**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý**                         | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                        |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                                                                                                                                                                                                                                          |
|                               | **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003**                                                                                                                                                                                                                                                                                                                              |
|                               |
| **OR**                             |
|                               |
| **o**                              | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                       |
|                               |                                                                                                                                                                                                                                                                                                                                                                          |
|                               | **FOR THE TRANSITION PERIOD FROM                               TO                            ** |
|                               |
| **Commission File Number 0-23553** |

 

| **PHOTOGEN TECHNOLOGIES, INC.**                                   |
|-------------------------------------------------------------------|
| (Exact name of small business issuer as specified in its charter) |
|                                                              |   |   |
| **NEVADA**                                                        |   | **62-1742885** |
| (State or other jurisdiction of  incorporation or organization)   |   | (I.R.S. Employer Identification No.) |
|                                                              |
| **140 Union Square Drive  New Hope, Pennsylvania 18938**          |
| (Address of principal executive offices)(Zip Code)                |
|                                                              |
| **215/862-6860**                                                  |
| (Issuer’s telephone number, including area code)             |

 

State thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date: 19,553,314 shares of common stock, $.001 parvalue per share, issued and outstanding at August 12, 2003.

 

TransitionalSmall Business Disclosure Format (check one):

 

Yes  o         No  ý

 

 

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**INDEX**

 

**At this time, this Form 10-QSB and financial statementshave not been reviewed by external auditors. We intend to consult in the futurewith external auditors and will make any revisions that management deemsnecessary through an appropriate amendment to this Form 10-QSB.**

 
| PART I.  | FINANCIAL INFORMATION                                           |
|----------|-----------------------------------------------------------------|
| ITEM 1.  | FINANCIAL STATEMENTS                                            |
| ITEM 2.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OR  PLAN OF OPERATION |
| ITEM 3.  | CONTROLS AND PROCEDURES                                         |
|     |                                                            |
| PART II. | OTHER INFORMATION                                               |
| ITEM 1.  | LEGAL PROCEEDINGS                                               |
| ITEM 2.  | CHANGES IN SECURITIES                                           |
| ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES                                 |
| ITEM 5.  | OTHER INFORMATION                                               |
| ITEM 6.  | EXHIBITS AND REPORTS ON FORM 8-K                                |

 

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**At this time, this Form 10-QSB and financial statementshave not been reviewed by external auditors. We intend to consult in the futurewith external auditors and will make any revisions that management deemsnecessary through an appropriate amendment to this Form 10-QSB.**

 

**PARTI. FINANCIAL INFORMATION**

 

**ITEM1.****                                                     FINANCIALSTATEMENTS**

 

Photogen Technologies, Inc.(A Development Stage Company)Consolidated Condensed Balance SheetsAll amounts in $

 
|                                                                                                                                             |   | **June 30,  2003** |       | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                                                                                                                             |   | **(Unaudited)**    |       | **(Audited)**          |       |
| **Assets**                                                                                                                                       |   |               | ** ** |                   | ** ** |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Current Assets**                                                                                                                               |   |               | ** ** |                   | ** ** |
| Cash and cash equivalents                                                                                                                        |   | $                  | 1,053,640  | ** **             | $          | 6,090,904 | ** ** |
| Deposits                                                                                                                                         |   | 108,721            |       | 98,721                 |       |
| Prepaid expenses                                                                                                                                 |   | 718,842            |       | 693,313                |       |
| **Total Current Assets**                                                                                                                         |   | 1,881,203          |       | 6,882,938              |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Property, Plant and Equipment ,** less  accumulated depreciation of $137,010 and $14,651, respectively                                         |   | 7,153,785          |       | 36,000                 |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Patent Costs,** net of amortization of  $163,021 and $142,359, respectively                                                                    |   | 336,979            |       | 357,641                |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Deposits**                                                                                                                                     |   | 14,383             |       | 14,383                 |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Purchased Technology**                                                                                                                         |   | 14,131,597         |       | 1,255,000              |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Investment in and Advances to Affiliate**                                                                                                      |   | 7,604,761          |       | 8,192,452              |       |
| Total Assets                                                                                                                                     |   | $                  | 31,122,708 | ** **             | $          | 16,738,414 | ** ** |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Liabilities and Shareholders’ Equity**                                                                                                    |   |               | ** ** |                   | ** ** |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Current Liabilities**                                                                                                                          |   |               | ** ** |                   | ** ** |
| Accounts payable and accrued expenses                                                                                                            |   | $                  | 4,277,883  | ** **             | $          | 869,135 | ** ** |
| Notes payable                                                                                                                                    |   | 2,500,000          | ** ** |                   | ** ** |
| Lines of Credit                                                                                                                                  |   | 4,682,093          | ** ** |                   | ** ** |
| Accrued equipment lease                                                                                                                          |   | 401,664            |       | 401,664                |       |
| **Total Current Liabilities**                                                                                                                    |   | 11,861,640         |       | 1,270,799              |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Accrued Equipment Lease**                                                                                                                      |   | 200,831            |       | 401,664                |       |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Shares Subject to Rescission**                                                                                                                 |   |               | ** ** | 650,000                | ** ** |
|                                                                                                                                             |   |               | ** ** |                   | ** ** |
| **Shareholders’ Equity**                                                                                                                    |   |               | ** ** |                   | ** ** |
| 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                    |       |
| Common stock; par value $.001 per share;  150,000,000 shares authorized; 19,278,007 and 16,137,465 shares issued and  outstanding, respectively  |   | 19,278             |       | 16,137                 |       |
| Additional paid-in capital                                                                                                                       |   | 50,989,932         |       | 43,144,880             |       |
| Common stock to be issued upon shareholder  approval                                                                                             |   | 5,043,226          | ** ** |                   | ** ** |
| Deficit accumulated during the development  stage                                                                                                |   | (36,992,327        | )          | (28,745,194            | )          |
| **Total Shareholders’ Equity**                                                                                                              |   | 19,060,237         |       | 14,415,951             |       |
|                                                                                                                                             |   | $                  | 31,122,708 |                   | $          | 16,738,414 | ** ** |

 

1

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Photogen Technologies, Inc.(A Development Stage Company)Consolidated Condensed Statements of Operations(Unaudited)All amounts in $

 
|                                                                               |   | **Three  Months  Ended  June 30,  2003** |       | **Three  Months  Ended  June 30,  2002** |       | **Six Months  Ended  June 30,  2003** |       | **Six Months  Ended  June 30,  2002** |       | **Cumulative  Amounts  From  November 3,  1996  (inception)  to  June 30,  2003** |       |
|------------------------------------------------------------------------------------|--------|------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
|                                                                               |   |                                     | ** ** |                                     | ** ** |                                  | ** ** |                                  | ** ** | **(Unaudited)**                                                                   | ** ** |
| **Operating Expenses**                                                             |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| Research and development                                                           |   | $                                        | 209,282    |                                     | $          | 152,873                               |       | $                                     | 763,445    |                                                                              | $          | 339,537 |   | $ | 5,120,082 |   |
| Sales, general and administrative                                                  |   | 2,653,464                                |       | 754,084                                  |       | 6,848,822                             |       | 1,324,637                             |       | 23,496,344                                                                        |       |
| Restructuring charges                                                              |   | —                                   |       | —                                   |       | —                                |       | 451,068                               |       | 1,404,508                                                                         |       |
| Provision for future lease payments                                                |   | —                                   |       | —                                   |       | —                                |       | —                                |       | 1,264,208                                                                         |       |
| **Total Operating Expenses**                                                       |   | 2,862,746                                |       | 906,957                                  |       | 7,612,267                             |       | 2,115,242                             |       | 31,285,142                                                                        |       |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Loss from Joint Venture**                                                        |   | (391,794                                 | )          | (380,331                                 | )          | (587,691                              | )          | (940,445                              | )          | (7,502,707                                                                        | )          |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Investment Income**                                                              |   | 2,291                                    |       | 177                                      |       | 6,813                                 |       | 1,502                                 |       | 1,215,754                                                                         |       |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Interest Expense**                                                               |   | (53,988                                  | )          | (54,541                                  | )          | (53,988                               | )          | (100,713                              | )          | (520,883                                                                          | )          |
| Loss from continuing operations                                                    |   | (3,306,237                               | )          | (1,341,652                               | )          | (8,247,133                            | )          | (3,154,898                            | )          | (38,092,978                                                                       | )          |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| Discontinued Operations                                                            |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| Loss from operations of discontinued  therapeutic business                         |   | —                                   |       | (544,657                                 | )          | —                                |       | (1,047,106                            | )          | (10,679,101                                                                       | )          |
| Gain from split-off of therapeutic business                                        |   | —                                   |       | —                                   |       | —                                |       | —                                |       | 11,779,752                                                                        |       |
| Income from discontinued operations                                                |   | —                                   |       | (544,657                                 | )          | —                                |       | (1,047,106                            | )          | 1,100,651                                                                         |       |
| **Net Loss**                                                                       |   | $                                        | (3,306,237 | )                                        | $          | (1,886,309                            | )          | $                                     | (8,247,133 | )                                                                                 | $          | (4,202,004 | ) | $ | (36,992,327 | ) |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Dividends on Preferred Stock**                                                   |   | (265,504                                 | )          | (344,215                                 | )          | (523,970                              | )          | (678,678                              | )          |                                                                              |       |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Net Loss Applicable to Common Shareholders**                                     |   | $                                        | (3,571,741 | )                                        | $          | (2,230,524                            | )          | $                                     | (8,771,103 | )                                                                                 | $          | (4,880,682 | ) |   |   |
|                                                                               |   |                                     |       |                                     |       |                                  |       |                                  |       |                                                                              |       |
| **Basic and Diluted Loss per Common Share**                                        |   | $                                        | (.21       | )                                        | $          | (.23                                  | )          | $                                     | (.52       | )                                                                                 | $          | (.51 | ) |   |   |
|                                                                               |   |                                     | ** ** |                                     | ** ** |                                  | ** ** |                                  | ** ** |                                                                              | ** ** |
| **Weighted Average Number of Common Shares  Outstanding – Basic and Diluted** |   | 17,267,374                               |       | 9,585,948                                |       | 16,973,099                            |       | 9,585,948                             |       |                                                                              |       |

 

2

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Photogen Technologies, Inc.(A Development Stage Company)Consolidated Condensed Statements of Shareholders’ Equity(Unaudited)

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

 

