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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission File No. 0-31261

ATHEROGENICS, INC.

(Exact name of registrant as specified in its charter)


Georgia
    
    58-2108232(State of incorporation)
    
    (I.R.S. Employer Identification Number)


8995 Westside Parkway, Alpharetta, Georgia 30004

(Address of registrants principal executive offices, including zip code)




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(Registrants telephone number, including area code): (678) 336-2500

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  x   No  o

As of November 12, 2003, there were 36,706,849 shares of the registrants
common stock outstanding.



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                         |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                    
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | CONDENSED BALANCE SHEETS               
|                                                   |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative And Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                       
|                                                   | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|EX-10.24 PURCHASE AGREEMENT DATED AUGUST 19, 2003 
|EX-31 SECTION 302 CERTIFICATION OF THE CEO AND CFO
|EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO



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ATHEROGENICS, INC.
FORM 10-Q
INDEX

Page No.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Balance Sheets
September 30, 2003 and December 31, 2002
    
    
    3Condensed Statements of Operations
Three and nine months ended September 30, 2003 and 2002
    
    
    4Condensed Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    13PART II.
    
    OTHER INFORMATIONItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    13Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    14SIGNATURES
    
    
    15






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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




ATHEROGENICS, INC.
CONDENSED BALANCE SHEETS

September 30,
    
    December 31,2003
    
    2002(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    97,658,370
    
    
    $
    32,132,329Short-term investments
    
    
    47,175,931
    
    
    
    2,538,802Prepaid expense
    
    
    1,640,996
    
    
    
    166,995Notes receivable and other current assets
    
    
    577,497
    
    
    
    56,726Total current assets
    
    
    147,052,794
    
    
    
    34,894,852Equipment and leasehold improvements, net of accumulated
depreciation and amortization
    
    
    2,663,674
    
    
    
    2,825,267Other assets
    
    
    3,815,861
    
    
    
    231,925Total assets
    
    $
    153,532,329
    
    
    $
    37,952,044LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,222,976
    
    
    $
    1,959,295Accrued research and development costs
    
    
    3,572,216
    
    
    
    945,506Accrued liabilities
    
    
    1,869,360
    
    
    
    589,345Accrued compensation
    
    
    769,206
    
    
    
    957,056Current portion of equipment loan facility
    
    
    470,341
    
    
    
    434,637Total current liabilities
    
    
    7,904,099
    
    
    
    4,885,839Convertible notes payable
    
    
    100,000,000
    
    
    
    Equipment loan facility, net of current portion
    
    
    206,948
    
    
    
    572,492Shareholders equity:Preferred stock, no par value: Authorized - 5,000,000 shares
    
    
    
    
    
    
    Common stock, no par value: Authorized - 100,000,000
shares; issued and outstanding - 36,679,954 and
28,133,560 shares at September 30, 2003 and
December 31, 2002, respectively
    
    
    172,000,077
    
    
    
    122,182,607Warrants
    
    
    994,376
    
    
    
    798,076Deferred stock compensation
    
    
    (862,905
    )
    
    
    (1,243,786
    )Accumulated deficit
    
    
    (126,710,790
    )
    
    
    (89,243,494
    )Accumulated other comprehensive income
    
    
    524
    
    
    
    310Total shareholders equity
    
    
    45,421,282
    
    
    
    32,493,713Total liabilities and shareholders equity
    
    $
    153,532,329
    
    
    $
    37,952,044


The accompanying notes are an integral part of these condensed financial statements.

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ATHEROGENICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating expenses:Research and development
    
    
    11,604,055
    
    
    
    5,700,117
    
    
    
    32,596,372
    
    
    
    16,403,313General and administrative
    
    
    1,536,893
    
    
    
    989,292
    
    
    
    3,969,165
    
    
    
    2,997,487Amortization of deferred
stock compensation
    
    
    320,477
    
    
    
    443,371
    
    
    
    1,110,664
    
    
    
    1,442,017Total operating expenses
    
    
    13,461,425
    
    
    
    7,132,780
    
    
    
    37,676,201
    
    
    
    20,842,817Operating loss
    
    
    (13,461,425
    )
    
    
    (7,132,780
    )
    
    
    (37,676,201
    )
    
    
    (20,842,817
    )Net interest (expense) income
    
    
    (175,192
    )
    
    
    206,057
    
    
    
    208,905
    
    
    
    779,885Net loss
    
    $
    (13,636,617
    )
    
    $
    (6,926,723
    )
    
    $
    (37,467,296
    )
    
    $
    (20,062,932
    )Net loss per share -
basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.25
    )
    
    $
    (1.06
    )
    
    $
    (0.72
    )Weighted average shares
outstanding  basic and diluted
    
    
    36,566,434
    
    
    
    27,979,930
    
    
    
    35,451,468
    
    
    
    27,927,575


The accompanying notes are an integral part of these condensed financial statements.

