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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

(Mark One)

|  |  |                                                                                      
|- |  | -------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to________

Commission file number 0-31261

AtheroGenics, Inc.

(Exact name of Registrant as specified in its charter)


|                                                                      |  |                                                  
|--------------------------------------------------------------------- |  | -------------------------------------------------
|Georgia(State or other jurisdiction of
incorporation or organization) |  | 58-2108232(I.R.S. Employer Identification Number)

|                                                                                                             |  |                                                                   
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------
|8995 Westside Parkway,
Alpharetta, Georgia 30004(Address of principal executive offices, including zip code) |  | (678) 336-2500(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, No Par Value
Common Stock Purchase Rights



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 if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x

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

The aggregate market value of the 28,918,490 shares of voting stock held
by nonaffiliates of the registrant, computed by reference to the closing price
as reported on the Nasdaq National Market as of the last business day of
AtheroGenics most recently completed second fiscal quarter (June 30, 2003),
was approximately $431,753,056. AtheroGenics has no nonvoting common equity.

The number of shares outstanding of the registrants common stock, as of
March 8, 2004: 36,973,755.

Documents Incorporated by Reference:

Portions of the proxy statement filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 with respect to the 2004 Annual Meeting of
Shareholders are incorporated herein by reference in Part III.





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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business                                                                                       
|                                                  | Item 2. Properties                                                                                     
|                                                  | Item 3. Legal Proceedings                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                          
|                                                  | Item 5. Market for Registrants Common Equity and Related Shareholder Matters                          
|                                                  | Item 6. Selected Financial Data                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                                                  | Item 8. Financial Statements and Supplementary Data                                                    
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                  | Item 9A. Controls and Procedures                                                                       
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                  | Item 11. Executive Compensation                                                                        
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
|                                                  | Item 13. Certain Relationships and Related Transactions                                                
|                                                  | Item 14. Principal Accountant Fees and Services                                                        
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                       
|EX-10.25 2ND LOAN MODIFICATION AGREEMENT         
|EX-10.26 3RD LOAN MODIFICATION AGREEMENT         
|EX-10.27 NEGATIVE PLEDGE AGREEMENT DATED 12/29/03
|EX-23.01 CONSENT OF ERNST & YOUNG                
|EX-24.01 POWERS OF ATTORNEY                      
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO     
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO     
|EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO 



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ATHEROGENICS, INC
FORM 10-K

INDEX

|           |  |                                                                                                |  |  |          |  |      |  | 
|---------- |  | ---------------------------------------------------------------------------------------------- |  |  | -------- |  | ---- |  | 
|           |  |                                                                                                |  |  |          |  | Page
|           |  |                                                                                                |  |  |          |  |     
|           |  |                                                                                                |  |  | PART I   |  |      |  | 
|Item 1.    |  | Business                                                                                       |  |  | 1        | 
|Item 2.    |  | Properties                                                                                     |  |  | 20       | 
|Item 3.    |  | Legal Proceedings                                                                              |  |  | 20       | 
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                            |  |  | 20       | 
|           |  |                                                                                                |  |  | PART II  |  |      |  | 
|Item 5.    |  | Market for Registrants Common Equity and Related Shareholder Matters                          |  |  | 20       | 
|Item 6.    |  | Selected Financial Data                                                                        |  |  | 21       | 
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  |  | 22       | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  |  | 27       | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                    |  |  | 28       | 
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  |  | 43       | 
|Item 9A.   |  | Controls and Procedures                                                                        |  |  | 43       | 
|           |  |                                                                                                |  |  | PART III |  |      |  | 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                             |  |  | 44       | 
|Item 11.   |  | Executive Compensation                                                                         |  |  | 44       | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |  |  | 44       | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                 |  |  | 44       | 
|Item 14.   |  | Principal Accountant Fees and Services                                                         |  |  | 44       | 
|           |  |                                                                                                |  |  | PART IV  |  |      |  | 
|Item 15.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  |  | 45       | 
|Signatures |  |                                                                                                |  |  | 48       | 





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PART I




Item 1.Business

Overview

AtheroGenics is a research-based pharmaceutical company incorporated in
the State of Georgia in 1993. We are 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. We have developed a proprietary
vascular protectant, or v-protectant, technology platform to discover drugs to
treat these types of diseases. Based on our v-protectant platform, we have
four drug development programs in the clinic and are pursuing a number of other
preclinical programs.

Our first v-protectants are drug candidates that block the production of
proteins that are necessary to initiate and maintain inflammation. For
example, one of these proteins, VCAM-1, binds to white blood cells that
accumulate at the site of inflammation and directs these cells in their
migration from the bloodstream into the tissue. We believe that v-protectants
can suppress chronic inflammation by blocking production of VCAM-1 without
undermining the bodys ability to protect itself against infection.

AGI-1067 is our v-protectant candidate that is most advanced in clinical
development. AGI-1067 is designed to benefit patients with coronary heart
disease, which is atherosclerosis of the blood vessels of the heart.
Atherosclerosis is a common disease that results from inflammation and the
build-up of plaque in arterial blood vessel walls. More than 13 million people
in the United States currently have been diagnosed with coronary heart disease.
There are no medications available for physicians to treat directly the
underlying chronic inflammation associated with coronary heart disease.
Instead, physicians treat risk factors, such as high cholesterol and high blood
pressure, to slow the progression of the disease. The anti-inflammatory
mechanism of AGI-1067 represents a novel, direct therapeutic approach that may
be suitable as a chronic treatment for all patients with coronary heart
disease, including those without traditional risk factors.

We have completed a successful 305-patient Phase II clinical trial, called
CART-1 (Canadian Antioxidant Restenosis Trial), that demonstrated the safety
and effectiveness of AGI-1067 for the treatment of post-angioplasty restenosis,
a condition that affects many patients with coronary heart disease. In
addition, CART-1 data also showed that after only six weeks of therapy, there
was an apparent anti-atherosclerotic effect in blood vessels adjacent to the
angioplasty site, but not involved in the angioplasty. A recent analysis of the
CART-1 trial offers additional data on the impact of AGI-1067 on plaque burden,
a measure of disease in coronary blood vessels. In the treatment groups
receiving the two highest doses of AGI-1067, plaque burden decreased by 1.6%
and 1.9%, respectively, a therapeutic effect that we believe is consistent with
reversing coronary artery disease. The trial also demonstrated that AGI-1067
was well tolerated, with no increase in adverse events versus placebo. Based on
the results of a subsequent End of Phase II meeting with the U.S. Food and Drug
Administration (FDA), we proceeded to develop a Phase III clinical trial
protocol to evaluate AGI-1067 for the treatment of atherosclerosis. The Phase
III protocol has received a Special Protocol Assessment from the FDA. A Special
Protocol Assessment is written confirmation from the FDA that the protocol is
adequately designed to support a New Drug Application for the drug in the
specified treatment area.