3

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|                                                                           |   |                 |       |         |       |              |       |              |       |              |       |           |       |            |       |       |       |        |       | **Deficit** |       |        |       |
|--------------------------------------------------------------------------------|--------|----------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|----------------|------------|-----------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                           |   | **Preferred  Stock** |       |         |       |              |       |              |       | **Common  Stock** |       | **Additional** |       | **Accumulated** |       |       |       |
|                                                                           |   | **Series A**         |       | **Series B** |       | **Common  Stock** |       | **Members’** |       | **To be**         |       | **Paid-in**    |       | **Development** |       |       |       |
|                                                                           |   | **Shares**           |       | **Amount**   |       | **Shares**        |       | **Amount**        |       | **Shares**        |       | **Amount**     |       | **Capital**     |       | **Issued** |       | **Capital** |       | **Stage**   |       | **Total**   |       |
|                                                                           |   |                 |       |         |       |              |       |              |       |              |       |           |       |            |       |       |       |        |       |        |       |        |       |
| **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 service                                               |   | —               |       | —       |       | —            |       | —            |       | —            |       | —         |       | —          |       |       |       | 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 dividends                                          |   | —               |       |         |       | 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 loss 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 |   |
|                                                                           |   |                 | ** ** |         | ** ** |              | ** ** |              | ** ** |              | ** ** |           | ** ** |            | ** ** |       | ** ** |        | ** ** |        | ** ** |        | ** ** |
| Issuance of common stock for cash                                              |   | —               |       | —       |       | —            |       | —            |       | 27,778            |       | 28             |       | —          |       |       |       | 29,972      |       | —      |       | 30,000      | ** ** |
| Issuance of common stock for standstill agreement                              |   | —               |       | —       |       | —            |       | —            |       | 750,000           |       | 750            |       | —          |       |       |       | 1,173,000   |       | —      |       | 1,173,750   | ** ** |
| Options issued to consultants for services                                     |   | —               |       | —       |       | —            |       | —            |       | —            |       | —         |       | —          |       |       |       | 9,200       |       | —      |       | 9,200       | ** ** |
| Shares issued to consultant for services                                       |   | —               |       | —       |       | —            |       | —            |       | 18,750            |       | 19             |       | —          |       |       |       | 62,294      |       | —      |       | 62,313      | ** ** |
| Employee compensation from stock options                                       |   | —               |       | —       |       | —            |       | —            |       | —            |       | —         |       | —          |       |       |       | 314,462     |       | —      |       | 314,462     | ** ** |
| Shares issued in Technology Purchase                                           |   | —               |       | —       |       | —            |       | —            |       | 2,198,137         |       | 2,198          |       | —          |       |       |       | 5,581,070   |       | —      |       | 5,583,268   | ** ** |
| Shares to be issued in Technology Purchase                                     |   | —               |       | —       |       | —            |       | —            |       | —            |       | —         |       | —          |       | 5,043,226  |       |        |       | —      |       | 5,043,226   | ** ** |
| Shares previously subject to rescission                                        |   | —               |       | —       |       | —            |       | —            |       | 124,627           |       | 125            |       | —          |       |       |       | 649,875     |       | —      |       | 650,000     | ** ** |
| Penalty shares to Xmark                                                        |   | —               |       | —       |       | —            |       | —            |       | 11,250            |       | 11             |       | —          |       |       |       | 25,189      |       | —      |       | 25,200      | ** ** |
| Options exercised through cashless exercise                                    |   | —               |       | —       |       | —            |       | —            |       | 10,000            |       | 10             |       | —          |       |       |       | (10         | )          | —      |       | —      | ** ** |
| Net loss for the six months ended June 30, 2003                                |   | —               |       | —       |       | —            |       | —            |       | —            |       | —         |       | —          |       |       |       | —      |       | (8,247,133  | )          | (8,247,133  | )          |
|                                                                           |   |                 |       |         |       |              |       |              |       |              |       |           |       |            |       |       |       |        |       |        |       |        |       |
| **Balance,** at June 30,  2003                                                 |   | 12,856               |       | $            | 128        |              | —     |              | $          | —            |       | 19,278,007     |       | $               | 19,278     |       | $          | —      |       | $           | 5,043,226  |        | $          | 50,989,932 |   | $ | (36,992,327 | ) | $ | 19,060,237 |   |

 

4

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Photogen Technologies, Inc.(A Development Stage Company)Consolidated Condensed Statements of Operations(Unaudited)All amounts in $

 
|                                                              |   | **Six Months  Ended  June 30, 2003** |       | **Six Months  Ended  June 30,2002** |   | **Cumulative  Amounts  From  November 3,  1996  (Inception)** |   |
|-------------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|--------|---------------------------------------------------------------|--------|
|                                                              |   |                                 |       |                                |   | **(Unaudited)**                                               |   |
| **Cash Flows From Operating Activities**                          |   |                                 |       |                                |   |                                                          |   |
| Net loss                                                          |   | $                                    | (8,247,133 | )                                   | $      | (4,202,004                                                    | )      | $ | (36,992,327 | ) |
| Loss from discontinued operations                                 |   |                                 |       |                                |   | 10,679,101                                                    |   |
| Depreciation and amortization                                     |   | 143,021                              |       | 211,684                             |   | 1,820,925                                                     |   |
| Loss on disposal of fixed assets                                  |   | —                               |       | —                              |   | 38,424                                                        |   |
| Gain on sale of marketable securities                             |   | —                               |       | —                              |   | (18,503                                                       | )      |
| United States Treasury Notes Amortization                         |   | —                               |       | —                              |   | 12,586                                                        |   |
| Gain on sale of therapeutic business                              |   |                                 |       |                                |   | (11,779,752                                                   | )      |
| Stock option compensation                                         |   | 314,462                              |       | 29,134                              |   | 1,993,032                                                     |   |
| Issuance of stock for standstill agreement                        |   | 1,198,950                            |       | —                              |   | 1,198,950                                                     |   |
| Beneficial inducement costs for convertible  notes                |   |                                 |       |                                |   | 206,348                                                       |   |
| Issuance of warrants in exchange for  services rendered           |   | —                               |       | —                              |   | 4,317,091                                                     |   |
| Issuance of stock options in settlement of  lawsuit               |   |                                 |       |                                |   | 806,415                                                       |   |
| Issuance of stock for services rendered                           |   | 71,513                               |       |                                |   | 71,513                                                        |   |
| Loss from investment in affiliate                                 |   | 587,691                              |       | 940,445                             |   | 7,502,707                                                     |   |
| Changes in operating assets and  liabilities:                     |   |                                 |       |                                |   |                                                          |   |
| Prepaid expenses                                                  |   | (25,529                              | )          | 29,775                              |   | (718,842                                                      | )      |
| Accounts payable                                                  |   | (114,064                             | )          | 514,210                             |   | 790,939                                                       |   |
| Accrued expenses                                                  |   | 684,760                              |       | 412,824                             |   | 954,469                                                       |   |
| Accrued equipment lease                                           |   | (200,832                             | )          | (107,719                            | )      | 933,145                                                       |   |
| Accrued restructuring                                             |   |                                 |       | 301,068                             |   |                                                          |   |
| Net cash used in operating activities  (continuing operations)    |   | (5,587,161                           | )          | (1,870,583                          | )      | (18,183,779                                                   | )      |
| Net cash used in discontinued operations                          |   | —                               |       | —                              |   | (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                         |   | —                               |       | —                              |   | (38,656,973                                                   | )      |
| Sales of United States Treasury Notes                             |   | —                               |       | —                              |   | 39,778,548                                                    |   |
| Purchase of capital assets                                        |   | —                               |       | —                              |   | (636,877                                                      | )      |
| Proceeds from sale of equipment                                   |   | —                               |       | —                              |   | 145,551                                                       |   |
| Costs to acquire patent                                           |   | —                               |       | —                              |   | (237,335                                                      | )      |
| Investment in and advances to affiliate                           |   | —                               |       | (531,053                            | )      | (15,107,468                                                   | )      |
| Decrease (increase) in deposit                                    |   | (10,000                              | )          | 298,850                             |   | (453,753                                                      | )      |
| Investment in Alliance Pharmaceutical Corp.                       |   | 1,255,000                            |       |                                |   | —                                                        |   |
| Technology Purchase                                               |   | (5,407,196                           | )          |                                |   | (5,407,196                                                    | )      |
| Net cash used in investing activities                             |   | (4,162,196                           | )          | (232,203                            | )      | (20,594,006                                                   | )      |
| Net cash used in investing activities of  discontinued operations |   | —                               |       | —                              |   | (1,306,676                                                    | )      |
|                                                              |   |                                 |       |                                |   |                                                          |   |
| *Cash Flows From Financing Activities*                            |   |                                 |       |                                |   |                                                          |   |
| Principal payments on capital leases                              |   | —                               |       | —                              |   | (291,704                                                      | )      |
| Net proceeds from issuance of equity                              |   | 30,000                               |       | —                              |   | 40,539,340                                                    |   |
| Proceeds from capital contributions by  shareholders              |   | —                               |       | —                              |   | 1,911,674                                                     |   |
| Proceeds from issuance of debt                                    |   | 4,682,093                            |       | 832,905                             |   | 10,029,003                                                    |   |
| Cost of recapitalization                                          |   | —                               |       | —                              |   | (371,111                                                      | )      |
| Net cash provided by financing activities                         |   | 4,712,093                            |       | 832,905                             |   | 51,817,202                                                    |   |
|                                                              |   |                                 |       |                                |   |                                                          |   |
| *Increase (decrease) in Cash and Cash  Equivalents*               |   | (5,037,264                           | )          | (1,269,881                          | )      | 1,053,640                                                     |   |
|                                                              |   |                                 |       |                                |   |                                                          |   |
| **Cash and Cash Equivalents,** at beginning of  period            |   | 6,090,904                            |       | 1,352,904                           |   | —                                                        |   |
| **Cash and Cash Equivalents,** at end of period                   |   | $                                    | 1,053,640  |                                | $      | 83,023                                                        |   | $ | 1,053,640 |   |

 

5

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1.                                       **Basis of Presentation**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationpursuant to Regulation S-K. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the six months endedJune 30, 2003 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2003.

 

The financialstatements have not been reviewed by external auditors.  The Company intends to consult with externalauditors and amend this Form 10-QSB to make any revisions that may be necessary.

 

2.                                       **Going Concern**

 

Theaccompanying financial statements are prepared assuming the Company is a goingconcern.  The Company believes it lackssufficient working capital to fund operations for the entire fiscal year endingDecember 31, 2003.  Substantialadditional capital resources will be required to fund the ongoing operationsrelated to the Company’s marketing, manufacturing, research and businessdevelopment activities.  Managementbelieves there are a number of potential alternatives available to meet thecontinuing capital requirements such as public or private financings orcollaborative agreements.  The Companyis taking continuing actions to reduce its ongoing expenses.  If adequate funds are not available, theCompany will be required to significantly curtail its operating plans and mayhave to sell or license out significant portions of the Company’s technology orproducts.  The financial statements donot 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.

 

3.                                       **Basic and Diluted Loss Per Common Share**

 

Basic anddiluted loss per common share is computed based on the weighted average numberof common shares outstanding.  Loss pershare excludes the impact of outstanding options, warrants, convertiblepreferred stock and shares issuable following shareholder approval of theacquisition of the medical imaging (“Imagent”) business (“Purchased Technology”or “Technology Purchase”) of Alliance Pharmaceutical Corp. (“Alliance”), asthey are antidilutive.  Potential commonshares excluded from the calculation at June 30, 2003 are 6,441,231 options, 427,431warrants, 151,819 shares issuable upon the conversion of Series A ConvertiblePreferred Stock, and 1,985,522 shares to be issued following shareholderapproval.

 

6

----

 

4.                                       **Stock Options**

 

The Companyhas adopted the disclosure-only provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123),but applies the intrinsic value method set forth in Accounting Principles BoardOpinion No. 25 for stock options granted to employees and directors.  The Company expenses the fair value of stockoptions granted to nonemployees.  In2002, the Company issued stock options to employees with an exercise price lessthan the market price on the date of grant, which vest over four years.  In 2003, the Company also issued stockoptions in connection with the Technology Purchase with an exercise price lessthan the market price on the date of grant, which vest over four years.Accordingly, compensation expense of  $314,462has been recorded in the first six months of 2003.