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ATHEROGENICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine months endedSeptember 30,2003
    
    2002Operating activities:Net loss
    
    $
    (37,467,296
    )
    
    $
    (20,062,932
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    679,029
    
    
    
    549,292Amortization of deferred stock compensation
    
    
    1,110,664
    
    
    
    1,442,017Changes in operating assets and liabilities:Prepaid expenses
    
    
    (1,474,001
    )
    
    
    (221,533
    )Notes receivable and other current assets
    
    
    (466,374
    )
    
    
    288,892Accounts payable
    
    
    (736,319
    )
    
    
    403,144Accrued research and development
    
    
    2,626,710
    
    
    
    (317,659
    )Accrued liabilities
    
    
    1,092,165
    
    
    
    270,541Net cash used in operating activities
    
    
    (34,635,422
    )
    
    
    (17,648,238
    )Investing activities:Purchases of equipment and leasehold improvements
    
    
    (455,769
    )
    
    
    (488,779
    )(Purchases) sales of short-term investments
    
    
    (44,636,915
    )
    
    
    18,160,189Net cash (used in) provided by investing activities
    
    
    (45,092,684
    )
    
    
    17,671,410Financing activities:Proceeds from the issuance of convertible notes
    
    
    96,300,000
    
    
    
    Proceeds from the issuance of common stock
    
    
    48,411,649
    
    
    
    Proceeds from the exercise of common stock options
    
    
    872,338
    
    
    
    238,399Proceeds from equipment loan facility
    
    
    
    
    
    
    936,851Payments on equipment loan facility and capital lease obligation
    
    
    (329,840
    )
    
    
    (226,128
    )Net cash provided by financing activities
    
    
    145,254,147
    
    
    
    949,122Increase in cash and cash equivalents
    
    
    65,526,041
    
    
    
    972,294Cash and cash equivalents at beginning of period
    
    
    32,132,329
    
    
    
    28,682,050Cash and cash equivalents at end of period
    
    $
    97,658,370
    
    
    $
    29,654,344Supplemental disclosures of cash flow information:Interest paid
    
    $
    49,593
    
    
    $
    34,986Remeasurement adjustment for variable options and warrants issued
for technology license agreements and consulting agreements
    
    
    579,383
    
    
    
    (30,200
    )


The accompanying notes are an integral part of these condensed financial statements.

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ATHEROGENICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) which
management considers necessary for a fair presentation of the financial
position, results of operations and cash flows of AtheroGenics for the interim
periods presented. Certain footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted from the interim financial
statements as permitted by the rules and regulations of the Securities and
Exchange Commission. Interim results are not necessarily indicative of results
for the full year.

The interim results should be read in conjunction with the financial
statements and notes thereto included in AtheroGenics Annual Report on Form
10-K for the year ended December 31, 2002. Shareholders are encouraged to
review the Form 10-K for a broader discussion of AtheroGenics opportunities
and risks inherent in the business. Copies of the Form 10-K are available on
request.

2. Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board approved SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for how to
classify and measure financial instruments with characteristics of both
liabilities and equity. It requires that financial instruments that fall
within its scope be classified as liabilities. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and for
pre-existing financial instruments as of July 1, 2003. AtheroGenics does not
have any financial instruments that fall under the guidance of SFAS 150 and,
therefore, the adoption of SFAS 150 will not have a material impact on
AtheroGenics financial statements.

3. Net Loss per Share

SFAS No. 128, Earnings per Share,requires presentation of both basic and
diluted earnings per share. Basic earnings per share is computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed in the
same manner as basic earnings per share except that diluted earnings per share
reflects the potential dilution that would occur if outstanding options,
warrants and convertible notes payable were exercised. Because AtheroGenics
reported a net loss for all periods presented, shares associated with stock
options, warrants and convertible note payable are not included because they
are antidilutive. Basic and diluted net loss per share amounts are the same
for the periods presented.

