2002 in connectionwith the corporate separation transaction). Each of these employment agreements is terminable at-will and can beterminated by either party at any time with or without cause.  In addition, Drs. Williams and Koenig andMr. Boveroux are bound by their respective Employee Confidentiality, Inventionsand Noncompetition Agreements, as amended (each of these agreements is referredto as a “Confidentiality Agreement”). Each Confidentiality Agreement provides that while we employ therespective individual and for a period of two years after termination he willnot engage in activities that compete with our business.  Each Confidentiality Agreement also requiresthe respective employee to disclose to our Board of Directors all inventions orother intellectual property discovered or made by the employee during his employmentand twelve months thereafter, if those inventions are related to or useful inour business, or result from duties assigned to that individual or from the useof any of our assets or facilities.

 

Drs. Williams andKoenig and Mr. Boveroux each receive typical health, life and disability insurancebenefits that are available to our other salaried employees.  These individuals are also eligible to defera portion of their salary through our 401(k) plan, but the company did notmatch or make any contributions to the 401(k) plan during the 2002 fiscal yearnor does the company maintain a pension plan.

 

We have a consultingagreement with Dr. Watson pursuant to which he provides business and productdevelopment services to us.  Theconsulting agreement commenced in November, 2002 and continues on amonth-to-month basis (unless terminated earlier by notice or cause).  The consulting agreement provides that Dr.Watson will be paid $175 per hour of service, be reimbursed for all reasonableout-of-pocket expenses, and receive non-qualified stock options to purchase upto ten thousand (10,000) shares of the company’s common stock on February 3,2003 and on January 1 of each year so long as the consulting agreement is ineffect.

 

Officers generally serveat the discretion of the Board of Directors. We do not have any compensatory plans or arrangements resulting fromresignation, retirement or any other termination of an executive officer’semployment with us.  However, theemployment agreements for Drs. Williams and Koenig and Mr. Boveroux eachprovide for severance in the event we terminate their employment withoutcause.  Upon termination without cause,Dr. Williams would be entitled to a severance payment equal to one

 

82

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year’s salary.  If terminated without cause, Mr. Boverouxand Dr. Koenig would each be entitled to receive six month’s salary.

 

###### **ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

 

**Security Ownership of CertainBeneficial Owners and Management. **The following table sets forth theapproximate beneficial ownership of our common stock as of March 30, 2003 bydirectors and executive officers of the company who have held such position atany time during the 2002 fiscal year, and any person or group known to us to bethe owner of more than five percent of our common stock.  Shares beneficially owned by the individualsbelow through family partnerships or other entities they control are includedin the number of shares listed in the table below for that individual.

 
| **Name and Address  of Beneficial Owner(1)**                                                       |   | **Shares of Common Stock   Beneficially Owned (2)** |   | **Percent of Class  Outstanding (3)** |    |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                               |   |                                                |   |                                  |    |
| **EXECUTIVE  OFFICERS AND DIRECTORS:**                                                             |   |                                                |   |                                  |    |
|                                                                                               |   |                                                |   |                                  |    |
| Brooks Boveroux                                                                                    |   | 363,180                                             | (4)    | 1.9                                   |    |
|                                                                                               |   |                                                |   |                                  |    |
| Gene Golub  625 North Michigan Ave., Ste 2000  Chicago, IL 60611                                   |   | 123,015                                             | (5)    |                                  | *       |
|                                                                                               |   |                                                |   |                                  |    |
| Reinhard Koenig, Ph.D.,  M.D.                                                                      |   | 199,844                                             | (6)    |                                  | *       |
|                                                                                               |   |                                                |   |                                  |    |
| Lester H. McKeever, Jr.  819 South Wabash Avenue  Chicago, IL 60605                                |   | 36,250                                              | (7)    |                                  | *       |
|                                                                                               |   |                                                |   |                                  |    |
| William D. McPhee  One Hollis Street, Suite 232  Wellesley, MA 02482                               |   | 462,963                                             | (8)    | 2.4                                   |    |
|                                                                                               |   |                                                |   |                                  |    |
| Timothy Scott, Ph.D.  7327 Oak Ridge Highway  Knoxville, TN  37931                            |   | 0                                                   | (9)    |                                  | *       |
|                                                                                               |   |                                                |   |                                  |    |
| Eric A. Wachter, Ph.D.  7327 Oak Ridge Highway  Knoxville, TN  37931                          |   | 0                                                   | (9)    |                                  | *       |
|                                                                                               |   |                                                |   |                                  |    |
| Alan D. Watson, Ph.D.  One Kendall Square  Building 1000, Fifth Floor  Cambridge, MA 02139         |   | 25,000                                              | (10)   |                                  | *  |
|                                                                                               |   |                                                |   |                                  |    |
| Robert J. Weinstein,  M.D.  and Lois Weinstein  500 Lake Cook Road, Suite 130  Deerfield, IL 60015 |   | 4,182,901                                           | (11)   | 21.9                                  |    |