 

For stockoptions granted to employees and directors during the first six months of 2003,the Company has estimated the fair value of each option granted using theBlack-Scholes option-pricing model with the following assumptions:

 

|                                             |   | **2003** |       |
|--------------------------------------------------|--------|----------|------------|
|                                             |   |     | ** ** |
| Weighted average fair value per options  granted |   | $        | 2.05       |   |
|                                             |   |     | ** ** |
| Significant assumptions (weighted average)       |   |     | ** ** |
| Risk-free interest rate at grant date            |   | 5.0      | %          |
| Expected stock price volatility                  |   | 99       | %          |
| Expected option life (years)                     |   | 5        |       |
|                                                  |        |          |            |  |

 

If the Companyhad elected to recognize compensation expense based on the fair value at thegrant dates, consistent with the method prescribed by SFAS No. 123, net lossper share would have been changed to the pro forma amount indicated below:

** **

|                                                                                                               |   | **2003**   |       |
|--------------------------------------------------------------------------------------------------------------------|--------|------------|------------|
|                                                                                                               |   |       | ** ** |
| Net Loss, as reported                                                                                              |   | $          | (8,771,103 | ) |
|                                                                                                               |   |       | ** ** |
| Add stock based employee compensation  expense included in reported net income                                     |   | 314,462    |       |
|                                                                                                               |   |       | ** ** |
| Less total stock-based employee  compensation expense determined under the fair value based method for all  awards |   | (1,219,234 | )          |
| Pro forma net loss                                                                                                 |   | $          | (9,675,875 | ) |
|                                                                                                               |   |       | ** ** |
| Basic and diluted loss per common share, as  reported                                                              |   | $          | (0.52      | ) |
| Basis and diluted loss per common share,  pro forma                                                                |   | $          | (0.57      | ) |

 

7

----

 

**5.****                                     ****JointVenture/Investment in Affiliate**

 

Following issummarized financial information for Sentigen at June 30, 2003 and 2002:

 

| **June 30,**                                                                                 |   | **2003**  |       | **2002**   |       |
|----------------------------------------------------------------------------------------------|--------|-----------|------------|------------|------------|
|                                                                                         |   |      | ** ** |       | ** ** |
| Cash                                                                                         |   | $         | 410        |       | $          | **—** |   |
| License purchased from Elan, net of  amortization of $2,690,225 and $1,711,961, respectively |   | 9,565,209 |       | 13,288,039 |       |
|                                                                                         |   |      | ** ** |       | ** ** |
| Total assets                                                                                 |   | $         | 9,565,619  |       | $          | 13,288,039 |   |
|                                                                                         |   |      | ** ** |       | ** ** |
| Due to affiliates                                                                            |   | $         | 378,099    |       | $          | 230,254 |   |
|                                                                                         |   |      | ** ** |       | ** ** |
| Total shareholders’ equity                                                              |   | 9,187,520 |       | 13,057,785 |       |
|                                                                                         |   |      | ** ** |       | ** ** |
| Total liabilities and equity                                                                 |   | $         | 9,565,619  |       | $          | 13,288,039 |   |
|                                                                                         |   |      | ** ** |       | ** ** |
| Research and development Expense                                                             |   | $         | —     |       | $          | 666,219 |   |
| General and administrative expense                                                           |   | —    |       | 18,739     |       |
| Amortization of license                                                                      |   | 489,132   |       | 489,132    |       |
| Impairment of license                                                                        |   | 244,566   |       | —     |       |
|                                                                                         |   |      | ** ** |       | ** ** |
| Net loss                                                                                     |   | $         | (733,698   | )          | $          | (1,174,090 | ) |

 

8

----

 

**6.****                                      PurchasedTechnology**

 

On June 18,2003, the Company closed on the acquisition of the medical imaging business ofAlliance Pharmaceutical Corp. (the “Purchased Technology”).  A summary of the Purchased Technology acquisitioncosts and allocation to the assets acquired and liabilities assumed is asfollows:

 
| Total Acquisition Costs:                         |   |   |       |
|--------------------------------------------------|--------|--------|------------|
| Issuance of Common Stock                         |   | $      | 10,626,494 |   |
| Acquisition-related Expenses                     |   | $      | 5,407,196  |   |
|                                             |   | $      | 16,033,690 |   |
| Allocated to Assets and Liabilities as  follows: |   |   |       |
| Tangible Assets Acquired                         |   | $      | 7,240,145  |   |
| Assumed Liabilities                              |   | $      | (5,338,052 | ) |
| Purchased Technology                             |   | $      | 14,131,597 |   |
|                                             |   | $      | 16,033,690 |   |

 

Following issummarized statements of revenues and direct expenses for the PurchasedTechnology for the year ended December 31, 2002 and the approximate six-monthperiod ended June 18, 2003 (date of purchase):

** **
|                              |   | **Year ended  12/31/02** |       | **Six-Month  period  ended  6/18/03** |       | **Total for  Periods** |       |
|-----------------------------------|--------|--------------------------|------------|---------------------------------------|------------|------------------------|------------|
| Expenses:                         |   |                     | ** ** |                                  | ** ** |                   | ** ** |
| Research & development        |   | $                        | 12,775,041 |                                  | $          | 4,501,299              |       | $ | 17,276,341 |   |
| Sales, general and administrative |   | 5,080,021                |       | 1,363,973                             |       | 6,443,995              |       |
| Total Expenses                    |   | $                        | 17,855,063 |                                  | $          | 5,865,273              |       | $ | 23,720,336 |   |

 

Assuming that the Technology Purchase had occurred on the first day ofthe Company’s fiscal year ended December 31, 2002 or the first day of thesix-month period ended June 30, 2003 (unaudited) pro forma condensedconsolidated financial information would be as follows:

 
|                              |   | **Year ended  12/31/02** |        | **Six-Month period  ended****6/30/03** |       | **Total for  Periods** |       |
|-----------------------------------|--------|--------------------------|-------------|----------------------------------------|------------|------------------------|------------|
| Expenses:                         |   |                     | ** **  |                                   | ** ** |                   | ** ** |
| Research & development        |   | $                        | 14,002,938  |                                   | $          | 5,264,745              |       | $ | 19,267,683 |   |
| Sales, general and administrative |   | 9,110,104                |        | 8,212,796                              |       | 17,322,900             |       |
| Restructuring charge              |   | 807,483                  |        | —                                 |       | 807,483                |       |
| Total Expenses                    |   | 23,920,525               |        | 13,477,541                             |       | 37,398,066             |       |
| Loss from joint venture           |   | (3,452,837               | )           | (587,691                               | )          | (4,040,528             | )          |
| Investment income                 |   | 1,563                    |        | 6,813                                  |       | 8,376                  |       |
| Interest expense                  |   | (418,466                 | )           | (53,988                                | )          | (472,454               | )          |
| Loss from continuing operations   |   | (27,790,265              | )           | (14,112,407                            | )          | (41,902,672            | )          |
| Discontinued operations - net     |   | 10,283,322               |        | —                                 |       | 10,283,322             |       |
| Expenses in excess of revenues    |   | $                        | (17,506,943 | )                                      | $          | (14,112,407            | )          | $ | (31,619,350 | ) |

 

9

----

 

This pro forma information is not necessarily indicative of the actualresults that would have been achieved had the Purchased Technology beenacquired the first day of the Company’s year or six-month period, nor is itnecessarily indicative of future results.

 

**7.****                                      EquityTransactions**

 

Pursuant to aStandstill and Make Whole Agreement with Xmark Fund, L.P. and Xmark Fund Ltd.(collectively “Xmark”), secured creditors of Alliance, the Company issued atotal of 750,000 shares to Xmark.  Xmarkagreed to not exercise any rights against Alliance as a creditor.  The value of these shares was treated as anexpense.

 

On May 2,2003, the Company executed a Going Forward Agreement with Xmark that provided,among other things, for the issuance of shares of the Company’s common stockupon the acquisition of the Purchased Technology as payment for interest owedby Alliance to Xmark.  Xmark also hascertain put rights with respect to shares of the Company it owns.

 

On June 18,2003, the Company issued 2,198,137 shares of its common stock to certaincreditors of Alliance, including Xmark, as partial consideration for theTechnology Purchase.  Following approvalby shareholders, the Company will issue an additional 1,985,522 shares tocertain other creditors as part of the Purchased Technology.

 

In the secondquarter, the Company recognized the issuance of 124,627 shares of common stockthat previously had been subject to rescission.

 

During thefirst half of 2003, the Company issued an aggregate of 67,778 shares pursuantto several factors including cash, compensation for service, penalties forfailure to timely register certain shares and cashless exercise of stockoptions.

 

**8.****                                      SecuredDebt**

 

Notes payable – At the closing of theTechnology Purchase, the Company issued to Xmark promissory notes in the totalprincipal amount of $2,500,000.  Thenotes are payable in two equal installments on August 5 and November 3, 2003 or(if sooner) at the time the Company completes a financing of at least$18,000,000 of gross proceeds and bear interest at 3% over the prime rate.  Interest is payable in shares of common stock.

 

Obligations toXmark (including obligations under the put right) are secured by a firstpriority security interest on the Imagent related tangible and intangibleassets.

 

Lines of Credit – To obtain funds foroperations and certain cash payments related to the Technology Purchase, theCompany issued $4,660,000 in Revolving Convertible Senior Secured PromissoryNotes (the “Promissory Notes”) to two institutional investors(“Investors”).  The notes are secured bya first priority security interest on all the Company’s assets (but as to thelien on Imagent related assets, the lien is subordinate to the securityinterest held by Xmark), bear interest at 7.25% per annum, compounded monthly,and are due on the earlier of August 5, 2003 or upon the occurrence of an“acceleration event.”  All principal andinterest under the Promissory Notes will convert into the Company’s commonstock upon completion of a qualified financing that closes before August 5,2003 at the same price and on the same terms as are in effect for the

 

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otherinvestors in the qualified financing; and the Investors will have the samerights, benefits and obligations as other investors in that financing.  The acceleration events include a breach ofthe Company’s obligations or representations under a security agreement infavor of the Investors; if the Company files for bankruptcy protection orsimilar events occur indicating insolvency; if the Company liquidates, or ifthe Company incurs any debt senior or pari passu to the debt of the Investors.

 

**9.****                                      SubsequentEvents**

 

The Companydefaulted on the principal payment due to Xmark on August 5, 2003 and Xmarkdelivered a notice stating that it was accelerating all amounts due under thenotes.  On August 18, 2003, the Companyand Xmark executed a Letter Agreement pursuant to which the Company made animmediate payment of $1,250,000 and Xmark rescinded the default notice.  In addition, as part of the Letter Agreement:

 

•                  The Company hasthe right to extend the November 3, 2003 payment due date monthly until April3, 2004 for a fee (and not as a reduction of any amounts due and owing underthe promissory notes) ranging from $50,000 to $100,000 per month.

 

•                  The demandregistration rights held by Xmark became piggyback registration rights.

 

•                  The definitionof “Event of Default” was changed to be repayments of borrowed moneyindebtedness.

 

•                  If the Companymakes payments to certain institutions, it will make a pro-rata payment toXmark.

 

The Companydefaulted on its Promissory Notes due to the Investors.  The Investors have not asserted any of theirrights under the default provisions of the Promissory Notes and have continuedto advance capital, payable upon demand, to the Company.  All other terms and conditions of thesePromissory Notes remain unchanged.

 

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**ITEM 2.****                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

Portions of the discussion in this Form10-QSB contain forward-looking statements and are subject to the Risk Factorsdescribed below.  References to the“Company,” “Photogen,” “we” or “our” are to Photogen Technologies, Inc. and itsconsolidated subsidiaries.  Imagent® isa registered trademark owned by Photogen.

 

The accompanying financialstatements have been prepared assuming we are a going concern.  The Company lacks sufficient working capitalto fund operations for the remainder of the fiscal year ending December 31,2003 without additional debt or equity financing.  The financial statements for the six months ended June 30, 2003do 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 this uncertainty.