4. Stock-Based Compensation

AtheroGenics has elected to follow Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), in
accounting for its stock-based employee compensation plans, rather than the
alternative fair value accounting method provided for under SFAS No. 123,
Accounting for Stock-Based Compensation(SFAS 123), as SFAS 123 requires the
use of option valuation models that were not developed for use in valuing
employee stock options. AtheroGenics accounts for transactions in which
services are received in exchange for equity instruments based on the fair
value of such services received from non-employees, in accordance with SFAS 123
and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure(SFAS 148), an amendment
to SFAS 123, requires disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements.

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The following table illustrates the effect on net loss and net loss per
share if the fair value based method had been applied to all outstanding and
unvested options in each period, based on the provisions of SFAS 123 and SFAS
148.

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net loss, as reported
    
    $
    (13,636,617
    )
    
    $
    (6,926,723
    )
    
    $
    (37,467,296
    )
    
    $
    (20,062,932
    )Add: Stock-based employee compensation
expense included in reported net loss
    
    
    140,649
    
    
    
    356,108
    
    
    
    422,209
    
    
    
    1,140,128Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (847,777
    )
    
    
    (851,497
    )
    
    
    (2,571,404
    )
    
    
    (2,535,006
    )Pro forma net loss
    
    $
    (14,343,745
    )
    
    $
    (7,422,112
    )
    
    $
    (39,616,491
    )
    
    $
    (21,457,810
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.37
    )
    
    $
    (0.25
    )
    
    $
    (1.06
    )
    
    $
    (0.72
    )Basic and diluted, pro forma
    
    $
    (0.39
    )
    
    $
    (0.27
    )
    
    $
    (1.12
    )
    
    $
    (0.77
    )


5. Deferred Stock Compensation

Deferred compensation for options granted to employees represents the
difference between the exercise price and the deemed fair value of
AtheroGenics common stock on the dates these stock options were granted. The
deferred compensation is included as a reduction of shareholders equity and is
amortized over the vesting periods of the individual options, generally four
years, using the graded vesting method. The graded vesting method provides for
vesting of portions of the overall award at interim dates and results in higher
vesting in earlier years than straight-line vesting.

Deferred compensation for options and warrants granted to consultants is
determined in accordance with SFAS 123 and EITF Issue No. 96-18 as the fair
value of the equity instruments issued. Deferred compensation for options and
warrants granted to consultants is adjusted to fair market value on each
balance sheet date.

At
September 30, 2003, AtheroGenics had a total of $862,905 of
deferred stock compensation remaining to
be amortized over the vesting periods of all stock options and warrants.

6. Follow-on Offering

In February 2003, AtheroGenics completed a follow-on public offering of
8,280,000 shares of common stock (including the exercise of the underwriters
over-allotment option) that raised net proceeds of approximately $48,400,000.

7. Convertible Notes Payable

In August 2003, AtheroGenics issued $100 million in aggregate principal
amount of 4.5% convertible notes due September 1, 2008 with interest payable
semi-annually in March and September. Net proceeds to AtheroGenics were
approximately $96.3 million, after deducting expenses and underwriters
discounts and commissions. AtheroGenics recorded issuance costs related to the
notes of approximately $3.7 million. These costs are recorded as other assets
and are being amortized to interest expense over the five-year life of the
notes.

The notes may be converted at the option of the holder into shares of
AtheroGenics common stock, prior to the close of business on September 1, 2008
at a conversion rate of 65.1890 shares per $1,000 principal amount of notes,
representing a conversion price of approximately $15.34, subject to adjustment.
Under certain circumstances, we may be obligated to redeem all or part of the
notes prior to their maturity at a redemption price equal to 100% of their
principal amount, plus accrued and unpaid interest and liquidated damages, if
any, up to but excluding the maturity date.

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AtheroGenics filed a shelf registration statement with the Securities and
Exchange Commission (SEC) on October 31, 2003 covering the resale of the
notes and the common stock issuable upon conversion of the notes. The SEC has
not yet declared the registration statement effective. AtheroGenics has agreed
to use its reasonable best efforts to cause the registration statement to
become effective as promptly as is practicable and to keep the shelf
registration statement effective until the earlier of: (1) the date that all
of the registrable securities have been sold pursuant to the shelf registration
statement or pursuant to Rule 144 under the Securities Act or any similar
provision then in force; or (2) the expiration of the holding period with
respect to the registrable securities under Rule 144(k) under the Securities
Act of 1933, or any successor provision.