We are currently conducting a Phase IIb clinical trial called CART-2,
which is a 500-patient study that examines the effect of 12 months of AGI-1067
therapy on atherosclerosis and post-angioplasty restenosis. We recently
completed enrollment in CART-2 and expect to complete the treatment phase of
CART-2 in mid-2004, after which we will proceed with data analysis and
disclosure of the results.

In June 2003, we initiated a pivotal Phase III trial, referred to as ARISE
(Aggressive Reduction of Inflammation Stops Events), which is being conducted
in cardiac centers in the United States, Canada, the United Kingdom and South
Africa. ARISE will evaluate the impact of AGI-1067 on important outcome
measures such as death due to coronary disease, myocardial infarction, stroke,
coronary re-vascularization and unstable angina in patients who have coronary
heart disease. The study will assess the incremental benefits of AGI-1067
versus the current standard of care therapies in this patient population. As
such, all patients in the trial, including those on placebo, will be receiving
other appropriate heart disease medications, including statins and other
cholesterol-lowering therapies, high blood pressure medications and
anti-clotting agents. ARISE 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.

AGIX-4207, our second v-protectant candidate, 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 AGIX-4207 on biological markers of inflammation in rheumatoid
arthritis patients. Data from this trial demonstrated that treatment

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with AGIX-4207 was safe and well tolerated by all patients. In the trial,
AGIX-4207 significantly inhibited an increase in the erythrocyte sedimentation
rate, an important biomarker of disease activity, versus patients on placebo.
The effect of AGIX-4207 on the other biomarkers tested was not statistically
significant although some showed trends toward benefit.

We have commenced enrollment for a 275-patient Phase II clinical trial of
AGIX-4207, called OSCAR (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 rheumatoid arthritis. We expect to complete the enrollment and
treatment phases of OSCAR in the second quarter of 2004, after which we will
proceed with data analysis and disclosure of the results.

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 candidate, AGI-1096, is a novel antioxidant and
selective anti-inflammatory agent which 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 the safety and tolerability of AGI-1096 in
healthy volunteers. The results of the AGI-1096 clinical trial data
demonstrated the drug was well tolerated at all oral doses, with no
drug-related adverse events. We recently announced a collaboration with
Fujisawa Pharmaceutical Co., Ltd. to further develop AGI-1096.

We have identified additional potential v-protectant candidates to treat
other chronic inflammatory diseases, including asthma. We are evaluating these
v-protectants to determine lead drug candidates for clinical development. We
plan to develop these v-protectants rapidly and may seek regulatory fast track
status, if available, to expedite development and commercialization. We will
continue to expand upon our v-protectant technology platform using functional
genomics to identify novel therapeutic gene targets. Functional genomics is the
process by which one uses scientific models and techniques to discover and
modify genes, measure the consequences of the modifications, and reliably
determine the function of those genes.

Business Strategy

Our objective is to become a leading pharmaceutical company focused on
discovering, developing and commercializing novel drugs for the treatment of
chronic inflammatory diseases. The key elements of our strategy include the
following:



| |  |  | Continue aggressive development program for AGI-1067.We
intend to rapidly develop AGI-1067 for the treatment and prevention
of atherosclerosis in patients with coronary heart disease. We are
currently enrolling patients in the ARISE Phase III clinical trial
for the treatment of atherosclerosis in patients with coronary heart
disease.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Extend our v-protectant technology platform into additional
therapeutic areas that address unmet medical needs.We believe that
our v-protectants have the potential for treating a wide variety of
other chronic inflammatory diseases. These indications include:
rheumatoid arthritis, asthma, chronic organ transplant rejection and
other diseases. We are currently enrolling patients in the OSCAR
Phase II clinical trial with our v-protectant compound, AGIX-4207,
for the treatment of rheumatoid arthritis. We completed Phase I
clinical trials with positive results for both AGIX-4207 I.V., an
intravenously administered drug for the treatment of rheumatoid
arthritis, and for AGI-1096, a v-protectant developed for the
prevention of chronic organ transplant rejection.
|
| |  |  | Expand our clinical product candidate portfolio.In addition
to our existing discovery programs, we intend to acquire rights to
other product candidates and technologies that complement our
existing product candidate lines or that enable us to capitalize on
our scientific and clinical development expertise. We plan to expand
our product candidate portfolio by in-licensing or acquiring product
candidates, technologies or companies.                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Commercialize our products.We plan to collaborate with large
pharmaceutical companies to commercialize products that we develop to
target patient or physician populations in broad markets. In
contrast, we plan to develop a sales force to commercialize those of
our products that we develop to target appropriate patient or
physician populations in narrow markets.                                                                                                                                                                                                                                                                                                                                                                                                                      

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Inflammation and Disease

Inflammation is a normal response of the body to protect tissues from
infection, injury or disease. The inflammatory response begins with the
production and release of chemical agents by cells in the infected, injured or
diseased tissue. These agents cause redness, swelling, pain, heat and loss of
function. Inflamed tissues generate additional signals that recruit white
blood cells to the site of inflammation. White blood cells destroy any
infective or injurious agent, and remove cellular debris from damaged tissue.
This inflammatory response usually promotes healing but, if uncontrolled, may
become harmful.

The inflammatory response can be either acute or chronic. Acute
inflammation lasts at most only a few days. The treatment of acute
inflammation, where therapy includes the administration of aspirin and other
non-steroidal anti-inflammatory agents, provides relief of pain and fever for
patients. In contrast, chronic inflammation lasts weeks, months or even
indefinitely and causes tissue damage. In chronic inflammation, the
inflammation becomes the problem rather than the solution to infection, injury
or disease. Chronically inflamed tissues continue to generate signals that
attract white blood cells from the bloodstream. When white blood cells migrate
from the bloodstream into the tissue they amplify the inflammatory response.
This chronic inflammatory response can break down healthy tissue in a
misdirected attempt at repair and healing. Diseases characterized by chronic
inflammation include, among others:



| |  |  | atherosclerosis, including coronary heart disease;
| | - |  | --------------------------------------------------
|
| |  |  | rheumatoid arthritis;                             
|
| |  |  | organ transplant rejection; and                   
|
| |  |  | asthma.                                           

Atherosclerosis is a common cardiovascular disease that results from
inflammation and the buildup of plaque in arterial blood vessel walls. Plaque
consists of inflammatory cells, cholesterol and cellular debris.
Atherosclerosis, depending on the location of the artery it affects, may result
in a heart attack or stroke.