 

83

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| **Name and Address  of Beneficial Owner(1)**                                           |   | **Shares of Common Stock   Beneficially Owned (2)** |   | **Percent of Class  Outstanding (3)** |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                   |   |                                                |   |                                  |   |
| Taffy J. Williams,  Ph.D.                                                              |   | 1,274,285                                           | (12)   | 6.7                                   |   |
|                                                                                   |   |                                                |   |                                  |   |
| All directors and  executive officers as a group (10 persons)                          |   | 6,667,437                                           |   | 34.9                                  |   |
|                                                                                   |   |                                                |   |                                  |   |
| **OTHER  SHAREHOLDERS:**                                                               |   |                                                |   |                                  |   |
|                                                                                   |   |                                                |   |                                  |   |
| Stuart P. Levine  500 Lake Cook Road, Suite 130  Deerfield, IL 60015                   |   | 4,098,150                                           | (11)   | 21.4                                  |   |
|                                                                                   |   |                                                |   |                                  |   |
| Mi3 L.P.  One Hollis Street, Suite 232  Wellesley, MA 02482                            |   | 462,963                                             | (13)   | 2.4                                   |   |
|                                                                                   |   |                                                |   |                                  |   |
| MRNA Fund II L.P.  225 Berkeley Street, Suite 1650  Boston, MA 02216                   |   | 64,385                                              | (14)   |                                  | *      |
|                                                                                   |   |                                                |   |                                  |   |
| Oxford Bioscience  Partners IV L.P.  225 Berkeley Street, Suite 1650  Boston, MA 02216 |   | 6,481,482                                           | (15)   | 33.9                                  |   |
|                                                                                   |   |                                                |   |                                  |   |
| Tannebaum, LLC  875 N. Michigan Avenue  Suite 2930  Chicago, IL 60611-1901             |   | 3,344,045                                           | (16)   | 17.5                                  |   |
|                                                                                   |   |                                                |   |                                  |   |
| Parties to Voting  Agreement  (6 persons)                                              |   | 11,881,451                                          | (17)   | 62.2                                  |   |

 

----

* Constitutes one percentor less of the percent of class outstanding.

 

(1)  Unless otherwise indicated, the address ofeach person named in the table is c/o:** **Photogen Technologies, Inc., 140Union Square Drive, New Hope, PA  18938.

 

(2) With respect todirectors and executive officers, based on information furnished by thedirector or executive officer listed.

 

(3) The percent of classoutstanding includes common stock outstanding as of March 30, 2003 and theshares subject to options exercisable within 60 days of March 30, 2003.

 

(4)  Includes 363,180 options exercisable within60 days of March 30, 2003.

 

(5)  Includes 108,015 shares of common stock and15,000 options exercisable within 60 days of March 30, 2003.

 

(6)  Includes 21,500 shares of common stock and178,344 options exercisable within 60 days of March 30, 2003.

 

84

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(7)  Includes 16,250 shares of common stock and20,000 options exercisable within 60 days of March 30, 2003.

 

(8)  Includes 462,963 shares held by Mi3, L.P.,which Mr. McPhee may be deemed to control. Mr. McPhee disclaims beneficial ownership of Mi3, L.P.’s shares for allother purposes.

 

(9)  Pursuant to the corporate separation whichclosed on November 12, 2002, the shares held by the Tennessee Stockholders wereredeemed by the company and cancelled. Also, Dr. Wachter resigned as an officer and director of the company andDr. Scott resigned as an officer on November 12, 2002.

 

(10)  Includes 25,000 shares of common stock.

 

(11)  Includes 3,344,045 shares held by Tannebaum,LLC, which Dr. Weinstein and Mr. Levine may be deemed to control.  Dr.  Weinstein and Mr. Levine disclaimbeneficial ownership of Tannebaum, LLC’s shares for all other purposes.  As of March 31, 2003, Tannebaum Ventures,LLC will be the manager of Tannebaum, LLC and Dr. Weinstein and Mr. Levine willno longer be deemed to control the shares held by Tannebaum, LLC.  Dr. Weinstein and Mr. Levine are parties tothe Voting Agreement described in footnote 17 below.  The shares held by the other parties to the Voting Agreement arenot included here.