AtheroGenics intends to use the net proceeds from the sale of the notes
for research and development activities, including clinical trials, process
development and manufacturing support, and for general corporate purposes,
including working capital. Pending these uses, the net proceeds will be
invested in interest-bearing, investment-grade securities.

8. Bank Credit Agreements

In March 2002, AtheroGenics entered into a revolving credit facility with
Silicon Valley Bank, as modified in June 2003, for up to a maximum amount of
$5,000,000 to be used for working capital requirements. Under the terms of the
facility, interest on advances is charged at Silicon Valley Banks prime rate
plus 1.50% per year, provided that certain liquidity levels are maintained;
otherwise interest will be charged at Silicon Valley Banks prime rate plus
2.0% per year. Amounts borrowed under the revolving credit facility may be
repaid and reborrowed at any time and from time to time during the term of the
facility. The revolving line of credit terminates on September 5, 2004 and all
outstanding amounts and accrued interest will be due and payable on that date.
As of September 30, 2003, there were no outstanding balances under the
revolving credit facility.

In addition, in March 2002, AtheroGenics entered into an equipment loan
facility with Silicon Valley Bank, as modified in June 2003, for up to a
maximum amount of $2,500,000 to be used to finance existing and new equipment
purchases. The interest rate on the equipment advances was equal to the
greater of: (1) Silicon Valley Banks prime rate plus 3.0% or (2) 7.5% per
year, and was fixed at the time of each advance. Amounts borrowed under the
equipment loan facility are repaid in 33 equal installments of principal and
interest beginning on the first business day of the month following an advance.
The borrowing period under the equipment loan facility, as modified, expired
on September 30, 2003. As of September 30, 2003, there was an outstanding
balance of $677,289 under the equipment loan facility and the weighted average
interest rate was 7.7%.

As collateral for the revolving credit facility and for the equipment loan
facility, AtheroGenics granted to Silicon Valley Bank a security interest in
all of its assets other than its intellectual property, and granted a negative
pledge on its intellectual property.

9. Reclassifications

Certain prior year balances have been reclassified to conform with the
current year presentation. These reclassifications had no effect on previously
reported net loss or shareholders equity.




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following should be read with the financial statements and related
footnotes and Managements Discussion and Analysis of Financial Condition and
Results of Operations included in AtheroGenics Annual Report onForm 10-Kfor
the fiscal year ended December 31, 2002. The results discussed below are not
necessarily indicative of the results to be expected in any future periods.
The following discussion contains forward-looking statements that are subject
to risks and uncertainties which could cause actual results to differ from the
statements made. These risks are set forth in more detail in our Annual Report
onForm 10-K.

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OVERVIEW

Since our operations began in 1994, we have focused on the discovery,
development and commercialization of novel drugs for the treatment of chronic
inflammatory diseases, including heart disease (atherosclerosis), rheumatoid
arthritis, organ transplant rejection and asthma. Based on our proprietary
vascular protectant, or v-protectant, technology platform, we have four drug
programs in the clinic, and are pursuing a number of other preclinical
programs.

AGI-1067 is our v-protectant candidate that is most advanced in clinical
development, and is designed to benefit patients with heart disease. AGI-1067
is currently in a Phase III clinical trial, referred to as ARISE, or Aggressive
Reduction of Inflammation Stops Events, to evaluate the impact of AGI-1067 on
important outcome measures such as death due to heart disease, myocardial
infarction, stroke, coronary revascularization and unstable angina in patients
who have coronary heart disease. ARISE, which began enrollment in June 2003,
will enroll 4,000 patients who will be followed for an average of 18 months or
until a minimum of 1,160 primary events, or outcome measures, have occurred.
We recently completed enrollment in our AGI-1067 CART-2 Phase IIb clinical
trial. CART-2 is a 12-month, 500 patient, double-blind, placebo-controlled
trial of AGI-1067 280mg, administered orally once daily, versus placebo, to
assess the effect of AGI-1067 on the progression of atherosclerosis in patients
with heart disease. We expect to complete the treatment phase of CART-2 in
mid-2004 and will then proceed with data analysis and disclosure of the
results.