Atherosclerosis of the blood vessels of the heart is called coronary
artery disease or heart disease. It is the leading cause of death in the
United States, claiming more lives each year than all forms of cancer combined.
Recent estimates suggest that over 13 million Americans are diagnosed with
some form of atherosclerosis. When atherosclerosis becomes severe enough to
cause complications, physicians must treat the complications themselves,
including angina, heart attack, abnormal heart rhythms, heart failure, kidney
failure, stroke, or obstructed peripheral arteries. Many of the patients with
established atherosclerosis are treated aggressively for their associated risk
factors, as with statins, which have been repeatedly shown to slow the
progression of atherosclerosis and prevent future adverse events such as heart
attack, stroke, and death. Other risk factors associated with atherosclerosis
include elevated triglyceride levels, high blood pressure, smoking, diabetes,
obesity and physical inactivity. Many atherosclerosis patients also experience
symptoms of angina and/or a history of acute coronary syndromes, such as
myocardial infarctions and unstable angina. In addition, most of these
patients have high-cholesterol, and as a result, the current treatment focuses
primarily on cholesterol reduction. Additionally, these patients are routinely
treated with anti-hypertensives and anti-platelet drugs to help prevent the
formation of blood clots. There are currently no medications available for
physicians to treat directly the underlying chronic inflammation of
atherosclerosis.

Rheumatoid arthritis is a common form of arthritis that is characterized
by inflammation of the membrane lining the joint, which causes pain, stiffness,
warmth, redness and swelling. The inflamed joint lining, the synovium, can
invade and damage bone and cartilage. Inflammatory cells release enzymes that
may digest bone and cartilage. The involved joint can lose its shape and
alignment, resulting in pain and loss of movement. When the immune system
works properly, it is the bodys defense against bacteria, viruses and other
foreign cells. In an immune disorder like rheumatoid arthritis, the immune
system works improperly and attacks the bodys own joints and other organs. In
rheumatoid arthritis, white blood cells move from the bloodstream into the
joint tissues. Fluid containing inflamed cells accumulates in the joint. The
white cells in the joint tissue and fluid produce many substances, including
enzymes, antibodies and other molecules that attack the joint and can cause
damage. In the United States, approximately one percent of the population, or
2.1 million people, have rheumatoid arthritis. The cause of rheumatoid
arthritis is not yet known, and the disease differs from person to person.
Anyone can get rheumatoid arthritis, including children and the elderly.
However, the disease usually begins in the young- to middle-adult years. Among
people with rheumatoid arthritis, women outnumber men three-to-one. The disease
occurs in all ethnic groups and in all parts of the world.

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Current treatment methods for rheumatoid arthritis focus on relieving
pain, reducing inflammation, stopping or slowing joint damage, and improving
patient function and well-being, and include non-steroidal anti-inflammatory
drugs, corticosteroids, and drugs designed to slow the progression of disease,
termed disease modifying anti-rheumatic drugs, or DMARDs. DMARDs can cause
serious side effects, and include drugs that were originally designed to treat
cancer, such as methotrexate. Modern treatments with two new DMARDs developed
by other companies, Enbrel® (etanercept) and Remicade® (infliximab), have
substantially improved the quality of life for people with rheumatoid
arthritis. These drugs prove that blocking the activity of tumor necrosis
factor, a molecule that stimulates a broad range of cellular activities
implicated in the inflammation process, improves rheumatoid arthritis.
However, both of these drugs must be injected and both increase the risk of
severe infection.

Organ transplantation takes place when an organ from a donor is surgically
removed and placed in a recipient patient whose own organ has failed because of
disease or infection. Except for transplants between identical twins, all
transplant donors and recipients are immunologically incompatible. This
biological incompatibility is a barrier that causes the recipients immune
system to try to destroy or reject the new organ. A patients white blood
cells produce special proteins called antibodies that are created specifically
to latch onto the transplanted organ. While attached to the organ, the
antibodies alert the rest of the immune system to attack the organ slowly and
continuously. The current treatment for prevention of organ transplant
rejection focuses on the use of powerful immunosuppressive drugs such as
cyclosporin A, tacrolimus and rapamycin (sirolimus). These drugs, which are
initiated during the acute rejection phase, need to be taken continuously after
the transplant procedure, often cause side effects, and may fail to prevent
long-term rejection of the transplant. Immunosuppressants may also impair the
recipients immune system in order to reduce the immune response against the
transplant. The Scientific Registry of Transplant Recipients reports that even
with the use of immunosuppressants, patients run the risk of losing a donated
organ during the first three years following transplantation, and roughly 50
percent of patients have functioning organ transplants after approximately ten
years.

Asthma is a common chronic inflammatory disease of the bronchial tubes,
which are the airways in the lungs. Asthma is marked by episodic airway
attacks that are caused by many stresses, including allergy, cold air, ozone or
exercise. Asthma therapy has concentrated on the use of inhaled
corticosteroids to reduce chronic inflammation and bronchodilators to provide
symptomatic relief. Asthmatic patients, however, continue to experience
flare-ups, or exacerbations, that are not prevented nor effectively treated by
these medicines.

Many physicians are only now becoming aware of the key role of chronic
inflammation in diverse diseases such as atherosclerosis and asthma for which
existing anti-inflammatory treatments are incomplete and limited in use. As
more physicians recognize that a wide range of chronic diseases are
inflammatory in nature, we believe that these physicians will require safer and
more effective anti-inflammatory treatments. We believe that one of these
therapeutic approaches will be the administration of drugs designed to block
the migration of white blood cells through blood vessel walls into inflamed
tissues, unless the inflammation is due to infection.

V-Protectant Technology

We have developed a proprietary v-protectant technology platform for the
treatment of chronic inflammatory diseases. This platform is based on the work
of our scientific co-founders R. Wayne Alexander, M.D., Ph.D. and Russell M.
Medford, M.D., Ph.D. In 1993, Drs. Alexander and Medford discovered a novel
mechanism within arterial blood vessel walls that could control the excessive
accumulation of white blood cells without affecting the bodys ability to fight
infection. V-protectant technology exploits the observation that the
endothelial cells that line the interior wall of the blood vessel play an
active role in recruiting white blood cells from the blood to the site of
chronic inflammation. V-protectants are drugs that block harmful effects of
oxygen and other similar molecules, collectively called oxidants. Scientists
have known for some time that some oxidants can damage cells, but have more
recently determined that these same oxidants may also act as signals to modify
gene activity inside cells. This change in gene activity leads to the
production of proteins that initiate or maintain inflammation. The protein
products of these cells, including VCAM-1, attract white blood cells to the
site of chronic inflammation. We believe that an excess number of VCAM-1
molecules on the surface of cells is a disease state. We also believe that
AGI-1067 and other v-protectants can act as antioxidants and can block the
specific type of inflammation caused by oxidants acting as signals. We believe
that v-protectants will provide this anti-inflammatory benefit without
undermining the bodys ability to protect itself against infection.