 

(12) Includes 4,250shares of common stock and 1,270,035 options exercisable within 60 days ofMarch 30, 2003.

 

(13)  Includes 462,963 shares of commonstock.  Note that Mr. McPhee is thePresident of Mi3 Services L.L.C. which is the general partner of Mi3, L.P.  Mi3, L.P. is a party to the Voting Agreementdescribed in footnote 17 below.  Theshares held by the other parties to the Voting Agreement are not included here.

 

(14)  Includes 64,385 shares of common stock.  MRNA Fund II L.P. is a party to the VotingAgreement described in footnote 17 below. The shares held by the other parties to the Voting Agreement are notincluded here.

 

(15)  Includes 64,385 shares held by MRNA Fund IIL.P., which Oxford Bioscience Partners IV L.P. may be deemed to control.  Oxford disclaims beneficial ownership ofsuch shares for all other purposes. Oxford Bioscience Partners IV L.P. is a party to the Voting Agreementdescribed in footnote 17 below.  Theshares held by the other parties to the Voting Agreement are not included here.

 

(16)  Includes 3,344,045 shares of commonstock.  Tannebaum, LLC is a party to theVoting Agreement described in footnote 17 below.  The shares held by the other parties to the Voting Agreement arenot included here.

 

(17)  Dr. Weinstein, Mr. Levine, Mi3, L.P., MRNAFund II, L.P., Oxford Bioscience Partners IV L.P., and Tannebaum, LLC areparties to the Voting Agreement described above at page 8.  The parties to the Voting Agreement may bedeemed to be a “group” within the meaning of Section 13(d)(3) of the SecuritiesExchange Act of 1934, as amended.  Theprovisions of the Voting Agreement include an agreement by the parties to votetheir shares for the election of certain directors nominated by the parties tothe Voting Agreement.

 

**Change in Control Agreements. **Weknow of no arrangements which could result in a change of control of PhotogenTechnologies, Inc.

 

85

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**Securities Authorized for Issuance Under Equity CompensationPlans.**

 

The information providedin the following table is as of December 31, 2002.

 
| **Plan Category**                                           |   | **Number of securities  to be issued upon  exercise of outstanding  options, warrants and  rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** |   | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))  (c)** |      |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Equity  compensation plans approved by security holders:    |   | 4,144,925                                                                                                |   | $                                                                                       | 14.05  |                                                                                                                                                       | 1,922,700 |   |
| Equity  compensation plans not approved by security holders |   | 427,431                                                                                                  |   | $                                                                                       | 7.94   |                                                                                                                                                       | 0         |   |

 

We have issued thefollowing warrants to purchase shares of our common stock without the priorapproval of our stockholders:

 

•                  a warrant to purchase 150,000 shares at $1.08 per share to BroadmarkCapital, LLC in connection with a Settlement Agreement and Mutual Release datedas of September 23, 2002 which related to our engagement of Broadmark Capital,LLC as a placement agent.

 

•                  a warrant to purchase 190,000 shares at $2.52 per share to ClinicalRegulatory Strategies, LLC in connection with our August 12, 2002 engagement ofClinical Regulatory Strategies, LLC to provide us with certain clinical,regulatory and new product development services.

 

•                  a warrant to purchase 25,000 shares at $84.68 per share to ElanInternational Services, Ltd. on October 20, 1999 in connection with our jointventure with Elan.

 

•                  a warrant to 3,750 shares at $44.23 to a consultant as of January 24,2000 in connection with certain consulting services provided by the consultant.

 

•                  warrants to purchase an aggregate of 8,181 shares at $47.78 to GilfordSecurities Incorporated and certain of its employees in connection with certainplacement agent services provided to us by Gilford Securities Incorporated inFebruary, 2000.

 

•                  a warrant to purchase 500 shares at $47.04 to Aqua Partners, Inc. in connectionwith certain investor services provided by Aqua Partners, Inc. in November,1999.

 

•                  warrants to purchase an aggregate of 50,000 shares at $1.08 to FarcapGroup, LLC in connection with certain consulting services provided by FarcapGroup, LLC in August, 1999.

 

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###### **ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

 

**Certain Relationships and RelatedTransactions. **We are involved in a joint venturetransaction with affiliates of Elan Corporation, plc (“Elan”).  Aidan King (one of our former directors whoserved during the 2002 fiscal year) is employed as Vice President, BusinessDevelopment for Elan.  That joint venture,called Sentigen Ltd., is involved in the development of lymphography diagnosticproducts and is described above under the heading “Sentigen Ltd. – JointVenture with Elan Corporation,” and in Note 3 to our Financial Statements.