Our second clinical compound, AGIX-4207, is a novel oral agent being
developed for the treatment of the signs and symptoms of rheumatoid arthritis.
We have completed a Phase II clinical trial that evaluated safety, tolerability
and the effect of orally administered AGIX-4207 on biological markers of
inflammation in rheumatoid arthritis patients. Data from the trial
demonstrated that treatment with AGIX-4207 was safe and well tolerated by
patients and also inhibited an increase in the inflammatory biomarker known as
the erythrocyte sedimentation rate, or ESR, by more than 90 percent.
Enrollment has commenced for a 220 patient Phase II trial of AGIX-4207, called
OSCAR, or Oral Suppression of Cellular Inflammation Attenuates Rheumatoid
Arthritis. OSCAR will evaluate the impact of various doses of AGIX-4207 versus
placebo on clinical efficacy, biomarkers and safety in patients with mild to
moderate rheumatoid arthritis. AGIX-4207 I.V., our third v-protectant
candidate, is an intravenous drug designed to treat rheumatoid arthritis
patients in whom the rapid attainment of target drug levels in the blood is
desirable. We have completed a Phase I clinical trial that assessed the safety
and tolerability of AGIX-4207 I.V. in healthy volunteers. The results from
this trial demonstrated that single infusions of AGIX-4207 I.V. were well
tolerated and adverse events were generally mild and not considered clinically
significant.

Our fourth v-protectant drug, AGI-1096, is a novel antioxidant and
selective anti-inflammatory agent that is being developed to address the
accelerated inflammation of grafted blood vessels, known as transplant
arteritis, common in chronic organ transplant rejection. We have completed a
Phase I clinical trial that assessed safety and tolerability of AGI-1096 in
healthy volunteers. The results of AGI-1096 clinical trial data demonstrated
the drug was well tolerated at all oral doses, with no drug-related adverse
events.

To date, we have devoted substantially all of our resources to research
and development. We have not received any commercial revenues from product
sales. We expect to incur significant losses in most years prior to deriving
any product revenue as we continue to increase research and development costs.
We have incurred significant losses since we began operations in 1994 and as of
September 30, 2003, we had an accumulated deficit of $126.7 million. We cannot
assure you that we will become profitable. We expect that losses will
fluctuate from quarter to quarter and that these fluctuations may be
substantial. Our ability to achieve profitability depends upon a variety of
factors, including our ability, alone or with others, to complete the
successful development of our product candidates, to obtain required regulatory
clearances, and to manufacture and market our future products.

On August 19, 2003, we issued $100 million in aggregate principal amount
of convertible notes due 2008 through a Rule 144A private placement to
qualified institutional buyers. These notes are convertible into our common
stock at the option of the holder at a conversion rate of 65.1890 shares per
$1,000 principal amount of notes, or approximately $15.34 per share, subject to
adjustment.

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RESULTS OF OPERATIONS

Comparison of the Three and Nine Month Periods Ended September 30, 2003 and 2002

Revenues

There were no revenues during the three and nine months ended September
30, 2003 and 2002.

Expenses

Research and Development.Research and development expenses increased
104% to $11.6 million for the three months ended September 30, 2003 from $5.7
million for the comparable period in 2002, and 99% to $32.6 million for the
nine months ended September 30, 2003 from $16.4 million for the comparable
period in 2002. The increase in research and development expenses for the
three and nine months ended September 30, 2003 was primarily due to
expenditures related to the AGI-1067 ARISE Phase III clinical trial, such as
manufacturing activities for clinical drug supply, clinical site selection and
payments to clinical investigators. In addition, there were increased
expenditures for the implementation of the AGIX-4207 OSCAR Phase II clinical
trial and the ongoing AGI-1067 CART-2 Phase IIb clinical trial.

General and Administrative.General and administrative expenses increased
55% to $1.5 million for the three months ended September 30, 2003 from $1.0
million for the comparable period in 2002, and 32% to $4.0 million for the nine
months ended September 30, 2003 from $3.0 million for the comparable period in
2002. The increase in general and administrative expenses for the three and
nine months ended September 30, 2003 was primarily due to business development
activities, including increased staffing and partnership discussions for
AGI-1067, and higher insurance premiums.