 

On November 12, 2002, wesplit off our therapeutic business to certain founding shareholders in exchangefor all of their 52.9% ownership interest in Photogen.  Our therapeutic business had been focused onthe development of certain photodynamic therapy products.  Our remaining diagnostic business has beenfocused on the development of products for medical imaging, with particularemphasis on cardiovascular imaging.

 

On June 18,2003, we closed on the acquisition of assets related to the diagnostic imagingbusiness, including Imagent (perflexane lipid microspheres), an FDA-approvedproduct, of Alliance Pharmaceutical Corp. (“Alliance”).  We also entered into a number of agreementsrelated to that acquisition.  Thefinancial statements include the operating impact of this acquisition from June18, 2003 through June 30, 2003.  We arecurrently seeking additional capital to operate the Imagent business and tocontinue our development programs.

 

At theclosing, we paid approximately $1,300,000 in cash and delivered 2,198,137shares of our common stock.  At thedirection of Alliance, we delivered the cash and stock to creditors, employeesand vendors of Alliance.  In addition tothe bridge financing we provided to Alliance before the closing, our purchaseof a $1,250,000 interest in Alliance’s obligations to two of its creditors,Xmark Fund, Ltd. and Xmark Fund, L.P. (collectively “Xmark”), and ourassumption of specified Alliance operating liabilities related to Imagent, weare obligated to pay additional amounts to Alliance secured and unsecuredcreditors after the closing (including Xmark, discussed below, andothers).  At various times between 90and 365 days after the closing and subject to reaching satisfactory agreementswith certain Alliance secured and unsecured creditors, we must pay an aggregateamount of up to approximately $3,000,000 to creditors other than Xmark and(subject to stockholder approval, discussed below) deliver up to an aggregateof approximately 1,985,522 shares of our common stock.  The amount of consideration was determinedthrough arms-length negotiations.

 

In addition,after the closing and through 2010, we must pay Alliance further considerationin the form of an earn out based on Imagent revenue we invoice (subject tocertain reductions).  This earn outequals, for each year of the earn out: 7.5% of Imagent revenue up to $20,000,000; 10% of Imagent revenuebetween $20,000,000 and $30,000,000; 15% of Imagent revenue between $30,000,000and $40,000,000; and 20% of Imagent revenue above $40,000,000.  The earn out will be reduced by amounts wepay pursuant to a license agreement with Schering Aktiengesellschaft(“Schering”), net of payments we receive from Schering under the license, and

 

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amounts of any indemnificationclaims we have against Alliance.  Theearn out is subject to three additional offsets (which are to be applied in themanner described in the Asset Purchase Agreement dated as of June 10, 2003 withAlliance) that entitle us to retain portions of the earn out otherwise payableto Alliance:

 

•                  Up to approximately $1,600,000 for a fixedprice offset, depending on the satisfaction of certain conditions;

•                  The amount of any payments not committed toat closing that we make after the closing to Alliance’s creditors plus up to$1,000,000 of litigation expenses for certain patent and other litigation; and

•                  Between $4,000,000 and $5,000,000, which isthe principal and accrued interest under our bridge loans to Alliance,depending on the satisfaction of certain conditions.

 

We alsoentered into a series of agreements with Xmark.  Pursuant to a Standstill and Make Whole Agreement dated as ofDecember 30, 2002, we issued 750,000 shares of our common stock to Xmark, whoagreed to not exercise any rights against Alliance as a creditor for the periodof the standstill.  On May 2, 2003, weentered into a Going Forward Agreement pursuant to which Xmark agreed to extendthe period during which Xmark had refrained from exercising its rights as acreditor against Alliance to permit us to complete the acquisition.  On that date, we also purchased the$1,250,000 interest in Alliance’s obligations to Xmark.

 

At the closingof our acquisition of the Imagent assets, pursuant to the Going Forward Agreement,we delivered to Xmark our promissory notes in the total principal amount of$2,500,000.  These notes are payable intwo equal installments on August 5, 2003 and November 3, 2003 or (if sooner) atthe time we complete a financing resulting in at least $18,000,000 of grossproceeds to us and bear interest at 3% over the prime rate.  The interest on the notes is payable inshares of our common stock.  At theclosing, we issued Xmark 1,056,144 shares of our common stock for the interestthat had accrued to that date.

 

Ourobligations to Xmark are secured by a first priority security interest on theImagent related tangible and intangible assets.  Xmark would be entitled to foreclose on its lien covering theseassets if we default on our obligations to Xmark, if we lose FDA approval forImagent, if we fail to pay other debts, or if we file for bankruptcy protectionor similar matters.

 

We defaultedon the principal payment due on August 5, 2003 and Xmark delivered a notice tous stating that it was accelerating all amounts due under the notes.  We negotiated a new agreement with Xmarkdated August 18, 2003 (the “Letter Agreement”) pursuant to which we agreed tomake an immediate payment of $1,250,000 and Xmark agreed to rescind the defaultnotice.  The other key terms of theLetter Agreement are as follows:

 

•                  We remainobligated to make a second principal payment of $1,250,000 on the earlier tooccur of (i) November 3, 2003 or (ii) the consummation of one or moreinstitutional financings resulting in aggregate gross proceeds to us of atleast $18,000,000.  We will have theright to extend the November 3rd due date monthly until April 3,2004 for a fee (and not as a reduction of any amounts due and owing under thepromissory notes) ranging from $50,000 to $100,000 per month.

•                  Within twentydays of the execution of the Letter Agreement we will pay to Xmark, in cash orin shares of our common stock (valued at $1.00 per share, subject to

 

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certainadjustments), $26,248 for failure to timely register the shares of our commonstock issued to Xmark for resale.

•                  Our obligationto register the shares of common stock issued to Xmark for resale under theterms of the Going Forward Agreement was terminated and no further penaltypayments or shares will be due to Xmark as a result of our failure to registerthe shares of our common stock held by Xmark. In lieu of the demand registration rights Xmark previously had, theLetter Agreement provides that Xmark will have piggy-back registration rights.

•                  The definitionof “Event of Default” in the security agreements securing our obligations toXmark was amended.  The provision thatan Event of Default included any default by us in the payment of borrowed moneyindebtedness was eliminated.  Instead,we agreed that it would be an Event of Default if we made repayments ofborrowed money indebtedness.

•                  With regard topayments to certain specified institutions, we agreed we would also make a prorata payment to Xmark.

 

Except as specificallyamended by the Letter Agreement, the terms of the Going Forward Agreement andthe other agreements governing our obligations to Xmark remain in effect,including Xmark’s put right with respect to our common stock that Xmark owns.

 

Xmark’s put right,as set forth in the Going Forward Agreement, requires us to repurchase at $1.00per share up to 750,000 shares of common stock we issued under a prioragreement with Xmark and all additional shares we issue to Xmark under theGoing Forward Agreement.  The put rightis fully exercisable beginning on the earlier of 13 months after the closing ofthe acquisition of the Imagent assets or the date on which we close a financingfor $20,000,000 or more.  Before thattime, Xmark can exercise the put right in quarterly installments beginning 90days after the closing of our acquisition of the Imagent assets.  In connection with these quarterlyinstallments, we can elect to defer repurchasing the shares if we lack adequatecash to satisfy our operating and working capital requirements for thesubsequent 18-month period based on an operating plan approved by ourBoard.  We agreed to use our reasonableefforts to have sufficient cash to meet our operating plan.  If we do not repurchase these shares, Xmarkis entitled to a payment of 1.5% of the value of the shares not repurchased forany 30-day period or pro rata portion thereof during which such failure iscontinuing.

 

We issued82,977 shares of our common stock to Xmark as of August 1, 2003 for interestand various penalties, including the failure to register the shares of ourcommon stock held by Xmark by that date.

 

In connectionwith the closing of the acquisition of the Imagent assets, we issuedapproximately 18% of our outstanding common stock.  Nasdaq rules applicable under these circumstances require us toobtain prior stockholder approval before issuing more than 20% of ourstock.  We intend to hold a meeting ofstockholders, currently planned for the fourth quarter of 2003.  At the stockholder meeting, we will askstockholders to consider approving our issuing additional shares of commonstock that may exceed 20% of the outstanding common stock, which will beutilized in connection with the acquisition. Additional details about these matters will be provided in our proxymaterials to be filed with the Securities and Exchange Commission.

 

We expect thatour quarterly and annual results of operations will fluctuate based on severalfactors including, the timing and amount of expenses involved in marketing andmanufacturing Imagent, conducting our research programs, particularly theconduct of clinical trials, the cost of clinical material used in those trialsand required for compliance with FDA

 

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regulations and the amount, ifany, of fees, milestone payments and research support payments received frompotential strategic partners.

 

We considerour investment in the purchased technology of Imagent to be a significantestimate.  The carrying value of thistechnology is $14,131,597.  Theassumptions underlying the financial forecast have been based on currentlyavailable information including estimates of market size and penetration,pricing, competitive threats and general operating expenses.  These estimates may change and such changesmay impact future estimates of carrying value.

 

We alsoconsider our investment in the joint venture with affiliates of ElanCorporation, plc (“Elan”) to be subject to a significant estimate.  The carrying value of our 80.1% equityinterest in Sentigen, Ltd., the joint venture entity, plus advances toSentigen, Ltd., at December 31, 2002 totaled $8,192,452.  Sentigen’s management reviewed its financialprojections and has concluded that given delays in the development of N1177,resulting from capital constraints, the carrying value of the intangible assetsin the joint venture should be reduced by $2,500,000.  In addition, commencing in April, 2003, as the development plansare being further delayed pending the acquisition of sufficient capital toallocate to the development of N1177, Sentigen is recording an additionalmonthly impairment provision of $81,522. The assumptions underlying thefinancial forecasts were based on currently available information, includingestimates of development costs, pricing, operating expenses and market sizesand penetration.  These estimates maychange and any such changes may impact future estimates of appropriate carryingvalues.

 

**Results ofOperations**

 

Prior to ouracquisition of the Imagent assets in June, 2003, our efforts were focused onthe development and clinical testing of diagnostic products, specificallyPH-50, being developed as a cardiovascular imaging agent, and N1177, beingdeveloped for lymphography, the diagnosis of cancer metastasizing to lymphnodes.  To date, we have not generatedrevenues from the sale of any proposed diagnostic products or otheroperations.  Net loss applicable tocommon shareholders (after preferred dividends) was $4,880,682 and $8,771,103for the six months ended June 30, 2002 and 2003, respectively.  Our cumulative losses since inception,including “in-kind” preferred stock and beneficial conversion dividendstotaling $8,170,199, are approximately $45,162,526.

 

With theacquisition of the Imagent business, we hired approximately 35 employeesrelated to this business.  Theseemployees were formerly associated with Alliance and bring capabilities inmanufacturing, marketing and additional capabilities in research and related administrativeinfrastructure.  We also continue tocontract with third party consultants having expertise in clinical developmentand regulatory matters to supplement our internal capabilities.  In addition, we contract with third partyresearch laboratories, contract research organizations and manufacturers forclinical material supplies and the management of clinical trials, and withacademic and other institutions to conduct specified research projects.

 

Research anddevelopment expenses for the six months ended June 30, 2002 and 2003 were $339,537and $763,445, respectively.  Theseexpenses include personnel costs, fees and other compensation paid to outsideconsultants, and costs associated with conducting preclinical studies andmanufacturing product to be used in these studies.

 

Substantiallyall of the research expenses in the first six months of 2003 were oriented tothe preclinical development of PH-50, a product having greater market potentialthan N1177.