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Products

The table below summarizes our therapeutic programs, their target
indication or disease and their development status.

|                            |  |                                       |  |                         
|--------------------------- |  | ------------------------------------- |  | ------------------------
|Therapeutic Program         |  | Disease/Indication                    |  | Development Status      
|                            |  |                                       |  |                         
|V-PROTECTANTS              |  |                                       |  |                         
|AGI-1067                    |  | Atherosclerosis                       |  | Phase III clinical trial
|AGIX-4207                   |  | Rheumatoid arthritis                  |  | Phase II clinical trial 
|AGIX-4207 I.V               |  | Exacerbations of rheumatoid arthritis |  | Phase I clinical trial  
|AGI-1096                    |  | Transplant rejection                  |  | Phase I clinical trial  
|Oral product candidate      |  | Chronic asthma                        |  | Pre-IND                 
|FUNCTIONAL GENOMICS PROGRAM |  | Inflammatory diseases                 |  | Research                
|MEKK TECHNOLOGY PLATFORM    |  | Inflammatory diseases                 |  | Research                

We have established therapeutic programs for product development using
lead candidates we select from among our compound libraries. These programs
seek to exploit the value of the products early and to expand their use
broadly. We continue to test compounds to identify back-up and
second-generation product candidates. We are also pursuing novel discovery
targets in chronic inflammation.

AGI-1067

Our lead v-protectant product candidate, AGI-1067, is a novel small
molecule that was designed to treat atherosclerosis of the blood vessels of the
heart, or coronary artery disease. We believe that AGI-1067 may treat all
areas of the coronary artery susceptible to atherosclerosis in a way that
cannot be achieved with any existing therapy.

AGI-1067 was studied preclinically in multiple species to establish its
therapeutic properties. Dosed orally, AGI-1067 blocked VCAM-1 expression,
prevented atherosclerosis and showed potent anti-oxidant activity. Based upon
the successful completion of preclinical testing, AGI-1067 was studied in
seven Phase I clinical trials in more than 150 men and women, including healthy
volunteers and patients up to the age of 85, to assess tolerability and
potential for interaction with other drugs. In addition, we have given AGI-1067
in combination with other drugs commonly used in patients with atherosclerosis.
In these clinical trials the subjects tolerated AGI-1067 well, with no dose or
use-limiting side effects. These positive results supported our progress to
Phase II clinical trials.

In November 2001, data from our first Phase II trial, called CART-1,
presented at the American Heart Association 2001 Scientific Sessions suggested
that AGI-1067 had a direct anti-atherosclerotic effect on coronary blood
vessels, consistent with reversing the progression of coronary artery disease.

CART-1 was a 305-patient clinical trial that compared three oral doses of
AGI-1067 in the amounts of 70 mg, 140 mg and 280 mg, given for six weeks, to
placebo and probucol, a drug that has been shown to prevent restenosis. The
primary endpoint of the trial was the size of the luminal area, or coronary
artery opening, as measured by intravascular ultrasound, or IVUS, six months
after angioplasty. CART-1 results showed that the study met its primary
endpoint, achieving statistical significance for both the AGI-1067 dose
response and for 280 mg AGI-1067 vs. placebo.

In addition, an early direct benefit on coronary heart disease was evident
at two weeks as shown by a dose response improvement of the luminal area at the
site of angioplasty for patients who received AGI-1067. This direct benefit
was maintained at the angioplasty site at the six-month follow-up, as measured
by repeat angiography. A recent analysis of the CART-1 trial offers additional
data on the impact of AGI-1067 on plaque burden, a measure of disease in
coronary blood vessels. In the treatment groups

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receiving the two highest doses of AGI-1067, plaque burden decreased by 1.6%
and 1.9%, respectively, a therapeutic effect that we believe is consistent with
reversing coronary artery disease.

In July 2003, we completed enrollment in CART-2, a 500-patient Phase IIb
clinical trial that examines the effect of 12 months of AGI-1067 therapy on
atherosclerosis and post-angioplasty restenosis. We expect to complete the
treatment phase of CART-2 in mid-2004, after which we will proceed with data
analysis and disclosure of the results.

Based on the results of a subsequent End of Phase II meeting with the FDA
in 2002, AtheroGenics accelerated the development of a Phase III clinical trial
protocol to evaluate AGI-1067 for the treatment of atherosclerosis. This
protocol was submitted to the FDA in November 2002. The protocol was accepted
in March 2003 and we are currently enrolling patients in our Phase III clinical
trial.

The Phase III ARISE trial is being conducted in cardiac centers throughout
the United States, Canada, South Africa and the United Kingdom. ARISE will
evaluate the impact of AGI-1067 on important clinical outcome measures
including death due to coronary heart disease, myocardial infarction, stroke,
coronary re-vascularization and unstable angina in patients who have coronary
heart disease. The study will also assess the incremental benefits of AGI-1067
over the current standard of care in this patient population. As such, all
patients in the trial, including those on placebo, will be receiving other
appropriate heart disease medications, including statins and other
cholesterol-lowering therapies, high blood pressure medications and
anti-clotting agents. ARISE 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.

AGIX-4207

Rheumatoid arthritis is a chronic, progressively debilitating inflammatory
disease that affects articular, or rotating, joints resulting in significant
pain, stiffness and swelling and leads to degradation of the joint tissue.
According to the Arthritis Foundation, there are 2.1 million people with
rheumatoid arthritis in the United States. Approximately 70 percent of
patients with rheumatoid arthritis are young and middle-aged women.

Physicians treat rheumatoid arthritis in a stepwise fashion, starting with
the occasional to regular use of anti-inflammatory agents such as aspirin or
ibuprofen, and proceeding to treatment with DMARDs, which can potentially be
toxic. The newer DMARDs target the modulation of tumor necrosis factor (TNF),
tissue repair and proliferation. The recent successful introduction of new
drugs for rheumatoid arthritis has highlighted both the market potential and
the size and scope of the unmet medical need of these patients. These drugs
are partially effective and may cause serious side effects. AGIX-4207 is a
selective modulator of TNF induced genes and is being tested as a medication
that would be taken orally, once a day. This selective nature of AGIX-4207 may
decrease chronic inflammation in rheumatoid arthritis with fewer side effects.

In March 2001, we commenced a Phase I clinical trial to assess the safety
and tolerability of AGIX-4207 in healthy volunteers. In February 2002, we
received results from the Phase I clinical trial demonstrating that AGIX-4207
is well tolerated over the single and multiple dose ranges studied. Adverse
events were generally mild and not considered clinically significant.

In September 2002, we commenced a Phase II clinical trial to evaluate the
safety of orally administered AGIX-4207 in patients, and its effect on
biomarkers of inflammation. The trial evaluated 27 patients, who were being
treated for rheumatoid arthritis with the prescribed dosing regimen of
Remicade®, every six-to-eight weeks, and met American College of Rheumatology
response criteria. In July 2003, we received the results from this clinical
trial and the data demonstrated that treatment with AGIX-4207 was safe and well
tolerated by all patients. In the trial, AGIX-4207 significantly inhibited an
increase in the erythrocyte sedimentation rate, an important biomarker of
disease activity, versus patients on placebo. In addition, no serious adverse
events, discontinuations from therapy or new laboratory abnormalities were
noted in patients who received the drug. In October 2003, we initiated the
enrollment in a Phase II clinical trial called OSCAR, a multi-center,
randomized, double-blind, placebo-controlled trial of approximately 275
patients. The patients are being randomized into four groups and treated with
one of three doses of AGIX-4207 or placebo, administered orally, once a day,
for 12 weeks. Patients who have been treated with DMARDs prior to
screening will not be included in the trial. The primary endpoint, a reduction
in the clinical signs and symptoms of disease in patients with rheumatoid
arthritis, will be measured after 12 consecutive weeks of treatment using the
American College of Rheumatology ACR 20 composite score. The ACR 20 is a
standard measurement of response utilized to evaluate improvement of signs and
symptoms in rheumatoid arthritis patients. The trial will also assess a
variety of secondary endpoints, including ACR 50 and ACR 70 scores, biological
markers, safety and tolerability and time to initiation of rescue medication.