Amortization of Deferred Stock Compensation.Amortization of deferred
stock compensation was $320,477 for the three months ended September 30, 2003,
compared to $443,371 for the comparable period in 2002, and $1.1 million for
the nine months ended September 30, 2003, compared to $1.4 million for the
comparable period in 2002. The decrease in the three and nine months ended
September 30, 2003 is due to the deferred stock compensation being amortized
using the graded vesting method, which results in higher amortization in the
earlier years. The decrease was partially offset by the effect of remeasuring
options and warrants granted to consultants to current fair market value.

Net Interest (Expense) Income

Net interest expense was $175,192 for the three months ended September 30,
2003 compared to net interest income of $206,057 for the comparable period in
2002. Net interest income decreased to $208,905 for the nine months ended
September 30, 2003 from $779,885 for the comparable period in 2002. The
variance in net interest (expense) income in both the three and nine month
periods is a due to the interest expense on our convertible notes.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through sales
of equity securities and convertible notes. At September 30, 2003, we had
cash, cash equivalents and short-term investments of $144.8 million, compared
with $34.7 million at December 31, 2002. Working capital at September 30, 2003
was $139.1 million, compared to $30.0 million at December 31, 2002. The
increase in cash, cash equivalents, short-term investments and working capital
is primarily due to the issuance of convertible notes that raised net proceeds
of $96.3 million and a follow-on public offering of 8.3 million shares of
common stock in the first quarter of 2003 that raised net proceeds of $48.4
million.

Net cash used in operating activities was $34.6 million for the nine
months ended September 30, 2003, compared to $17.6 million for the comparable
period in 2002. The increase in the use of cash in operating activities is
principally due to funding a net loss of $37.5 million and an increase in
prepaid expense of $1.5 million, partially offset by the
increase in the research and development accrual of $2.6 million and
the accrued liabilities of $1.1 million. The increase in cash to fund the net loss is
primarily attributable to the expenditures for our ARISE Phase III clinical
trial and our CART-2 Phase IIb clinical trial for AGI-1067 and the
implementation of our OSCAR Phase II clinical trial for AGIX-4207, as well as
other ongoing product development activities. The increase in prepaid expense
is due to pre-payments made to contractors for the ARISE clinical trial which
will be expensed when service is performed. In

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connection with entering into the ARISE clinical trial for AGI-1067 and the
resultant increase in cash usage, we expect that prepaid expenses and the
research and development accrual may fluctuate more significantly than in
previous periods. We anticipate net cash usage in 2003 for ARISE and our other
on-going clinical programs, as well as our other operating activities, to be
approximately $48.0 million and in 2004 to be greater, subject to the impact of
a corporate partnering arrangement for AGI-1067.

Net cash used in investing activities was $45.1 million for the nine
months ended September 30, 2003, compared to $17.7 million provided by
investing activities for the comparable period in 2002. Net cash used in
investing activities during the nine months ended September 30, 2003 consisted
primarily of the purchases of available-for-sale securities and equipment and
leasehold improvements. Net cash provided by investing activities during the
nine months ended September 30, 2002 consisted primarily of the sales of
available-for-sale securities, with the proceeds reinvested in interest bearing
cash equivalents, partially offset by the purchase of equipment and leasehold
improvements.

Net cash provided by financing activities was $145.3 million for the nine
months ended September 30, 2003, and $949,122 for the comparable period in
2002. Net cash provided by financing activities in the nine months ended
September 30, 2003 consisted primarily of net proceeds of approximately $96.3
million from the convertible debt Rule 144A private placement and $48.4 million
from the follow-on public offering of 8.3 million shares of our common stock.
This was partially offset by payments on our equipment loan facility. Net cash
provided by financing activities in the nine months ended September 30, 2002
consisted of the receipt of funds from the equipment loan facility and exercise
of stock options, offset by payments for the equipment loan facility and
capital lease obligations.

In March 2002, we entered into a revolving credit facility with Silicon
Valley Bank, as modified in June 2003, in the amount of up to $5.0 million to
be used for working capital requirements. In addition, we entered into an
equipment loan facility with Silicon Valley Bank, as modified in June 2003, in
the amount of up to $2.5 million to be used to finance existing and new
equipment purchases. At September 30, 2003 there was no outstanding balance on
the revolving credit facility and an outstanding balance of $677,289, with a
weighted average interest rate of 7.7%, on the equipment loan facility. The
borrowing period under the equipment loan facility, as modified, expired on
September 30, 2003. As collateral for the revolving credit facility and for
the equipment loan facility, AtheroGenics granted to Silicon Valley Bank a
security interest in all of its assets other than its intellectual property,
and granted a negative pledge on its intellectual property.