 

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Expenses associated with the developmentof PH-50 are borne completely by us, whereas expenses associated with thedevelopment of N1177 are charged to Sentigen, our joint venture.  Due to capital constraints, we incurredminimal expenses in the joint venture, other than amortization of ourinvestment in the joint venture, during the first half of 2003.

 

Selling,general and administrative expenses from continuing operations were $1,324,637and $6,848,822****for the six monthsended June 30, 2002 and 2003, respectively. These expenses include costs associated with our acquisition of theImagent business, obtaining patent protection for our intellectual property,costs associated with administrative personnel and corporate management, theamortization of options granted to our employees, legal and related expensesand facilities expenses.

 

In the firstsix months of 2003, general and administrative expenses increased by $5,524,185to $6,848,822.  The primary reasons forthe increase were related to our acquisition of the Imagent business fromAlliance including, (i) provisions we have taken against advances we hadmade to Alliance and shares of our common stock we had issued to Xmark pursuantto a standstill agreement with Xmark, (ii) costs of conducting duediligence and other activities related to the acquisition of the Imagentbusiness and (iii) costs incurred by us to operate the Imagent businessfollowing its acquisition.  As part ofthe November, 2002 restructuring and financing, stock options were granted toour remaining employees with an exercise price equal to the price at whichcommon stock was sold to the new institutional investors.  In addition, as part of the acquisition ofthe Imagent business and the related hiring of employees from Alliance, wegranted these new employees an aggregate of 1,865,750 stock options with anexercise price of $1.25 per share.  Asthe exercise prices were below the closing price of our common stock at thedates of grant, we recorded an expense of approximately $314,462 in the firstsix months of 2003 reflecting the differentials between those respective twoprices.

 

In the fourthquarter of 1999, we entered into a joint venture with affiliates of Elan forthe development of N1177, a potential product to identify and diagnose lymphnodes for the presence of cancer.  Weown 80.1% of the joint venture entity, Sentigen, Ltd., with the balanceowned by Elan.  During the first sixmonths of 2002 and 2003, we recorded losses from the joint venture of $940,445and $587,691, respectively.  In 2002,these losses resulted from our share of development expenses incurred in thejoint venture by the two participants, including personnel expenses and costsassociated with developing a manufacturing process, and the purchase of drugsubstance and other materials.  In 2003,these losses were substantially the result of the amortization of the licensepurchased from Elan and a charge for further impairment of the license valueas, due to capital constraints, limited development work was being conducted.

 

Investmentincome for the six months ended June 30, 2002 and 2003 was $1,502 and $6,813,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 that capital.  We invest funds in the investment portfolioin U.S. government obligations.  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.

 

Sinceinception, we had been developing products for both therapeutic and medicalimaging applications.  As one of aseries of transactions on November 12, 2002, we split off our therapeuticbusiness to certain founding shareholders in exchange for all of their 52.9%ownership interest in Photogen. Accordingly, the expenses associated with that business have beenreclassified as discontinued operations. Our therapeutic business had been focused on the

 

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development of certainphotodynamic therapy products, in particular a compound we called PH-10.  In the first half of 2002, we incurredlosses related to these operations of $1,047,106.

 

For the six monthsended June 30, 2002 and 2003 we had no purchases of equipment and leaseholdimprovements other than the acquisition of theassets related to the Imagent business, including the lease of amanufacturing facility located in San Diego. During the next twelve months we expect capital expenditures forequipment to be less than $500,000.

 

**Liquidity;Capital Resources**

 

Withoutadditional financing we may not have sufficient cash resources for our currentcommitments beyond the third quarter of 2003. We are currently funding our operations through borrowings, evidenced bysecured promissory notes, payable upon demand, from our principal institutionalinvestor.  We will need substantialadditional financing for our research, clinical testing, product developmentand marketing programs.  We cannotaccurately estimate the amount of additional financing required; however, theamount could be an additional****$30 millionor more over the next several years.  Inparticular, we are currently seeking to raise capital in one or moretransactions to fund our immediate and longer term capital needs through theprivate placement of securities to accredited investors. See “Risk Factors—Wemust raise additional financing in the future and our inability to do so willprevent us from implementing our business plan,” above.

 

At June 30,2003, we had cash and cash equivalents totaling approximately $1,053,640**.**

 

On June 18, 2003, we closedthe acquisition of the Imagent business from Alliance.  At the closing, we paid approximately $1,300,000in cash and delivered 2,198,137 shares of our common stock.  At the direction of Alliance, we deliveredthe cash and stock to creditors, employees and vendors of Alliance.  In addition to the bridge financing weprovided to Alliance before the closing, our purchase of a $1,250,000 interestin Alliance’s obligations to Xmark and our assumption of specified Allianceoperating liabilities related to Imagent, we are obligated to pay additionalamounts to Alliance secured and unsecured creditors at various times between 90and 365 days after the closing and subject to reaching satisfactory agreementswith certain Alliance secured and unsecured creditors.  We must pay an aggregate amount of up toapproximately $3,000,000 to creditors other than Xmark, pay certain royaltiesbased upon sales of Imagent, subject to certain offsets, and (subject tostockholder approval) deliver up to an aggregate of approximately 1,985,522shares of our common stock.

 

We alsoentered into a series of agreements with Xmark.  During the first six months, pursuant to an agreement with Xmark,we issued a total of 761,250 shares (including 11,250 shares as a penalty forthe failure to register those shares by April, 2003) of our common stock toXmark and Xmark agreed to not exercise any rights against Alliance as acreditor.  On May 2, 2003, we enteredinto a Going Forward Agreement pursuant to which Xmark agreed to extend theperiod during which Xmark had refrained from exercising its rights as acreditor against Alliance to permit us to complete the acquisition.

 

At the closingof the Imagent acquisition, we issued Xmark an additional 1,056,000 shares thatrepresented payment of interest that was due to Xmark by Alliance through theclosing date of the acquisition.  Thevalue of these additional 1,056,000 shares has been treated as part of thepurchase price of the Imagent business.

 

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Also at theclosing of our acquisition of the Imagent assets, pursuant to the Going ForwardAgreement, we delivered to Xmark our promissory notes in the total principalamount of $2,500,000.  These notes arepayable in two equal installments on August 5, 2003 and November 3, 2003or (if sooner) at the time we complete a financing resulting in at least$18,000,000 of gross proceeds to us and bear interest at 3% over the primerate.  The interest on the notes ispayable in shares of our common stock.

 

Three of ourexisting institutional investors have provided capital to us in exchange forour convertible promissory notes in an aggregate principal amount of up to$4,660,000 (at June 30, 2003 and $5,160,000 as at July 31, 2003).  The notes bear interest at a rate of 7.25%per annum, compounded monthly.  Unlessconverted into common stock, amounts due under the notes were payable on theearlier of August 5, 2003 or the date that we commit various defaults orbecome subject to bankruptcy or similar proceedings.  We defaulted on the payment of these notes on August 5, 2003;however, two of these investors loaned us an additional $350,000 as evidencedby promissory notes dated August 12, 2003 and $1,484,000 as evidenced bypromissory notes dated August 19, 2003 which bear interest at the rate of 7.25%per annum, compounded monthly.

 

In the secondquarter, we recognized the issuance of 124,627 shares of our common stock thatpreviously had been subject to rescission. We also issued an aggregate of 67,778 shares of our common stockpursuant to several factors including cash, compensation for service, penaltiesfor failure to timely register certain shares and the cashless exercise ofstock options.

 

The entireprincipal and interest outstanding under our notes to these investorsautomatically converts into shares of our common stock on the same terms and atthe same price as the shares issued in a financing for additional long-termcapital.  In no event, however, maythese be converted into shares of our common stock prior to stockholderapproval if and to the extent that conversion would violate Nasdaq rules applicableto us.  To secure the obligations underour notes to these investors, we granted them a security interest in all of ourtangible and intangible assets, including intellectual property.  This lien covers our Imagent-related assets,but as to these assets the investors’ lien is subordinate to the securityinterest held by Xmark.

 

We have been financing ouroperations with the proceeds of the financing we closed in November andDecember 2002 and January 2003 and, currently, through borrowings under our promissorynotes from certain of our existing institutional investors.  Our abilityto conduct operations is entirely dependent on our ability to obtain additionalcapital from these and potentially other investors.  If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders may result.  However, there can be no assurance that suchcapital 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,” below.

 

We have used, and expect overthe next 12 months to use the capital available from sales of common stock anddebt, for general corporate purposes, including activities related to themarketing and manufacture of Imagent, preparing for and conducting clinicaltrials, purchase and preparation of clinical material, conduct of preclinicalstudies, administrative expenses to support our research and development activities,capital expenditures and to meet working capital needs.

 

We arecurrently seeking to raise capital in one or more transactions to fund ourimmediate and longer term capital needs through the private placement ofsecurities to accredited investors.  In addition, we expect to evaluate from time to time theacquisition or license of

 

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businesses, technologies or products. The purchase of any such licenses or technologies would be funded by a portion ofany net proceeds of future offerings or the issuance of debt or equitysecurities specifically for that purpose.  We expect our use of capital toincrease as we build the commercial presence of Imagent and conduct furtherclinical trials of our products in development.

 

At the time of theacquisition of the Imagent business, we entered into a lease agreement with aunit of Baxter International for certain equipment used for the manufacture ofImagent.  Our annual cost for this leaseis approximately $126,000.  Our onlyother long-term commitment that is not recorded on our financial statements isfor our office space in Pennsylvania.  Annual rent for this lease, whichexpires in 2004, is approximately $190,765.

 

**Plan ofOperation**

 

Managementbelieves it lacks sufficient working capital to fund operations****for the entire fiscal year endingDecember 31, 2003.  Therefore,substantial additional capital resources will be required to fund the ongoingoperations related to our marketing and manufacturing of Imagent and ourresearch and business development activities. Our financial condition raises substantial doubt about our ability tocontinue as a going concern.  We believethere are a number of potential alternatives available to meet the continuingcapital requirements such as public or private financings or collaborativeagreements.  We are taking continuingactions to reduce our ongoing expenses. If adequate funds are not available, we will be required tosignificantly curtail our operating plans and may have to sell or license outsignificant portions of our technology or potential products.  The 2002 and 2003 financial statements,including those contained in this Form 10-QSB, 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 from theoutcome of this uncertainty.

 

During thenext twelve months, depending on the availability of sufficient capital, wewill focus our efforts primarily on the commercialization of Imagent and thedevelopment of PH-50 and N1177. Specifically, we will focus our operating efforts on the sales andmarketing of Imagent.  If additionalcapital becomes available, we also expect to conduct preclinical and humanclinical studies of our products in development.  We expect to continue to incur increasing losses for at least thenext three years as we intensify research and development, preclinical andclinical testing and associated regulatory approval activities and engage in orprovide for the manufacture and/or sale of any products that we may develop.

 

Greatercapital resources would enable us to quicken and expand our marketing andresearch and development activities, and our failure to raise additional capitalwill (absent a suitable collaborative agreement providing for a third party totake over these functions) significantly impair or curtail our ability toconduct further activities.  In anyevent, complete development and commercialization of our technology willrequire substantial additional funds. See  “Risk Factors—We must raiseadditional financing in the future and our inability to do so will prevent usfrom implementing our business plan,” below. We are seeking to raise capital through the sale of our common stock orother securities in a private placement to fund our immediate and longer termcapital needs.