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We have also developed an intravenously-dosed v-protectant drug
candidate, AGIX-4207 I.V., to treat rheumatoid arthritis patients in whom the
rapid attainment of target drug levels in the blood is desirable. These
populations may include patients with flare-ups or exacerbations of the
disease, patients who are intolerant of protein-based parenteral TNF
inhibitors, hospitalized patients with rheumatoid arthritis who undergo
elective or emergency surgical procedures and risk causing flare-ups, as well
as patients who are unable to take oral medication. An exacerbation is a
sudden worsening of the patients arthritis or condition that usually requires
hospitalization and intensive therapy. We have completed a Phase I clinical
trial to assess the safety and tolerability of AGIX-4207 I.V. in healthy
volunteers. The results demonstrated that single infusions of AGIX-4207 I.V.
were well tolerated in healthy volunteers at all the doses studied, including
those doses that reached targeted blood levels. There was no dose-related
increase in adverse events, and the drug had a safety profile similar to
placebo.

AGI-1096

Organ transplant rejection is caused when patients immune systems
recognize transplanted organs as foreign and, therefore, reject them. Acute
rejection occurs soon after transplantation, while chronic rejection may take
years. Recent industry sources report there are approximately 200,000 organ
transplant recipients in the United States who are at risk of chronic organ
transplant rejection. Chronic rejection is a major factor contributing to
organ shortage.

Physicians treat these patients with powerful immunosuppressants to block
all immune and inflammatory reactions that could cause organ transplant
rejection. These immunosuppressive therapies, however, may place patients at
increased risk for infection. The vascular protection provided by our drug
candidate may protect organs from rejection beyond the first year without
increasing the risk of infection.

AGI-1096 is an anti-inflammatory agent designed to both diminish the organ
transplant response to inflammation and directly protect the blood vessels to
the transplanted organ through its v-protectant activity. AGI-1096 inhibits
the expression of certain inflammatory proteins, including VCAM-1, in
endothelial cells lining the inside surfaces of blood vessel walls. We have
completed a Phase I clinical trial of AGI-1096 in healthy volunteers that
demonstrated AGI-1096 was well-tolerated over the escalating single oral doses
studied. Adverse events were generally mild and not considered clinically
significant. Subjects reached targeted blood levels for AGI-1096 that were
equivalent to those seen in successful pre-clinical models of organ transplant
rejection. In January 2004, we announced a collaboration with Fujisawa
Pharmaceutical Co., Ltd. to conduct preclinical and early stage clinical
development trials, with Fujisawa funding all development costs during the term
of the agreement. Fujisawa will also receive an option to negotiate for late
stage development and commercial right to AGI-1096.

AGI-Series for Respiratory Diseases

According to the American Lung Association, approximately 20 million
adults and children in the United States currently suffer from asthma. Current
therapies that target the underlying disease include corticosteroids and
several classes of drugs that relieve symptoms but are not effective for
chronic inflammation. None of these drugs, including inhaled corticosteroids,
are particularly effective for treating exacerbations of asthma, which remain a
major unmet medical problem. We believe that v-protectants may reduce the
inflammation associated with chronic asthma. We further believe that our
v-protectant may be useful in the treatment of up to 1.8 million patients
annually who develop acute exacerbations of asthma and seek emergency room
treatment in the United States.

We are evaluating classes of chemical compounds as potential treatments
for asthma and other respiratory diseases. We will evaluate these compounds
for regular treatment of chronic respiratory diseases or for exacerbations. We
will test our compounds for delivery by the oral, intravenous or inhaled route
of administration.

In June 2001, we entered into a worldwide exclusive license agreement with
National Jewish Medical and Research Center to discover and develop novel
therapeutics for the treatment of inflammation and asthma. We plan to use
these new technologies to discover and develop additional drug candidates for
the treatment of asthma and other diseases.

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Discovery Research Program

We have built a robust Discovery Research Program using our demonstrated
expertise in functional genomics, molecular biology, cell biology, physiology,
pharmacology, biochemistry and medicinal chemistry.

Our Discovery Research Program has four main objectives:



| |  |  | To discover and develop v-protectants with enhanced potency and
improved therapeutic properties.We are synthesizing novel compounds
and testing them in a variety of biochemical and cell-based assays to
discover and develop new, small molecule v-protectants. We believe
that these v-protectants will have improved therapeutic properties
and applicability across a wide range of chronic inflammatory
diseases. We have identified several novel series of highly potent
v-protectants.                                                                                                                                                                                                                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | To identify novel anti-inflammatory therapeutic targets utilizing
functional genomics.One part of our drug discovery platform is a set
of techniques that connects our knowledge of genes, which code for
proteins, to agents that modify gene activity. This collection of
methods, called functional genomics, enables us to select targets
efficiently. Our targets for therapy may be the gene, the protein,
another substance in the body that links to the protein, or the agent
that induces the change. For example, oxidants are agents that induce
changes in gene activity. We believe our functional genomics program
will enable us to identify novel genes and their protein products that
are critical to the chronic inflammatory disease process. We plan to
progress these genes and proteins into targets for novel classes of
drugs.
|
| |  |  | To develop new classes of v-protectant drugs based on the new
therapeutic targets identified by our functional genomics program.We
are identifying enzymes and other molecular targets that either
control or are controlled by oxidant signals. We believe these
discoveries will enable our chemists to synthesize the next generation
of v-protectants. We intend to use these enzymes and other molecular
targets for both internal efforts and as strategic collaboration
assets.                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | To develop a second broad platform for the discovery and
development of a new class of anti-inflammatory drug candidates.As a
result of entering into the license agreement with National Jewish
Medical and Research Center in June 2001, we plan to expand our
research program in the future to include the discovery and
development of new drug candidates through the exploitation of the
licensed technology.                                                                                                                                                                                                                                                                                                                                                                                                                                    

Patents and Intellectual Property

We have established a patent portfolio of owned and in-licensed patents
that cover our lead compounds and their use. It is our goal to pursue both
broad and specific patent protection in the key areas of our research and
development both in the United States and internationally, and to identify
value-added exclusive in-licensing opportunities.