On August 19, 2003, AtheroGenics issued $100 million in aggregate
principal amount of convertible notes due 2008 through a Rule 144A private
placement to qualified institutional buyers. These notes initially are
convertible into AtheroGenics common stock at a conversion rate of 65.1890
shares per $1,000 principal amount of notes, or approximately $15.34 per share.

The following table summarizes our long-term contractual obligations as of
September 30, 2003.

2003
    
    2004-2005
    
    2006-2007
    
    ThereafterOperating leases, net of sublease income
    
    $
    264,735
    
    
    $
    2,086,674
    
    
    $
    2,273,790
    
    
    $
    1,326,378Long-term debt
    
    
    104,797
    
    
    
    572,492
    
    
    
    
    
    
    
    100,000,000Total contractual obligations
    
    $
    369,532
    
    
    $
    2,659,166
    
    
    $
    2,273,790
    
    
    $
    101,326,378


Based upon the current status of our product development and
commercialization plans, we believe that our existing cash and cash equivalents
and short-term investments, along with our revolving credit facility with
Silicon Valley Bank and the proceeds from the recent issuance of convertible
notes, will be adequate to satisfy our capital needs for at least the next 12
months. However, our actual capital requirements will depend on many factors,
including:



| |  |  | the status of product development;
| | - |  | ----------------------------------



| |  |  | the time and cost involved in conducting clinical trials and obtaining regulatory approvals;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting and enforcing patent and other intellectual property claims;
| | - |  | ---------------------------------------------------------------------------------------------

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| |  |  | competing technological and market developments; and
| | - |  | ----------------------------------------------------



| |  |  | our ability to establish new licensing and partnering agreements.
| | - |  | -----------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the Reform Act)
provides a safe harbor for forward-looking statements made by or on behalf of
AtheroGenics. AtheroGenics and its representatives may from time to time make
written or oral forward-looking statements, including statements contained in
this report and our other filings with the Securities and Exchange Commission
and in our reports to our shareholders. Generally, the words believe,
expect, intend, estimate, anticipate, will and similar expressions
identify forward-looking statements. All statements which address operating
performance, events or developments that we expect or anticipate will occur in
the future, such as projections about our future results of operations or our
financial condition, research, development and commercialization of our product
candidates and anticipated trends in our business, are forward-looking
statements within the meaning of the Reform Act. The forward-looking
statements are and will be based on managements then current views and
assumptions regarding future events and operating performance, and speak only
as of their dates. AtheroGenics undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

The following are some of the factors that could affect our financial
performance or could cause actual results to differ materially from those
expressed or implied in our forward-looking statements:



| |  |  | AGI-1067, AGIX-4207, AGIX-4207 I.V. and AGI-1096 may fail in clinical trials;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to generate positive cash flow in light of our history of operating losses;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our inability to obtain additional financing on satisfactory terms, which could preclude us from
developing or marketing our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully develop our other product candidates;
| | - |  | -----------------------------------------------------------------



| |  |  | our ability to commercialize our product candidates if we fail to demonstrate adequately their safety
and efficacy;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | possible delays in our clinical trials;
| | - |  | ---------------------------------------



| |  |  | our inability to predict whether or when we will obtain regulatory approval to commercialize our
product candidates or the timing of any future revenue from these product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our need to comply with applicable regulatory requirements in the manufacture and distribution of
our products to avoid incurring penalties that may inhibit our ability to commercialize our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to protect adequately or enforce our intellectual property rights or secure rights to third
party patents;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our competitors to develop and market anti-inflammatory products that are more
effective, have fewer side effects or are less expensive than our current or future product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | third parties failure to synthesize and manufacture our product candidates, which could delay our
clinical trials or hinder our commercialization prospects;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to create sales, marketing and distribution capabilities or enter into agreements with
third parties to perform these functions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract, retain and motivate skilled personnel and cultivate key academic
collaborations;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain an adequate level of reimbursement or acceptable prices for our products; and
| | - |  | ---------------------------------------------------------------------------------------------------

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| |  |  | if plaintiffs bring product liability lawsuits against us, we may incur substantial financial loss or
may
be unable to obtain future product liability insurance at reasonable prices, if at all, either of which
could diminish our ability to commercialize our future products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The foregoing list of important factors is discussed in more detail in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and our
Registration Statement on Form S-3 (Registration No. 333-   ) filed with the
SEC on October 31, 2003, and is not exclusive.