 

During the 2002 fiscalyear, Dr. Weinstein (one of our current directors) was deemed to control Tannebaum,LLC (after March 30, 2003, Dr. Weinstein no longer controls such shares).  William McPhee (another one of our currentdirectors) is President of Mi3 Services L.L.C. which is the general partner ofMi3, L.P.  Mi3, L.P. purchased shares inthe institutional financing which closed on November 12, 2002 and is one of theinvestors that may receive a benefit under the Agreement (the “Elan Agreement”)dated November 12, 2002.  Pursuant tothe Elan Agreement, Elan will pay the amounts that certain investors otherwisewould have received on liquidation of the company if the liquidation preferenceof the Series A Preferred Stock had been eliminated.  Tannebaum, LLC also acquired shares of our common stock in thefinancing which closed on November, 12, 2002 through the conversion ofoutstanding debt into shares of our common stock.

 

###### **ITEM 14. CONTROLS ANDPROCEDURES**

 

Disclosure controls andprocedures are defined by the SEC as those controls and other  procedures that are designed to ensure thatinformation required to be disclosed in the company’s filings under theSecurities Act of 1934 is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.  The company’s Chief Executive Officer andChief Financial Officer have evaluated the company’s disclosure controls andprocedures within 90 days prior to the filing of this Annual Report on Form10-K and have determined that such disclosure controls and procedures areeffective.

 

Subsequent to thecompany’s evaluation, there were no significant changes in internal controls orother factors that could significantly affect internal controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

###### **ITEM 15. EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.**

 

**Exhibits**.

 

The following is a listof exhibits filed as part of this Form 10-K. Exhibits that were previouslyfiled are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit inthe previous filings is indicated in parentheses.

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                          |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                     |
| 3.1             |   | Articles of  Incorporation of Photogen Technologies, Inc., as amended  (Filed as Exhibit E to the company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.) |

 

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| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2             |   | Amended and Restated  Certificate of Designations, Preferences and Rights of Series A Preferred  Stock.  (Filed as Exhibit 3.5 to the  company’s Quarterly Report on Form 10-QSB for the quarter ended September 30,  1999 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.4             |   | Amended and Restated  Bylaws of Photogen Technologies, Inc. (Filed as Exhibit  C to the company’s Information Statement  on Form DEF 14C dated December 23, 2002 and incorporated herein by  reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 9.1             |   | Voting, Drag-Along and  Right of First Refusal Agreement entered into as of November 12, 2002 by and  among Robert J. Weinstein, M.D., Stuart P. Levine, Tannebaum, LLC, Mi3 L.P.,  Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P. (Filed as Exhibit G  to the company’s Proxy Statement on Form DEFM 14A dated September 12, 2002  and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1            |   | Common Stock Purchase  Agreement dated as of August 2, 2002 by and among Photogen Technologies,  Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P., MRNA Fund II L.P., New  England Partners Capital, L.P. and Tannebaum LLC. (Filed as Exhibit C to  the company’s DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2            |   | Amendment No. 1 to the  Common Stock Purchase Agreement dated as of August 2, 2002 by and among  Photogen Technologies, Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P., New England Partners Capital, L.P. and Tannebaum LLC.  (Filed as Exhibit A to the company’s DEFR 14A Proxy Supplement dated October  18, 2002 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3            |   | Separation Agreement  dated as of July 29, 2002 by and among the following: Craig Dees, Ph.D. and  Dees Family Foundation, Eric A. Wachter, Ph.D. and Eric A. Wachter 1998  Charitable Remainder Unitrust, Timothy D. Scott, Ph.D. and Scott Family  Investment Limited Partnership, Walter Fisher, Ph.D., Fisher Family  Investment Limited Partnership, and Walt Fisher 1998 Charitable Remainder  Unitrust, and John A. Smolik and Smolik Family LLP, Photogen Technologies,  Inc., Photogen, Inc., Robert J. Weinstein, M.D., Stuart P. Levine and  Tannebaum, LLC (Filed as Exhibit A to the company’s DEFM 14A dated September 12,  2002 and incorporate herein by reference.) |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4            |   | Registration Rights  Agreement entered into as of November 12, 2002 by and among Photogen  Technologies, Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P., MRNA Fund  II L.P. and Tannebaum, LLC (Filed as Exhibit D to the company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                                                                                                                                                                                                                                                                     |