V-Protectant Technology

We have license agreements with Emory University and The Regents of the
University of California covering aspects of our v-protectant technology.
These agreements obligate us to make milestone payments upon attainment of
agreed-upon goals and royalty payments on the sale of licensed products and
technology. The licenses with Emory University and The Regents of the
University of California also require us to be diligent in commercializing the
licensed technologies within certain time periods.

Under our license agreement with Emory University, Emory University
granted to us an exclusive license to make, use and sell methods and products
covered by certain patents and patent applications owned by Emory University
relating generally to the treatment and diagnosis of VCAM-1 related diseases.
The license agreement requires us to make royalty payments to Emory University
based on certain percentages of net revenue we derive from sales of products
covered by the licensed patents or patent applications, and from sublicensing
of the licensed patents or patent applications. The license agreement also
requires us to make milestone payments to Emory University upon the occurrence
of certain product development events. Milestone payments for AGI-1067 could
total $250,000 if all milestone objectives are met. We must indemnify Emory
University for all claims and/or losses caused or contributed to by
AtheroGenics arising out of our use of the license. We have procured
commercial general liability insurance in specified amounts customary in the
industry naming Emory University as an insured.

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The Emory license agreement will terminate when all patent rights licensed
under the agreement expire. Emory University may terminate the agreement if,
after Emory gives notice to us, we fail to make a payment, we fail to render
progress reports, we incur specified financial problems, we decide to no longer
develop licensed products under the agreement, or we breach a material term of
the agreement. We may terminate the agreement upon advance notice to Emory, or
if Emory University violates certain material terms of the agreement.

Under our license agreement with The Regents of the University of
California, we received a license to make, use and sell diagnostic and
therapeutic methods and products using monoclonal antibodies in atherosclerosis
and other diseases, which are claimed in applicable patent applications owned
by The Regents of the University of California in the U.S. and Canada. We must
make milestone payments to The Regents of the University of California upon
occurrence of various product development events of up to $45,000 for each
therapeutic application and $35,000 for each diagnostic application. In
addition, we must pay to The Regents of the University of California a
percentage of the net revenue we receive from the sale of products covered by
the patents and patent applications and from our sublicensing the licensed
patents and patent applications. The Regents of the University of California
may terminate the agreement upon proper notice for violation of material terms
of the agreement. The agreement expires in 2018, when the last patent covered
by the license expires. We may terminate the agreement at any time upon prior
notice to The Regents of the University of California. We must indemnify The
Regents of the University of California for all losses and claims arising out
of our use of the license. In addition, we have procured commercial liability
insurance in specified amounts customary in the industry naming the University
of California as an insured.

As part of our v-protectant technology patent portfolio, we also
purchased U.S. Patent No. 5,262,439 under an agreement with Dr. Sampath
Parthasarathy. We believe the cost of this agreement to us is
immaterial.

AGI-1067 Patent Portfolio

Our patent coverage on AGI-1067 is based on patent filings that we own and
patent filings exclusively licensed from Emory University. We own one issued
patent, U.S. Patent No. 5,262,439, which expires in 2012, and related filings
in Japan, Canada and Europe that generically cover the compound AGI-1067 as a
member of a class of related compounds. We own another patent, U.S. Patent No.
6,147,250, that protects through 2018 the specific compound AGI-1067 and its
use to treat VCAM-1 mediated diseases including, among others, atherosclerosis,
post-angioplasty restenosis and coronary artery disease. We also own U.S.
Patent No. 6,121,319, which covers the use of a class of compounds including
AGI-1067 to treat VCAM-1 mediated diseases. Applications corresponding to U.S.
Patent No. 6,147,250 and U.S. Patent No. 6,121,319 have also been filed in
foreign patent offices. The patents that we have exclusively licensed from
Emory University include the use of a substance that inhibits a class of
oxidant signals to treat diseases mediated by VCAM-1.

AGIX-4207 Patent Portfolio

Our patent coverage on AGIX-4207 is based on patent filings that we own
and patent filings exclusively licensed from Emory University. We own U.S.
Patent No. 6,548,699, and associated non-U.S. patent filings which describe
AGIX-4207 and its use to treat rheumatoid arthritis, other inflammatory
conditions and other disorders mediated by VCAM-1. This patent and its
associated non-U.S. counterparts will expire in 2018.

AGI-1096 Patent Portfolio

Our patent coverage on AGI-1096 is based on patent filings that we own and
patent filings exclusively licensed from Emory University. We own U.S. Patent
No. 6,617,352 and associated non-U.S. patent filings which describe AGI-1096
and its use to treat disorders mediated by VCAM-1. We also own U.S. Patent No.
6,670,398 which claims method of using AGI-1096 for treating transplant organ
rejection. These patents and any associated non-U.S. counterparts will expire
in 2018.

Other V-Protectant Compounds

Certain patent applications in the United States and non-U.S. countries
cover the use of a number of compounds identified in our research program to
act as v-protectants, and specifically for use in treating cardiovascular and
inflammatory disease. In addition we have exclusively licensed patents from
Emory University that cover the use of a class of compounds which act as
v-protectants.

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MEKK Technology

In June 2001, we entered into a worldwide exclusive license agreement with
National Jewish Medical and Research Center. Under the agreement, National
Jewish granted us an exclusive license under several of its U.S. and foreign
patents and patent applications and related technical information to make, use
and sell diagnostics and therapeutics for the treatment of human diseases,
including inflammation and asthma. Under the terms of the agreement with
National Jewish, we may grant sublicenses of our rights to others.

Under the agreement with National Jewish, we have assumed responsibility
for all future costs associated with research and development of products
developed from the licensed technology. We have also assumed responsibility
for the costs of filing, prosecuting and maintaining the licensed patent
rights. We granted National Jewish a warrant to purchase up to 40,000 shares
of our common stock at an exercise price of $6.00 per share, subject to a
vesting period. Under the agreement, we paid an upfront payment in connection
with the execution of the agreement and will pay milestone payments to National
Jewish upon the achievement of certain clinical and regulatory milestones.
Upfront and milestone payments could aggregate up to approximately $800,000.
If we fail to meet various performance milestones by certain dates, some or all
of the licensed technology will revert to National Jewish. We must also pay a
royalty to National Jewish on net sales of licensed products. If we sublicense
the licensed technology, we must pay to National Jewish a percentage of the
amounts paid to us by the sublicensee.

We may terminate the license agreement with National Jewish at any time
upon at least 90 days prior written notice. If we terminate the agreement in
this manner, all licensed patent rights and related technology revert to
National Jewish. Either party to the agreement may also terminate it upon a
material, uncured breach by the other, or upon the bankruptcy or insolvency of
the other. We must indemnify National Jewish for all losses and claims arising
out of our use of the license. We will procure commercial liability insurance
in amounts customary in the industry as required by the agreement.

Our patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved or unclear. We may not develop or obtain
rights to products or processes that are patentable. Even if we do obtain
patents, they may not adequately protect the technology we own or in-license.
In addition, others may challenge, seek to invalidate, infringe or circumvent
any patents we own or in-license, and rights we receive under those patents may
not provide competitive advantages to us.