Item 3. Quantitative And Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to changes in U.S. interest
rates. This exposure is directly related to our normal operating activities.
Our cash, cash equivalents and short-term investments are invested with high
quality issuers and are generally of a short-term nature. Interest rates
payable on our lease obligations are generally fixed. As a result, we do not
believe that near-term changes in interest rates will have a material effect on
our future results of operations.

The following table summarizes information on our equipment loan facility
and convertible notes. The table presents maturity of the debt and projected
annual average interest rates as of September 30, 2003.

Value as ofSeptember 30,2003
    
    2004-2005
    
    2006-2007
    
    Thereafter
    
    Total
    
    2003Long-term debt-fixed rate
Maturity
    
    $
    104,797
    
    
    $
    572,492
    
    
    $
    
    
    
    $
    100,000,000
    
    
    $
    100,677,289
    
    
    $
    100,677,289Average interest rate
    
    
    7.7
    %
    
    
    7.7
    %
    
    
    
    
    
    
    4.5
    %





Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.Our chief executive
officer and chief financial officer are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for AtheroGenics. Our
chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report, have concluded that our disclosure
controls and procedures are adequate and effective in timely alerting them to
material information relating to us required to be included in our periodic SEC
filings.

Changes in internal control over financial reporting.There were no
material changes in our internal control over financial reporting that occurred
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART II  OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds

On August 19, 2003, we issued $100 million in aggregate principal amount
of 4.5% convertible notes due September 1, 2008, in an exempt offering to the
initial purchasers, Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and
Adams, Harkness & Hill, Inc., pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. The initial purchasers
then resold the notes to qualified institutional buyers pursuant to Rule 144A
of the Securities Act. Net proceeds to us were approximately $96.3 million,
after deducting expenses and underwriters discounts and commissions of
approximately $3.7 million. The notes were issued under an indenture dated as
of August 19, 2003, with The Bank of New York Trust Company of Florida, N.A. as
trustee.

The notes may be converted at the option of the holder into shares of our
common stock, prior to the close of business on the final maturity date,
September 1, 2008 at a conversion rate of 65.1890 shares per $1,000 principal
amounts of notes, representing a conversion price of approximately $15.34,
subject to adjustment. Under certain

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circumstances, we may be obligated to redeem, all or part of the notes prior to
their maturity at a redemption price equal to 100% of their principal amount,
plus accrued and unpaid interest and liquidated damages, if any, up to but
excluding the maturity date. The notes bear interest at a rate of 4.5% per
annum payable semi-annually on March 1 and September 1 of each year.

In connection with this transaction, we filed a shelf registration
statement with the SEC on October 31, 2003, covering the resale of the notes
and the common stock issuable upon conversion of the notes. The SEC has not
yet declared the registration statement effective. We have agreed to use our
reasonable best efforts to cause the registration statement to become effective
as promptly as is practicable and to keep the shelf registration statement
effective until the earlier of: (1) the date that all of the registrable
securities have been sold pursuant to the shelf registration statement or
pursuant to Rule 144 under the Securities Act or any similar provision then in
force; or (2) the expiration of the holding period with respect to the
registrable securities under Rule 144(k) under the Securities Act of 1933, or
any successor provision.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 10.24
    
    -
    
    Purchase Agreement dated August 19, 2003 between
AtheroGenics, Inc. and the Initial Purchasers named
therein.Exhibit 31
    
    -
    
    Certifications of Chief Executive Officer and Chief
Financial Officer under Rule 13a-14(a)Exhibit 32
    
    -
    
    Certifications of Chief Executive Officer and Chief
Financial Officer under Section 1350.


(b) Reports on Form 8-K



| |  |  | On July 24 , 2003, we furnished a Current Report on Form 8-K under Item
12, reporting the issuance of our press release announcing our financial
results for the second quarter ended June 30, 2003.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 13, 2003, we filed a Current Report on Form 8-K under Item 5,
announcing the proposed convertible debt offering.
| |  |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 19, 2003, we filed a Current Report on Form 8-K under Item 5,
announcing the completion of our convertible debt offering.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

ATHEROGENICS, INCDate: November 14, 2003
    
    /s/ MARK P. COLONNESEMark P. ColonneseSenior Vice President of Finance and
Administration and Chief Financial Officer


15