 

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| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5            |   | Letter Agreement  entered into as of August 29, 2002 by and between Photogen Technologies, Inc.  and Clinical Regulatory Strategies, LLC (Filed as Exhibit 10.2 to the  company’s quarterly report on Form 10-Q for the quarter ended September 30,  2002 and incorporated herein by reference.)                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6            |   | Office Lease dated  February 19, 2001 by and between Photogen, Inc. and Union Square, Limited  Partnership.  (Filed as Exhibit 10.5  to the company’s Annual Report on Form 10-K for the year ended December 31,  2000 and incorporated herein by reference.)                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7            |   | Form of Registration  Rights Agreement dated as of December 30, 2002 entered into by and between  Photogen Technologies, Inc. and each of Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P., DMG Legacy Institutional Fund LLC, DMG Legacy Fund LLC, and  DMG Legacy International Ltd.                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8            |   | Employment Agreement  entered into by the company and Taffy J. Williams, Ph.D., dated October 28,  2002.                                                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9            |   | Employment Agreement  entered into by the company and Brooks Boveroux, dated October 28, 2002.                                                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10           |   | Employment Agreement  with Reinhard Koenig, Ph.D., M.D., RAC dated October 28, 2002.                                                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11           |   | Incentive Stock Option  Award Agreement entered into by and between the company and Taffy J.  Williams, Ph.D. dated May 17, 2000.   (Filed as Exhibit 10.4 to the company’s Current Report on Form 8-K  dated May 17, 2001 and incorporated herein by reference.)                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12           |   | Incentive Stock Option  Award Agreement entered into by the company and Brooks Boveroux dated August  1, 2000.  (Filed as Exhibit 10.13 to  the company’s Annual Report on Form 10-K dated December 31, 2000 and  incorporated herein by reference.)                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13           |   | Form of Indemnification  Agreement entered into by and between the company and each Director and  Senior Vice President of the company.                                                                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14           |   | Tufts University  Sponsored Research Agreement dated August 1, 1999 by and between Photogen,  Inc. and Tufts University, a/k/a Trustees of Tufts College.  (Filed as Exhibit 10.3 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)   Confidential portions of this exhibit were redacted. |

 

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| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.15           |   | Amended Warrant  Certificates between Photogen Technologies, Inc. and Farcap Group LLC dated  as of January 31, 2003.                                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.16           |   | License Agreement  effective as of September 30, 1999 between The General Hospital Corporation  and Photogen, Inc.  (Filed as Exhibit  10.7 to the company’s Quarterly Report on Form 10-QSB for the quarter ended  September 30, 1999 and incorporated herein by reference.)  Confidential portions of this exhibit were  redacted.                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.17           |   | Securities Purchase  Agreement dated as of October 20, 1999, among Photogen Technologies, Inc. and  Elan International Services, Ltd.   (Filed as Exhibit 10.8 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.18           |   | Warrant to Purchase  Shares of Common Stock dated October 20, 1999 between Photogen Technologies,  Inc. and Elan International Services, Ltd.   (Filed as Exhibit 10.9 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.19           |   | License Agreement dated  October 20, 1999 between Photogen Technologies, Inc, Photogen Newco Ltd. and  Elan Pharma International Limited.   (Filed as Exhibit 10.13 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.20           |   | License Agreement dated  October 20, 1999 between Elan Pharma International Limited, Photogen Newco  Ltd. and Photogen Technologies, Inc. (Filed as Exhibit 10.14 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.) Confidential portions of this exhibit were  redacted.                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21           |   | Subscription, Joint  Development and Operating Agreement dated October 20, 1999 between Elan  Pharma International Limited, Elan International Services, Ltd., Photogen  Technologies, Inc. and Photogen Newco Ltd.   (Filed as Exhibit 10.15 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.) Confidential portions of this exhibit were redacted. |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.22           |   | Equipment Lease between  Picker Financial Group, L.L.C. and Photogen, Inc. dated October 25, 1999.  (Filed as Exhibit 10.37 to the company’s Annual Report on Form 10-KSB for the  year ended December 31, 1999 and incorporated herein by reference.)                                                                                                                                                                                     |

 