 

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**ITEM3.  CONTROLS AND PROCEDURES**

 

We maintain aset of disclosure controls and procedures and internal controls designed toensure that information required to be disclosed in filings made pursuant tothe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms. Ourprincipal executive and financial officers have evaluated our disclosurecontrols and procedures within 90 days prior to the filing of this QuarterlyReport on Form 10-QSB and have determined that such disclosure controls andprocedures can be improved, specifically as to the timeliness ofreporting.  As a result, we areconsolidating our financial accounting and reporting activities at our SanDiego facility.

 

Our recentacquisition of the Imagent business from Alliance presents new challenges toour ability to maintain internal controls and procedures.  We have completed the certification of theCompany’s internal controls and procedures in this Form 10-Q on the basis thatthe financial information relating to the Imagent business was provided byAlliance’s financing organization, part of the other financial information wascompiled by our employees who are experienced from their previous work forAlliance in performing such tasks for public companies, and other informationwas prepared in accordance with our normal disclosure procedures andcontrols.  As we continue to integratethe Imagent business into the Company and consolidate the financial function ofthis business with our previous operations, we intend to reevaluate theeffectiveness of our internal controls so that they are appropriate to our newbusiness.

 

# **PART II.  OTHER INFORMATION**

 

## **ITEM 1.  LEGAL PROCEEDINGS**

 

On June 18, 2003, we filed a complaint against Amersham Health, Inc.and two other Amersham affiliates alleging that certain Amersham productsinfringe on claims in our patents covering Imagent.  The case is captioned as PhotogenTechnologies, Inc. and Alliance Pharmaceutical Corp. v. Amersham Health Inc.et. al., Civil Action No. 03CV2853(SRC), in the United States District Courtfor the District of New Jersey.  Ourcomplaint alleges that principally through their Optison® product, AmershamHealth Inc. and related Amersham entities infringe on seven patents owned byus.  We are also seeking a declarationthat the claims of fourteen Amersham patents are invalid and are not infringedby our Imagent product.  Alliance, theparty from whom we recently acquired the Imagent product, is also a plaintiffin the suit.  We are seeking damages, aninjunction against Amersham, a declaratory judgment and other relief.

 

Amersham filedan answer dated July 18, 2003 denying the material allegations of our claimsand asserting certain affirmative defenses and counterclaims.  Amersham’s counterclaims against us includeclaims of patent infringement, breach of contract, breach of good faith andfair dealing, and tortuous interference with contract.  We are studying Amersham’s answer, defensesand counterclaims in consultation with our counsel.

 

On July 29,2003, the European Patent Office revoked Amersham’s European Patent (EP) No.620744 with claims directed to contrast agents.  We had brought the opposition proceeding against the EP ‘744patent in the European Patent Office. The EP ‘744 is a counterpart to the patents that are the subject of oursuit against Amersham in the United States described above.

 

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## **ITEM 2.  CHANGES IN SECURITIES**

 

During the sixmonth period ending June 30, 2003, we have issued securities in thetransactions described below without registration under the SecuritiesAct.  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 underthe Securities Act relating to sales not involving any public offering, and/orRule 701 under the Securities Act relating to transactions occurring undercompensatory benefit plans.  We reliedon representations and warranties from the purchasers of the securities thatthey were acquiring the securities for their own account and not with a viewto, or for sale in connection with, any distribution of the securities inviolation of the Securities Act.

 

•                  Pursuant to the terms of the Standstill andMake Whole Agreement dated as of December 30, 2002, in each of January andFebruary, 2003, we issued 250,000 shares (an aggregate of 500,000 shares) toXmark in exchange for Xmark’s agreement to forbear from exercising its remediesas a creditor against Alliance.

 

•                  Pursuant to the terms of a ConsultingAgreement dated as of January 30, 2003, we issued 75,000 shares of ourcommon stock to a consultant, subject to certain forfeiture provisions, inexchange for consulting services.

 

•                  During January and February, 2003, we awarded40,000 options to acquire common stock pursuant to our 2000 Long Term IncentiveCompensation Plan (the “2000 Plan”).

 

•                  On June 1, 2003, we issued an aggregate of11,250 shares to Xmark as a penalty for failing to register for resale theshares of common stock issued to Xmark.

 

•                  In May and June, 2003, we issued revolvingconvertible senior secured promissory notes to certain of our investors in anaggregate principal amount of $4,160,000 bearing interest at 7.25% annually,compounded monthly.

 

•                  In connection with the acquisition of theImagent assets, we issued an aggregate of 2,198,137 shares of our common stockto various creditors of Alliance on June 18, 2003.

 

•                  In June, 2003, we awarded options to acquire1,865,750 shares of our common stock at an exercise price of $1.25 per share tonew employees under our 2000 Plan.

 

## **ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

Under theterms of that certain Going Forward Agreement we entered into with Xmark datedas of May 2, 2003, we had an obligation to pay Xmark $1,250,000 on August 5,2003 and an additional $1,250,000 on November 3, 2003 or (if sooner) at thetime we complete a financing resulting in at least $18,000,000 of grossproceeds to us.  On August 5, 2003, wewere unable to make our $1,250,000 payment to Xmark.  On August 6, 2003, we received a default notice from Xmarkregarding our failure to make the $1,250,000 payment.  On August 18, 2003, we entered into a Letter Agreement with Xmarkpursuant to which we agreed to make an immediate payment of $1,250,000 andXmark agreed to rescind the default notice. The other key terms of the Letter Agreement are as follows:

 

•                  We remainobligated to make a second principal payment of $1,250,000 on the earlier tooccur of (i) November 3, 2003 or (ii) the consummation of one or more institutionalfinancings resulting in aggregate gross proceeds to us of at least

 

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$18,000,000.  We will have the right to extend theNovember 3rd due date monthly until April 3, 2004 for a fee (and notas a reduction of any amounts due and owing under the promissory notes) rangingfrom $50,000 to $100,000 per month.

•                  Within twentydays of the execution of the Agreement we will pay to Xmark, in cash or inshares of our common stock (valued at $1.00 per share, subject to certainadjustments), $26,248 for failure to timely register the shares of our commonstock issued to Xmark for resale.

•                  Our obligationto register the shares of common stock issued to Xmark for resale under theterms of the Going Forward Agreement was terminated and no further penaltypayments or shares will be due to Xmark as a result of our failure to registerthe shares of our common stock held by Xmark. In lieu of the demand registration rights Xmark previously had, theLetter Agreement provides that Xmark will have piggy-back registration rights.

•                  The definitionof “Event of Default” in the security agreements securing our obligations toXmark was amended.  The provision thatan Event of Default included any default by us in the payment of borrowed moneyindebtedness was eliminated.  Instead,we agreed that it would be an Event of Default if we made repayments ofborrowed money indebtedness; and with regard to certain specified institutions,we agreed that we would also make a pro rata payment to Xmark.

•                  With regard topayments to certain specified institutions, we agreed we would also make a prorata payment to Xmark.

 

Except asspecifically amended by the Agreement, the terms of the Going Forward Agreementand the other agreements governing our obligations to Xmark remain in effect,including, but not limited to, Xmark’s put right with respect to our commonstock that Xmark owns.

 

We were alsoobligated to repay our promissory notes in favor of three of our investors foran aggregate principal amount of $5,160,000 as of August 5, 2003.  We were unable to meet our obligation underthe terms of these notes at that time; however, two of these noteholders loanedus an additional principal amount of $1,834,000, as evidenced by securedpromissory notes bearing interest at 7.25% per annum, compounded monthly andare payable upon demand.  Ourobligations to these noteholders are secured by a second priority lien in favorof the noteholders on our Imagent-related assets and a first priority lien infavor of the noteholders on all of our other assets.

 

## **ITEM 5.  OTHER INFORMATION**

 

**RISKFACTORS**

 

This Form10-QSB contains (and press releases and other public statements we may issuefrom time to time may contain) a number of forward-looking statements regardingour business and operations.  Statementsin this document that are not historical facts are forward-lookingstatements.  Such forward-lookingstatements include those relating to:

 

•                  our currentbusiness and product development plans,

 

•                  our futurebusiness and product development plans,

 

•                  the timing andresults of regulatory approval for proposed products, and

 

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•                  projectedcapital 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-QSB, including under “RiskFactors.” You should read these cautionary statements as being applicable toall related forward-looking statements wherever they appear in this Form10-QSB, in the materials referred to in this Form 10-QSB, in the materialsincorporated by reference into this Form 10-QSB, or in our press releases orother public statements.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this Form 10-QSB or other documents incorporated by referencemight not occur.  No forward-lookingstatement is a guarantee of future performance and you should not place unduereliance on any forward-looking statement.

 

The followingare the key risk factors that may affect our future results:

 

**We mustraise additional financing in the future and our inability to do so willprevent us from continuing as a going concern and implementing our businessdevelopment plan.**

 

During 2002,we sold $12,028,902 of our common stock to certain institutional investors anda group of individual accredited investors at a price per share of $1.08($2,500,000 of which was from the conversion of our outstanding note payable toTannebaum, LLC).  Our cash andsecurities on hand at June 30, 2003, was approximately $1,053,640.  We are currently funding our operationsthrough the issuance of secured promissory notes to one or more of ourprincipal institutional investors.  Wewill need substantial additional financing for our marketing and productdevelopment programs.

 

We cannotaccurately estimate the amount of additional financing required to develop ourproducts.  In particular, we arecurrently seeking capital in one or more transactions to fund our immediate andlonger term capital needs through a private placement to accreditedinvestors.  Additional funds may not beavailable on acceptable terms, if at all, and existing stockholders may bediluted as a result of those offerings. The pricing of our common stock, or other securities convertible intocommon stock, in any such transaction may also result in an increase in thenumber of shares of common stock issuable upon exercise of warrants inaccordance with the anti-dilution provisions in the instruments governing thosesecurities.

 

**Prior toour acquisition of the Imagent assets, we were a development stage company, wehave conducted only limited studies on our products in development and we donot have any revenues from sales.**

 

Our companyand our technologies, other than our recently acquired Imagent product, are inearly stages of development. We began our business as a biopharmaceuticalcompany in 1997.  To date, we have notgenerated revenues from sales or operations. We expect to generate revenue from sales of our newly acquired product,Imagent, but there can be no assurance that we will be able to generate enoughrevenue from such sales to be profitable for at least several years, if at all.

 

The drugproducts we currently contemplate developing will require costly and time-

 

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consuming research anddevelopment, preclinical and clinical testing and regulatory approval beforethey can be commercially sold.  We maynot be able to develop our technology into marketable products or develop ourtechnology 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 ahistory of losses and we may not achieve or maintain profitability in thefuture or pay cash dividends.**

 

We haveincurred losses since the beginning of our operations.  As of June 30, 2003, we have incurredcumulative net losses (before dividends on preferred stock) of approximately$36,992,327.  We expect our losses toincrease in the future as our financial resources are used for research anddevelopment, 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.

 

**The marketfor imaging products is extremely competitive, and many of our competitors havegreater resources and have products that are in more advanced stages ofdevelopment than we do, which may give them a competitive advantage over us.**

 

In addition tothe Imagent product*,* there arecurrently two FDA approved ultrasound contrast agents being marketed in theU.S. for certain cardiology applications by Amersham Health, Inc. and Bristol-MyersSquibb.  In addition, BraccoInternational has filed a New Drug Application with the FDA seeking approval tomarket its product.  Three othercompanies (POINT Biomedical, Acusphere and Amersham Health) are in advancedclinical trials for the use of ultrasound contrast agents for assessing certainorgans and vascular structures.  Weexpect that competition in the ultrasound contrast imaging field will be basedprimarily on each product’s safety profile, efficacy, stability, ease ofadministration, breadth of approved indications, and physician, healthcarepayer and patient acceptance.  We are atthe very early stages of launching the Imagent product, and we cannot predictwhether it will compete successfully with these other products.