Our commercial success will depend in part on our ability to manufacture,
use, sell and offer to sell our product candidates and proposed product
candidates without infringing patents or other proprietary rights of others.
We may not be aware of all patents or patent applications that may impact our
ability to make, use or sell any of our product candidates or proposed product
candidates. For example, U.S. patent applications do not publish until 18
months from their effective filing date. Further, we may not be aware of
published or granted conflicting patent rights. Any conflicts resulting from
patent applications and patents of others could significantly reduce the
coverage of our patents and limit our ability to obtain meaningful patent
protection. If others obtain patents with conflicting claims, we may be
required to obtain licenses to these patents or to develop or obtain
alternative technology. We may not be able to obtain any licenses or other
rights to patents, technology or know-how necessary to conduct our business as
described in this report. Any failure to obtain such licenses or other rights
could delay or prevent us from developing or commercializing our product
candidates and proposed product candidates, which could materially affect our
business.

Litigation or patent interference proceedings may be necessary to enforce
any of our patents or other proprietary rights, or to determine the scope and
validity or enforceability of the proprietary rights of others. The defense
and prosecution of patent and intellectual property claims are both costly and
time consuming, even if the outcome is favorable to us. Any adverse outcome
could subject us to significant liabilities, require us to license disputed
rights from others, or require us to cease selling our future products.

Trademarks

The U.S. Patent and Trademark Office issued a Certificate of Registration
for the trademark OXYKINE on April 10, 2001. The Patent and Trademark Office
issued a Certificate of Registration for the trademark AATHEROGENICS and design
on November 7, 2000 and issued one for the trademark AGI on September 19, 2000.
On February 3, 2003, we applied for the trademark V-PROTECTANT.

On January 30, 2002, Applied Genetics Incorporated Dermatics filed with
the United States Patent and Trademark Office a petition to cancel the
trademark AGI. Applied Genetics has not requested any monetary damages. We
filed an answer to the

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petition on March 11, 2002. On July 12, 2002, the United States Patent
and Trademark Office issued a suspension of the cancellation proceeding to
allow the parties to negotiate a settlement. A settlement agreement has been
reached between both parties and is pending approval with the Patent Office.

License Agreement with Schering-Plough

In October 1999, we entered into a worldwide exclusive license agreement
with Schering-Plough. Under the agreement we granted to Schering-Plough an
exclusive license under our patents and know-how to make, use and sell AGI-1067
and other specified compounds for the treatment of restenosis, coronary artery
disease and atherosclerosis. Schering-Plough paid us an initial nonrefundable
licensing fee of $5,000,000 upon signing the agreement and, pursuant to the
terms of the agreement, had assumed responsibility for all costs going forward
associated with the development, manufacturing and commercialization of
products containing AGI-1067 and any other licensed compound.

In October 2001, we reacquired the rights to AGI-1067 and related
technology and terminated the exclusive license agreement between us and
Schering-Plough to permit us to expedite the development of the compound. With
the termination of this license agreement, Schering-Plough has no further
rights to the technology or financial obligations to us.

Manufacturing

We have entered into an arrangement with a third party manufacturer for the
supply of AGI-1067 bulk drug substance and another third party manufacturer for
the formulated drug product. The supplier of the bulk drug substance for
AGI-1067 operates under current Good Manufacturing Practice guidelines using
cost-effective and readily available materials and reliable processes. The
starting material used in the manufacturing process of AGI-1067 is probucol,
which was once widely used in North America as a cholesterol-lowering agent,
but has since been withdrawn from the North American market due to lack of
efficacy. Under the terms of our arrangement, our bulk drug supplier will
manufacture sufficient quantities to support development activities for the
foreseeable future. After manufacture, a third party supplier formulates
AGI-1067 into the drug product under current Good Manufacturing Practice
guidelines. We anticipate that this supplier will be able to provide
sufficient formulated drug product to complete our ongoing and currently
planned clinical trials.

We plan to establish manufacturing agreements with third parties that
comply with Good Manufacturing Practice guidelines for bulk drug substance and
oral or intravenous formulations of our v-protectant product candidates,
including AGIX-4207, AGIX-4207 I.V. and AGI-1096.

Sales and Marketing

We plan to collaborate with large pharmaceutical companies to
commercialize product candidates which are for patient or physician populations
in broad markets. We believe that collaborating with large companies that have
significant marketing and sales capabilities provides for optimal penetration
into broad markets, particularly those areas that are highly competitive. In
contrast, we plan to develop a sales force to commercialize the products
targeted at appropriate patient and physician populations in narrow markets.
By using our own sales and marketing organization, we believe we can retain a
higher percentage of the profits generated from the sale of our products.

Competition

Developments by others may render our product candidates obsolete or
noncompetitive. We face intense competition from other companies for
collaborative arrangements with pharmaceutical, biotechnology and medical
device companies for establishing relationships with academic and research
institutes and for licenses to proprietary technology. These competitors,
either alone or in collaboration, may succeed in developing technologies or
products that are more effective than ours.

We believe pharmaceutical, biotechnology and medical device companies, as
well as academic and research institutions and government agencies, have drug
discovery and development programs related to our named therapeutic areas of
interest. Many of these companies and institutions, including Pfizer Inc.,
Amgen Inc., Johnson & Johnson, and Novartis AG, have targeted indications that
overlap significantly with our targets and have substantially greater resources
than we do. They may, therefore, succeed in commercializing products before we
do that compete with us on the basis of efficacy, safety and price.

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Our ability to compete is predicated on three related factors:



| |  |  | First, our scientists and their collaborators have pioneered
the basic discoveries and research methodologies linking oxidant
signals to vascular cell inflammation. These discoveries and
research methodologies form the foundation for our proprietary drug
discovery programs relating to chronic inflammation.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Second, our scientific expertise, coupled with our expertise in
clinical drug development, has enabled us to be the first company to
conduct clinical trials of an orally-administered, small molecule
v-protectant.                                                                                              
|
| |  |  | Third, we believe our scientific, development and licensing
expertise strongly positions us to acquire promising technologies and
products discovered outside AtheroGenics.                                                                                                                                        

Governmental Regulation

We plan to develop prescription-only drugs for the foreseeable future.
The U.S. Food and Drug Administration is the regulatory agency that is charged
with the protection of people in the United States who take prescription
medicines. Every country has a regulatory body with a similar mandate. In
addition, the European Union has vested centralized authority in the European
Medicines Evaluation Agency and Committee on Proprietary Medicinal Products to
standardize review and approval across member nations.

Regulatory agencies have established guidelines and regulations for the
drug development process. This process involves several steps. First, the
drug company must generate sufficient preclinical data to support initial human
testing. In the United States, the drug company must submit an Investigational
New Drug application prior to human testing. The Investigational New Drug
application contains adequate data on product candidate chemistry, toxicology
and metabolism and, where appropriate, animal research testing to support
initial safety evaluation in humans. In addition, the drug company provides to
the FDA a clinical plan, including proposed use and testing in subjects
comprising healthy volunteers and patients.