90

----

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                          |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                     |
| 10.23           |   | Standstill and  Make-Whole Agreement dated as of December 30, 2002 among Xmark Fund, L.P.,  Xmark Fund, Ltd., Alliance Pharmaceutical Corp. and Photogen Technologies.                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                     |
| 10.24           |   | Convertible Secured  Note Purchase Agreement dated as of October 4, 2002 by and between Alliance  Pharmaceutical Corp. and Photogen Technologies, Inc.                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                     |
| 10.25           |   | Form of 8% Convertible  Secured Promissory Note by Alliance Pharmaceutical Corp. for the benefit of  Photogen Technologies, Inc.                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                     |
| 10.26           |   | Amendment to the 8%  Convertible Secured Note Purchase Agreement, 8% Convertible Secured Notes and  Related Security Agreements dated as of   February 26, 2003 by and among Alliance Pharmaceutical Corp., Photogen  Technologies, Inc. and the other noteholders. |
|            |   |                                                                                                                                                                                                                                                                     |
| 10.27           |   | Warrant Agreement dated  as of November 12, 2002 between Broadmark Capital LLC and Photogen  Technologies, Inc.                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                     |
| 21              |   | Subsidiaries of  Registrant                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                     |
| 99.1            |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                     |
| 99.2            |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                     |

 

**Reports On Form 8-K**.

 

During the quarter endedDecember 31, 2002, we filed the following reports on Form 8-K:

 

1.               On October 16, 2002 we filed a Current Report on Form8-K announcing the restructuring of our equity financing with a group ofinstitutional investors.

 

2.               On October 31, 2002 we filed a Current Report on Form8-K with respect to our annual meeting of stockholders.

 

3.               On November 19, 2002 we filed a Current Report on Form8-K with respect to the consummation of a series of transactions resulting in achange of control, the disposition of certain assets, a one-for four reversesplit of our common stock, the resignation and appointment of certain directorsand the sale of our common stock.

 

4.               On November 25, 2002, we filed a Current Report onForm 8-K announcing that we entered into a term sheet with respect to ouracquisition of certain assets of Alliance.

 

91

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5.               On December 31, 2002, we filed a Current Report onForm 8-K announcing that we consummated the second closing of the sale of ourcommon stock to a group of institutional and individual accredited investors.

 

92

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Date:  | April 14, 2003 | Photogen Technologies,  Inc.                                      |
|--------|----------------|-------------------------------------------------------------------|
|   |           |
|   |           | By:                                                               | /s/ Taffy J. Williams |   |
|   |           | Taffy J. Williams,  Ph.D., President  and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**              |                         | **Title**                                     |                                              | **Date** |
|----------------------------|------------------------------|-----------------------------------------------|---------------------------------------------------|----------|
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Taffy J. Williams        |                                          | President, Chief  Executive Officer and Director, |     | April 14, 2003 |
| Taffy J. Williams,  Ph.D.  |                         | Chairman of the  Board (principal executive   |                                              |     |
|                       |                         | officer)                                      |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Brooks Boveroux          |                                          | Senior Vice President –  Finance, Chief      |     | April 14, 2003 |
| Brooks Boveroux            |                         | Financial  Officer, Secretary and Treasurer   |                                              |     |
|                       |                         | (principal  financial and accounting officer) |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Alan D. Watson           |                                          | Director                                          |     | April 14, 2003 |
| Alan D. Watson, Ph.D.      |                         |                                          |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Robert J. Weinstein      |                                          | Director                                          |     | April 14, 2003 |
| Robert J. Weinstein,  M.D. |                         |                                          |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Lester H. McKeever,  Jr. |                                          | Director                                          |     | April 14, 2003 |
| Lester H. McKeever, Jr.    |                         |                                          |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ Gene Golub               |                                          | Director                                          |     | April 14, 2003 |
| Gene Golub                 |                         |                                          |                                              |     |
|                       |                         |                                          |                                              |     |
| By:                        | /s/ William D. McPhee        |                                          | Director                                          |     | April 14, 2003 |
| William D. McPhee          |                         |                                          |                                              |     |

 

S-I

----

 

**CERTIFICATION**

 

I, Taffy J. Williams,Ph.D., certify that:

 

1.                                       I have reviewed this annual report onForm 10-K of Photogen Technologies, Inc.;

 

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

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                                       The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)                                   evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)                                    presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                                    all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                                   any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       The registrant’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:   April 14, 2003 | /s/ Taffy J. Williams                                    |   |
|----------------------------------|----------------------------------------------------------|--------|
|                             | Taffy J. Williams  President and Chief Executive Officer |

 

S-II

----

 

**CERTIFICATION**

 

I, Brooks Boveroux,certify that:

 

1.                                       I have reviewed this annual report onForm 10-K of Photogen Technologies, Inc.;

 