 

**We filed asuit against Amersham for patent infringement which, if resolved unfavorably,could impede our ability to utilize our patents for Imagent.**

 

We filed acomplaint against Amersham Health, Inc. and two other Amersham affiliatesalleging that certain Amersham products infringe on claims in our patentscovering Imagent.  We also seek adeclaration that our patents do not infringe on Amersham’s in this area, andother relief.  Alliance joined us as aplaintiff in this suit.  Amersham filedan answer denying the material allegations of our claims and asserting certaincounterclaims.  If the suit is resolvedunfavorably to us, we may have difficulty utilizing the protections of ourpatents for Imagent and there may be other complications that may make itdifficult to implement our commercialization strategy for Imagent.

 

**Our commonstock could be delisted from the NASDAQ SmallCap Market, which would maketrading in our common stock more difficult.**

 

SinceNovember, 1999, our common stock has been quoted in the Nasdaq SmallCapMarket.  We received a letter datedAugust 26, 2003 from Nasdaq notifying us that they had not

 

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received our Form 10-Q for theperiod ended June 30, 2003 as required by Marketplace Rule 4310(c)(14) andthat our securities will be delisted from The Nasdaq Stock Market on September4, 2003 unless we request a hearing in accordance with the Marketplace Rule4800 Series.  We have requested such ahearing, scheduled for September 18, 2003, and any delisting action will bestayed until then.  Our shares could bedelisted if Nasdaq does not reverse its position or if we otherwise fail tomeet the listing requirements of the Nasdaq SmallCap Market, which would forceus to list our shares on the OTC Bulletin Board or some other quotation medium,such as pink sheets, depending upon our ability to meet the specific listingrequirements of those quotation systems. As a result, an investor might find it more difficult to dispose of, orto obtain accurate price quotations for, our shares.  Delisting might also reduce the visibility, liquidity and priceof our common stock.

 

If our commonstock were delisted from the Nasdaq SmallCap Market and were not traded onanother national 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.

 

**Ourproposed products are subject to extensive testing and government approval, andwe may not obtain or maintain the approvals necessary to sell our proposedproducts.**

 

Other thanImagent, none of our proposed imaging products has received the FDA’s approval.An extensive series of clinical trials and other associated requirements mustbe completed before our proposed products can be approved and sold in the U.S.or other countries.  Requirements forFDA approval of a product include preclinical and clinical testing foreffective use and safety in animals and humans, which can be extremelycostly.  The time frame necessary toperform these tasks for any individual product is long and uncertain, and wemay encounter problems or delays that we cannot predict at this time.  Even if testing is successful, our proposedproducts may not demonstrate sufficient effectiveness or safety to warrant approvalby the FDA or other regulatory authorities. Any regulatory approval may not cover the clinical symptoms orindications that we may seek.  We mustalso obtain regulatory approvals comparable to those required in the U.S. tomarket our products in other countries.

 

Our proposedtechnologies and products generally must complete preclinical tests in animalsand three phases of tests (also called clinical trials) in humans before we canmarket them for use.  Use of ourtechnology has been limited primarily to laboratory experiments and animaltesting, only N1177 has completed Phase 1 human clinical trials.  We have not yet conducted substantivestudies on the effectiveness of our compounds on human subjects.

 

Our resultsfrom early clinical trials may not predict results that we will obtain in largescale clinical trials, as a number of companies have suffered significantsetbacks in advanced clinical trials, even after promising results in earlytrials.

 

We may notconduct additional Phase 2 or Phase 3 clinical trials for our products and suchtrials, if begun, may not demonstrate any efficacy or may not be completedsuccessfully in a timely manner, if at all.

 

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The rate ofcompletion of our clinical trials depends upon, among other things, the rate ofpatient enrollment.  Patient enrollmentis a function of many factors, including the size of the patient population fora particular indication, the nature of the clinical protocol under which ourproducts will be studied, the proximity of the patient to a clinical site andthe eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs,regulatory filing delays, or both.

 

Furthermore,we, the FDA or other regulatory authorities may alter, suspend or terminateclinical trials at any time.  If we donot successfully complete clinical trials and obtain regulatory approval for aproduct, we will not be able to market that product.

 

**Anyproducts approved by the FDA are subject to postmarket requirements of the FDA.**

 

Our FDAapproved product, Imagent, is subject to numerous postmarket requirements byregulatory authorities.  We will besubject to inspection and marketing surveillance by the FDA to determine ourcompliance with regulatory requirements with respect to any approvedproducts.  If the FDA finds that we havefailed to comply, it can institute a wide variety of enforcement actions,ranging from a public warning letter to more severe sanctions such as:

 

•                  fines, injunctions and civil penalties;

 

•                  recall or seizure of our products;

 

•                  operating restrictions, partial suspension ortotal shutdown of production; and

 

•                  criminal prosecution.

 

Any enforcement action by the FDA may alsoaffect our ability to commercially distribute our products in the U.S.

 

**Productliability claims could increase our costs and adversely affect our results ofoperations.**

 

The clinicaltesting, manufacturing and marketing of our product candidates may expose us toproduct liability claims, and we may experience material product liabilitylosses in the future.  We maintaincertain levels of product liability insurance for the use of our productcandidates in clinical research, but our coverage may not continue to beavailable on terms acceptable to us or adequate for liabilities we actuallyincur.  A successful claim broughtagainst us in excess of available insurance coverage, or any claim or productrecall that results in significant adverse publicity against us, may have amaterial adverse effect on our business and results of operations.

 

**If we donot obtain and maintain patent or other protection of our core technologies, wemay have difficulty commercializing products using these technologies.**

 

Our successdepends in part on our ability to obtain, assert and defend our patents,protect trade secrets and operate without infringing the intellectual propertyof others.  Among the important risks inthis area are that:

 

•                  Our patent applications may not result inissued patents.  Moreover, any issuedpatents may not provide us with adequate protection of our intellectualproperty

 

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or competitive advantages,and the law on the scope of patent coverage is continually changing.

 

•                  Various countries limit the subject matterthat can be patented and limit the ability of a patent owner to enforce patentsin the medical field.  This may limitour ability to obtain or utilize those patents internationally.

 

•                  Existing or future patents or patentapplications (and the products or methods they cover) of our competitors (orothers, such as research institutions or universities) may interfere,invalidate, conflict with or infringe our patents or patent applications.  Similarly, the use of the methods or technologiescontained in our patents, patent applications and other intellectual propertymay conflict with or infringe the rights of others.

 

•                  If an advance is made that qualifies as ajoint invention, the joint inventor or his or her employer may have rights inthe invention.

 

We will beable to protect our proprietary rights from unauthorized use by third partiesonly to the extent that these rights are covered by valid and enforceablepatents or effectively maintained as trade secrets.  We own two patents in the U.S., and certain other patents inforeign countries including Australia, Canada, Japan and Germany that relate tomethods for performing lymphography.  Wealso acquired an extensive patent portfolio related to Imagent as part of theacquisition of the Imagent business.

 

We have filed patentapplications in the U.S. and under the Patent Cooperation Treaty covering anumber of foreign countries.  Thesepatent applications relate to the use of nanoparticulates, including PH-50, ascardiovascular imaging agents and to deliver pharmacologically activesubstances for treatment of various diseases. We are also the exclusive licensee of a group of patented proprietarycompounds known as “nanoparticulates,” including N1177 and PH-50 from NycomedImaging AS.  We are the exclusivelicensee of U.S. and foreign patent applications from Massachusetts GeneralHospital which relate to diagnostic imaging agents and methods for using thediagnostic imaging agents for medical location, treatment and diagnosis oftumors and other diseased tissues.

 

Additionalpatents may never be issued on any of the patent applications we own or licensefrom third parties.  Furthermore, evenif such patents 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 patentposition of biopharmaceutical companies involves complex legal and factualquestions and therefore we cannot assure the enforceability of thesepatents.  Litigation over patents andother intellectual property rights occurs frequently in our industry and thereis a risk that we may not prevail in disputes over the ownership ofintellectual property.  Further, aninterference proceeding with the Patent and Trademark Office may be institutedover the rights to certain inventions and there is a risk that we may notprevail in such an interference proceeding. Those disputes can be expensive and time consuming, even if we prevail.Intellectual property disputes are often settled through licensing arrangementsthat could be costly to us.  In anyintellectual property litigation, it is possible that licenses necessary tosettle the dispute would not

 

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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 extentwe use intellectual property through licenses or sub-licenses (as is the casefor some of our lymphography technology), our rights are subject to us performingthe terms 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.

 

Whereintellectual property results from a research project supported by governmentfunding, the government has limited rights to use the intellectual propertywithout paying us a royalty.

 

**We arehighly dependent upon a small number of employees and consultants who providemanagement expertise, and it may be difficult to implement our businessoperations and development plans without this expertise.**

 

Theseindividuals have entered into employment or consulting agreements,confidentiality and/or non-competition agreements with us.  We could suffer competitive disadvantage,loss of intellectual property or other material adverse effects on our businessand results of operations if any employee or consultant violates or terminatesthese agreements or terminates his or her association with us.  Our growth and future success also dependsupon the continued involvement and contribution from these individuals, as wellas our ability to attract and retain highly qualified personnel now and in thefuture.

 

We currentlyemploy two senior executive officers, including Dr. Williams (our ChiefExecutive Officer) and Mr. Boveroux (our Chief Financial Officer).  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.

** **

**Theraw materials necessary for the manufacture of PH-50 and N1177 are supplied byone supplier.  The raw materials forImagent are subject to a long-term supply contract with one supplier.  An interruption in availability of thosematerials may impair our ability to test and market those products.**

 

We haveassumed the rights and obligations of Alliance under the terms of the long-termsupply agreement that Alliance has entered for the principal raw material forImagent*. *Although some raw materials for the Imagent product arecurrently qualified from only one source and we have some inventory, we willattempt to acquire additional inventory of these materials and to negotiatelong-term supply arrangements.  Rawmaterials used in Imagent**cannotbe changed without equivalency testing of any new material by us and approvalof the FDA.

 

We currentlyrely on Nanosystems, a division of Elan, as the sole supplier of the rawnanoparticulates used to manufacture PH-50 and N1177.  There can be no assurance that

 

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Nanosystems will continue tosupply us with the raw materials that we need in a timely manner on conditionsthat are acceptable to us.

 

**Wemay encounter difficulties starting or expanding our manufacturing operations.**

 

We are leasinga single manufacturing facility located in San Diego, California.  This facility is subject to a variety ofquality systems regulations, international quality standards and otherregulatory requirements, including requirements for good manufacturingpractices, or current good manufacturing procedures.  We may encounter difficulties expanding our manufacturingoperations in compliance with these regulations and standards, which also couldresult in a delay or termination of manufacturing or an inability to meetproduct demand.

 

We will facerisks inherent in operating a single facility for the manufacture of Imagent*.* At this time, we do not have alternative production plans in place oralternative facilities available should the San Diego manufacturing facilitycease to function.  These risks includeunforeseen plant shutdowns due to personnel, equipment or other factors, andthe resulting inability to meet customer orders on a timely basis.

** **

**We have torely on third parties and collaborative relationships for the manufacture,clinical testing and marketing of Imagent and our proposed products, and it maybe difficult to implement our business development plans without thesecollaborations.**

 

We currentlyhave an agreement for sales and marketing of Imagent by Cardinal Health, Inc.which is under reevaluation to be more consistent with our current needs andresources.  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 obtain and maintain collaborativerelationships with third parties for research and development, preclinical andclinical testing, marketing and distribution of our proposed products.