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

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                                       The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)                                   evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)                                       presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                                      all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                                     any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       The registrant’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:   April 14, 2003 | /s/ Brooks Boveroux                                                                                |   |
|----------------------------------|----------------------------------------------------------------------------------------------------|--------|
|                             | Brooks Boveroux  Chief Financial Officer, Treasurer, Secretary and Senior  Vice President- Finance |

 

S-III

----

 

EXHIBITINDEX

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +3.1            |   | Articles of  Incorporation of Photogen Technologies, Inc., as amended  (Filed as Exhibit E to the company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +3.2            |   | Amended and Restated  Certificate of Designations, Preferences and Rights of Series A Preferred  Stock.  (Filed as Exhibit 3.5 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +3.4            |   | Amended and Restated  Bylaws of Photogen Technologies, Inc. (Filed as Exhibit  C to the company’s Information Statement  on Form DEF 14C dated December 23, 2002 and incorporated herein by  reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +9.1            |   | Voting, Drag-Along and  Right of First Refusal Agreement entered into as of November 12, 2002 by and  among Robert J. Weinstein, M.D., Stuart P. Levine, Tannebaum, LLC, Mi3 L.P.,  Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P. (Filed as Exhibit G  to the company’s Proxy Statement on Form DEFM 14A dated September 12, 2002  and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +10.1           |   | Common Stock Purchase  Agreement dated as of August 2, 2002 by and among Photogen Technologies,  Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P., MRNA Fund II L.P., New  England Partners Capital, L.P. and Tannebaum LLC. (Filed as Exhibit C to  the company’s DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +10.2           |   | Amendment No. 1 to the  Common Stock Purchase Agreement dated as of August 2, 2002 by and among  Photogen Technologies, Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P., New England Partners Capital, L.P. and Tannebaum LLC.  (Filed as Exhibit A to the company’s DEFR 14A Proxy Supplement dated October  18, 2002 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +10.3           |   | Separation Agreement  dated as of July 29, 2002 by and among the following: Craig Dees, Ph.D. and  Dees Family Foundation, Eric A. Wachter, Ph.D. and Eric A. Wachter 1998  Charitable Remainder Unitrust, Timothy D. Scott, Ph.D. and Scott Family  Investment Limited Partnership, Walter Fisher, Ph.D., Fisher Family  Investment Limited Partnership, and Walt Fisher 1998 Charitable Remainder  Unitrust, and John A. Smolik and Smolik Family LLP, Photogen Technologies,  Inc., Photogen, Inc., Robert J. Weinstein, M.D., Stuart P. Levine and  Tannebaum, LLC (Filed as Exhibit A to the company’s DEFM 14A dated September 12,  2002 and incorporate herein by reference.) |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| +10.4           |   | Registration Rights  Agreement entered into as of November 12, 2002 by and among Photogen  Technologies, Inc., Mi3 L.P., Oxford Bioscience Partners IV L.P., MRNA Fund  II L.P. and Tannebaum, LLC (Filed as Exhibit D to the                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

----

| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                           |
|            |   | company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| +10.5           |   | Letter Agreement  entered into as of August 29, 2002 by and between Photogen Technologies, Inc.  and Clinical Regulatory Strategies, LLC (Filed as Exhibit 10.2 to the  company’s quarterly report on Form 10-Q for the quarter ended September 30,  2002 and incorporated herein by reference.)                          |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| +10.6           |   | Office Lease dated  February 19, 2001 by and between Photogen, Inc. and Union Square, Limited  Partnership.  (Filed as Exhibit 10.5  to the company’s Annual Report on Form 10-K for the year ended December 31,  2000 and incorporated herein by reference.)                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| *10.7           |   | Form of Registration  Rights Agreement dated as of December 30, 2002 entered into by and between  Photogen Technologies, Inc. and each of Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P., DMG Legacy Institutional Fund LLC, DMG Legacy Fund LLC,  and DMG Legacy International Ltd.                                   |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| *10.8           |   | Employment Agreement  entered into by the company and Taffy J. Williams, Ph.D., dated October 28,  2002.                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| *10.9           |   | Employment Agreement  entered into by the company and Brooks Boveroux, dated October 28, 2002.                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| *10.10          |   | Employment Agreement  with Reinhard Koenig, Ph.D., M.D., RAC dated October 28, 2002.                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| +10.11          |   | Incentive Stock Option  Award Agreement entered into by and between the company and Taffy J.  Williams, Ph.D. dated May 17, 2000.   (Filed as Exhibit 10.4 to the company’s Current Report on Form 8-K  dated May 17, 2001 and incorporated herein by reference.)                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| +10.12          |   | Incentive Stock Option  Award Agreement entered into by the company and Brooks Boveroux dated August  1, 2000.  (Filed as Exhibit 10.13 to  the company’s Annual Report on Form 10-K dated December 31, 2000 and  incorporated herein by reference.)                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| *10.13          |   | Form of Indemnification  Agreement entered into by and between the company and each Director and  Senior Vice President of the company.                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                           |
| +10.14          |   | Tufts University  Sponsored Research Agreement dated August 1, 1999 by and between Photogen,  Inc. and Tufts University, a/k/a Trustees of Tufts College.  (Filed as Exhibit 10.3 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.) |