 

We arecurrently involved in a joint venture with affiliates of Elan, calledSentigen, Ltd., to develop and commercialize materials in the field oflymphography.  Collaborativerelationships may limit or restrict our operations or may not result in anadequate supply of necessary resources. Our collaborative partner could also pursue alternative technologies asa means of developing or marketing products for the diseases targeted by ourcollaborative program.  If a third partywe are collaborating with fails to perform under its agreement or fails to meetregulatory standards, this could delay or prematurely terminate clinicaltesting of our proposed products.

** **

**Ourproducts may not be fully accepted by physicians, laboratories and healthinsurance providers, which would reduce our revenue and limit our ability toraise capital.**

 

Our growth andsuccess will depend upon market acceptance by physicians, laboratories andhealth insurance 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 asMRI’s) to image internal vasculature and organs and therefor, our products maynot be utilized.

 

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**Changes inhealth care reimbursement policies or legislation may make it difficult forpatients to use or receive reimbursement for using our products, which couldreduce our revenues.**

 

Our successwill depend, in part, on the extent to which health insurers, managed careentities and similar organizations provide coverage or reimbursement for usingthe medical procedures and devices we plan to develop.  These third-party payers are increasinglychallenging the price of medical procedures and services and establishingguidelines that may limit physicians’ selections of innovative products andprocedures.  We also cannot predict theeffect of any current or future legislation or regulations relating tothird-party coverage or reimbursement on our business.  We may not be able to achieve marketacceptance of our proposed products or maintain price levels sufficient toachieve or maintain any profits on our proposed products if adequatereimbursement coverage is not available. Failure by physicians, hospitals and other users of our products toobtain sufficient reimbursement from third-party payers for the procedures inwhich our products would be used or adverse changes in governmental and privatethird-party payers’ policies toward reimbursement for such procedures wouldhave a material adverse effect on our business.

** **

**A smallgroup of stockholders control Photogen, which may make it difficult forstockholders who are not in that group to influence management.**

 

As of June 30,2003, a small group of stockholders control approximately 64.7% of ouroutstanding common stock.  Several ofour principal stockholders are also parties to a Voting, Drag-Along and Rightof First Refusal Agreement (the “Voting Agreement”) concerning the election ofcertain designees to the Board of Directors. The Voting Agreement requires these stockholders to vote their sharesfor the election of certain individuals nominated by parties to the VotingAgreement.  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 thepublic securities markets. These factors may affect the market and the marketprice for our common stock in ways that do not reflect the intrinsic value ofour common stock.

** **

**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.**

 

During theperiod from January 1, 2003 through June 30, 2003 the closing trade priceof our common stock ranged from $2.73 to $0.90per share.  Daily tradingvolume ranged from zero shares to approximately 29,950 shares during thatperiod.

 

The marketprices for securities of biopharmaceutical companies in general have beenhighly volatile and may continue to be highly volatile in the future.  The following factors may have an impact onthe price of our common stock:

 

•                  Announcements by us or others regardingscientific discoveries, technological innovations, commercial products, patentsor proprietary rights;

 

•                  Announcements by us concerning the licensingor other transactions of our products or technologies;

 

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•                  Private sale of a significant block of ourcommon stock at a price below the then current market price of our common stockand the subsequent registration and sale of those shares;

 

•                  The progress of preclinical or clinicaltesting;

 

•                  Developments or outcome of litigationconcerning proprietary rights, including patents;

 

•                  Changes in government regulation;

 

•                  Public concern about the safety of devices ordrugs;

 

•                  Limited coverage by securities analysts;

 

•                  The occurrence of any of the risk factorsdescribed in this section;

 

•                  Sales of large blocks of stock by anindividual or institution;

 

•                  Changes in our financial performance fromperiod to period, securities analysts’ reports, and general market conditions;and

 

•                  Economic and other external factors or adisaster or crisis.

 

**Ifstockholders holding substantial amounts of our common stock should sell theirstock in the public market, the price of our stock could fall and it may bemore costly for us to raise capital.**

 

We have reserved shares ofcommon stock for future issuance upon grants of options, or exercise orconversion of outstanding options and warrants and convertible securities.  In addition, some of our shares are eligiblefor sale in the public market free of restriction under Rule 144 of theSecurities Act.  Others shares of ourcommon stock are subject to agreements requiring us to permit the holders ofthe shares, under certain circumstances, to join in a public offering of ourstock or to demand that we register their shares for resale.

 

If our options and warrantsare all issued and exercised, investors may experience significant dilution inthe voting power of their common stock. The sale of these shares could place downward pressure on the overallmarket price of our common stock.

 

**ITEM 6.****                                                     EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits.

 

The followingis a list of exhibits filed as part of this Form 10-QSB.  Exhibits that were previously filed areincorporated by reference.  For exhibitsincorporated by reference, the location of the exhibit in the previous filingis indicated in parenthesis.

 

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| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                             |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                        |
| 2.1             |   | Asset Purchase Agreement dated as of June  10, 2003 by and between Photogen Technologies, Inc. and Alliance  Pharmaceutical Corp. (Filed as Exhibit 2.1 to the company’s Form 8-K dated  June 20, 2003 and incorporated herein by reference.)                                                          |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 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.)                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.1            |   | Going Forward Agreement dated as of May 2,  2003 by and among Photogen Technologies, Inc., Xmark Fund, L.P., and Xmark  Fund, Ltd. (Filed as Exhibit 10.1 to the Company’s 8-K filed on June 20, 2003  and incorporated herein by reference.)                                                          |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.2            |   | Security Agreement dated as of June 18,  2003 by and among Photogen Technologies, Inc., Xmark Fund, L.P. and Xmark  Fund, Ltd.  (Filed as Exhibit 10.2 to  the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                       |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.3            |   | Patent and Trademark Security Agreement  dated as of June 18, 2003 by and among Photogen Technologies, Inc., Xmark  Fund, L.P., and Xmark Fund, Ltd.  (Filed  as Exhibit 10.3 to the Company’s 8-K filed on June 20, 2003 and incorporated  herein by reference.)                                 |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.4            |   | Form of Secured Promissory Note dated June  18, 2003.  (Filed as Exhibit 10.4 to  the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.5            |   | Security Agreement dated as of June 18,  2003 by and among Photogen Technologies, Inc., Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P. and Mi3 LP.   (Filed as Exhibit 10.5 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                           |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.6            |   | Patent and Trademark Security Agreement  dated as of as of June 18, 2003 by and among Photogen Technologies, Inc.,  Oxford Bioscience Partners IV L.P., MRNA Fund II L.P. and Mi3 LP.  (Filed as Exhibit 10.6 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.) |
|            |   |                                                                                                                                                                                                                                                                                                        |
| 10.7            |   | Form of Revolving Convertible Senior  Secured Promissory Note dated June 18, 2003.   (Filed as Exhibit 10.7 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                                                                                   |

 

32

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| 10.8   |   | Equipment Lease dated as of June 18, 2003  by and between Photogen Technologies, Inc. and Baxter Healthcare  Corporation.  (Filed as Exhibit 10.8  to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| 10.9   |   | Letter Agreement dated as of August 18,  2003 by and between Photogen Technologies, Inc., Xmark Fund, Ltd., and Xmark  Fund L.P. (Filed as Exhibit 10.1 to the Company’s 8-K filed on August 19, 2003  and incorporated herein by reference.) |
|   |   |                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| 32.1   |   | 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.                                                                                               |
|   |   |                                                                                                                                                                                                                                               |
| 32.2   |   | 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.                                                                                               |

 

(b)                                 Reportson Form 8-K.

 

The followingreports on Form 8-K were filed during the three-month period ending June 30,2003:

 

1.                                       Reporton Form 8-K dated May 1, 2003 disclosing certain transactions with AlliancePharmaceuticals Corp., Xmark Fund, L.P. and Xmark Fund, Ltd.

 

2.                                       Reporton Form 8-K dated June 10, 2003 disclosing the execution of an Asset PurchaseAgreement with Alliance Pharmaceutical Corp.

 

3.                                       Reporton Form 8-K dated June 18, 2003 disclosing the closing of the acquisition ofcertain assets from Alliance Pharmaceutical Corp.

 

33

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**Signatures**

 

In accordancewith the requirements of the Exchange Act, the registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date:  September 4, 2003 | Photogen  Technologies, Inc.                                                                                                            |
|-------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                          |
|                          |
|                          |   /s/  Taffy J. Williams                                                                                                      |   |
|                          | Taffy J.  Williams, Ph.D., President and Chief  Executive Officer                                                                       |
|                          |
|                          |
|                          |   /s/  Brooks Boveroux                                                                                                        |   |
|                          | Brooks  Boveroux, Senior Vice President –  Finance and Chief Financial Officer (Principal  Financial and Chief Accounting Officer) |
|                               |                                                                                                                                         |  |  |

 

34

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**Exhibit Index**

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                            |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                       |
| +2.1            |   | Asset Purchase Agreement dated as of June  10, 2003 by and between Photogen Technologies, Inc. and Alliance  Pharmaceutical Corp. (Filed as Exhibit 2.1 to the company’s Form 8-K dated  June 20, 2003 and incorporated herein by reference.)                                                         |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +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.)                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.1           |   | Going Forward Agreement dated as of May 2,  2003 by and among Photogen Technologies, Inc., Xmark Fund, L.P., and Xmark  Fund, Ltd.  (Filed as Exhibit 10.1 to  the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                  |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.2           |   | Security Agreement dated as of June 18,  2003 by and among Photogen Technologies, Inc., Xmark Fund, L.P. and Xmark  Fund, Ltd.  (Filed as Exhibit 10.2 to  the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                      |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.3           |   | Patent and Trademark Security Agreement  dated as of June 18, 2003 by and among Photogen Technologies, Inc., Xmark  Fund, L.P., and Xmark Fund, Ltd.   (Filed as Exhibit 10.3 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.4           |   | Form of Secured Promissory Note dated June  18, 2003.  (Filed as Exhibit 10.4 to  the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.5           |   | Security Agreement dated as of June 18,  2003 by and among Photogen Technologies, Inc., Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P. and Mi3 LP.   (Filed as Exhibit 10.5 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                          |
|            |   |                                                                                                                                                                                                                                                                                                       |
| +10.6           |   | Patent and Trademark Security Agreement  dated as of as of June 18, 2003 by and among Photogen Technologies, Inc.,  Oxford Bioscience Partners IV L.P., MRNA Fund II L.P. and Mi3 LP  (Filed as Exhibit 10.6 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.) |

 

35

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| +10.7  |   | Form of Revolving Convertible Senior  Secured Promissory Note dated June 18, 2003.   (Filed as Exhibit 10.7 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| +10.8  |   | Equipment Lease dated as of June 18, 2003  by and between Photogen Technologies, Inc. and Baxter Healthcare  Corporation.  (Filed as Exhibit 10.8  to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)   |
|   |   |                                                                                                                                                                                                                                               |
| +10.9  |   | Letter Agreement dated as of August 18,  2003 by and between Photogen Technologies, Inc., Xmark Fund, Ltd., and Xmark  Fund L.P. (Filed as Exhibit 10.1 to the Company’s 8-K filed on August 19,  2003 and incorporated herein by reference.) |
|   |   |                                                                                                                                                                                                                                               |
| *31.1  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| *31.2  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                               |
| *32.1  |   | 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.                                                                                               |
|   |   |                                                                                                                                                                                                                                               |
| *32.2  |   | 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 by reference

 

36

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