 

----

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |   | Confidential portions  of this exhibit were redacted.                                                                                                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.15          |   | Amended Certificates  between Photogen Technologies, Inc. and Farcap Group LLC dated as of January  31, 2003.                                                                                                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.16          |   | License Agreement  effective as of September 30, 1999 between The General Hospital Corporation  and Photogen, Inc.  (Filed as Exhibit  10.7 to the company’s Quarterly Report on Form 10-QSB for the quarter ended  September 30, 1999 and incorporated herein by reference.)  Confidential portions of this exhibit were  redacted.                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.17          |   | Securities Purchase  Agreement dated as of October 20, 1999, among Photogen Technologies, Inc. and  Elan International Services, Ltd.   (Filed as Exhibit 10.8 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.18          |   | Warrant to Purchase  Shares of Common Stock dated October 20, 1999 between Photogen Technologies, Inc.  and Elan International Services, Ltd.   (Filed as Exhibit 10.9 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.19          |   | License Agreement dated  October 20, 1999 between Photogen Technologies, Inc, Photogen Newco Ltd. and  Elan Pharma International Limited.   (Filed as Exhibit 10.13 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.20          |   | License Agreement dated  October 20, 1999 between Elan Pharma International Limited, Photogen Newco  Ltd. and Photogen Technologies, Inc. (Filed as Exhibit 10.14 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.) Confidential portions of this exhibit were  redacted.                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.21          |   | Subscription, Joint  Development and Operating Agreement dated October 20, 1999 between Elan  Pharma International Limited, Elan International Services, Ltd., Photogen  Technologies, Inc. and Photogen Newco Ltd.   (Filed as Exhibit 10.15 to the company’s Quarterly Report on Form  10-QSB for the quarter ended September 30, 1999 and incorporated herein by  reference.) Confidential portions of this exhibit were redacted. |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| +10.22          |   | Equipment Lease between  Picker Financial Group, L.L.C. and Photogen, Inc. dated October 25, 1999.  (Filed as Exhibit 10.37 to the company’s Annual Report on Form 10-KSB for the  year ended December 31, 1999 and incorporated herein by reference.)                                                                                                                                                                                     |

 

----

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                    |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                               |
| *10.23          |   | Standstill and  Make-Whole Agreement dated as of December 30, 2002 among Xmark Fund, L.P.,  Xmark Fund, Ltd., Alliance Pharmaceutical Corp. and Photogen Technologies.                                                                                             |
|            |   |                                                                                                                                                                                                                                                               |
| *10.24          |   | Convertible Secured  Note Purchase Agreement dated as of October 4, 2002 by and between Alliance  Pharmaceutical Corp. and Photogen Technologies, Inc.                                                                                                             |
|            |   |                                                                                                                                                                                                                                                               |
| *10.25          |   | Form of 8% Convertible  Secured Promissory Note by Alliance Pharmaceutical Corp. for the benefit of  Photogen Technologies, Inc. dated November 15, 2002.                                                                                                          |
|            |   |                                                                                                                                                                                                                                                               |
| *10.26          |   | Amendment to the 8%  Convertible Secured Note Purchase Agreement, 8% Convertible Secured Notes and  Related Security Agreements dated as of February 26, 2003 by and among  Alliance Pharmaceutical Corp., Photogen Technologies, Inc. and the other  noteholders. |
|            |   |                                                                                                                                                                                                                                                               |
| *10.27          |   | Warrant Agreement dated  as of November 12, 2002 between Broadmark Capital LLC and Photogen  Technologies, Inc.                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                               |
| *21             |   | Subsidiaries of  Registrant                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                               |
| *99.1           |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                               |
|            |   |                                                                                                                                                                                                                                                               |
| *99.2           |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                               |

 

----

*Filed herewith

+Incorporated herein byreference

 

----