Clinical trials for a new product candidate usually proceed through four
phases:



| |  |  | Phase I clinical trials explore safety, blood levels,
metabolism and the potential for interaction with other drugs. Phase
I typically proceeds from healthy volunteers into patients with the
target disease and comprises up to approximately 200 total subjects.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Phase II clinical trials establish a dose for future testing
and marketing in an adequate number of patients with the target
disease. The clinical trials may include hundreds of patients who
have the target disease and who are receiving a range of background
medications. In addition, Phase II clinical trials verify the
mechanisms of action proposed preclinically.                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Phase III clinical trials usually include two adequate and well
controlled studies in the target population. For most chronic
diseases, drug companies study a few thousand patients to assure a
broadly applicable assessment of safety and efficacy.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |   |  | At the successful conclusion of Phase III, drug companies may submit a
product license application, called a New Drug Application in the
United States. Upon accepting the submission, the FDA or non-U.S.
regulatory authorities review the file for completeness, accuracy and
adherence to regulations. These authorities may use internal and
external consultants and may convene an expert committee to advise on
the safety, effectiveness and usefulness of the proposed new product
candidate prior to final regulatory judgment. The final step to
registration is approval of the package insert or label that defines
what the drug company may promote to physicians who may use the new
drug.
|
| |  |  | Phase IV clinical trials provide additional information to
support marketing of the drug for its approved indication. Phase IV
clinical trials may generate data to support promotion of the new
drug in comparison with other approved drugs and to support
healthcare economics claims. In addition, every pharmaceutical
company is responsible for post-marketing surveillance for safety in
the marketplace.                                                                                                                                                                                                                                                                                          

We must meet regulatory standards prior to exposing subjects to any drug
candidate. We remain responsible for any of these development activities
whether we perform them internally or contract them to a third party. The FDA
may audit us or our third party

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contractors at any time to ascertain compliance with standards. The FDA
may halt all ongoing work if it determines that we or our contractors have
deviated significantly from these standards. These standards include:



| |  |  | Good Manufacturing Practices, which govern process chemistry,
formulation, labeling and handling of a drug throughout its life
cycle;                                                                                                                                                                                                                                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Good Laboratory Practices, which govern the use of a drug in
animal studies to support establishment of safety or the disposition
and metabolism of the administered drug, and handling of human or
other biological samples for drug assays; and                                                                                                                                                                                                 
|
| |  |  | Good Clinical Practices, which govern the exposure of human
subjects under our protocols. Good Clinical Practices set standards
for the constitution and activities of institutional review boards
that are charged with assuring that the appropriate person gives
informed consent prior to study participation and protecting patients
whether they receive an experimental drug, an approved drug, or an
inactive look-alike called a placebo.

Advertising is subject to FDA approval in the United States and national
review elsewhere. In addition, state and local governments and other federal
agencies may control marketing if the drug substance, formulation, package,
intended use or disposal is subject to local regulation.

The FDA has expanded its expedited review process in recognition that
certain severe or life-threatening diseases and disorders have only limited
treatment options. Fast track designation expedites the development process
but places greater responsibility on a drug company during Phase IV clinical
trials. The drug company may request fast track designation for one or more
indications at any time during the Investigational New Drug application
process, and the FDA must respond within 60 days. Fast track designation
allows the drug company to develop product candidates and to request an
accelerated or priority review of the New Drug Application based on clinical
effectiveness in a smaller number of patients. If the FDA accepts the
submission as a priority review, the time for New Drug Application review and
approval is reduced from one year to six months. We plan to request fast track
designation as appropriate for internal drug development programs.

Research and Development

Our research and development expenses in 2003, 2002 and 2001 were $45.7
million, $22.8 million and $16.9 million, respectively. We plan to increase
significantly our research and development expenses as we continue to invest in
our clinical programs. We are proceeding with the ARISE Phase III clinical
trial for AGI-1067. This trial will enroll 4,000 patients and we expect the
total cost of the trial will be approximately $45 million. The expense
associated with this trial, when combined with our other operating activities
and on-going preclinical and clinical programs, is estimated to result in net
cash usage in 2004 of $63 million to $67 million.

Employees

We currently have 97 full-time employees, including 77 in research and
development. The employee group includes 27 employees with Ph.D.s, six with
M.D.s and 19 with Masters degrees. We believe that our employee relations are
good.

Available Information

Our internet website is located at www.atherogenics.com. Copies of our
reports filed under Section 13(a) or 15(d) of the Exchange Act, including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to these reports may be accessed from our website,
free of charge, as soon as reasonably practicable after these reports are
electronically filed with or furnished to the Securities and Exchange
Commission. The reference to our website address does not constitute
incorporation by reference of the information contained on the website and this
information should not be considered part of this document.

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Advisory Boards

We have established advisory boards to provide guidance and counsel on
aspects of our business. These boards are convened once a year and individual
members are contacted as required. Members of these boards provide input on
product research and development strategy, education and publication plans.
The names and members of these boards are as follows:

Scientific Advisory Board:

|                                          |  |                                                                                                                                                                                                                 |  |  |  | 
|----------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|R. Wayne Alexander, M.D., Ph.D.,
Chairman |  | R. Bruce Logue Professor and
Chairman of the Department of Medicine, Emory University School of
Medicine                                                                                                       
|                                          |  |                                                                                                                                                                                                                
|Victor J. Dzau, M.D.                      |  | Hersey Professor of the Theory and
Practice of Medicine and Chairman,
Department of Medicine, Harvard
Medical School and Physician in Chief
and Director of Research, Brigham and
Womens Hospital             
|                                          |  |                                                                                                                                                                                                                
|Erwin W. Gelfand, M.D.                    |  | Chairman, Department of Pediatrics,
National Jewish Medical and Research
Center                                                                                                                                
|                                          |  |                                                                                                                                                                                                                
|David G. Harrison, M.D.                   |  | Bernard Marcus Professor of Medicine,
Director, Division of Cardiology,
Emory University School of Medicine                                                                                                    
|                                          |  |                                                                                                                                                                                                                
|Gary L. Johnson, Ph.D.                    |  | Professor and Chair, Department of
Pharmacology, University of North
Carolina                                                                                                                                  
|                                          |  |                                                                                                                                                                                                                
|Dennis Liotta, Ph.D.                      |  | Samuel Candler Dobbs Professor of
Chemistry, Emory University School of
Medicine, Department of Chemistry                                                                                                      
|                                          |  |                                                                                                                                                                                                                
|Robert M. Nerem, Ph.D.                    |  | Director, Georgia Tech/Emory Center
(GTEC) for the Engineering of Living
Tissues and Director, Parker H. Petit
Institute for Bioengineering and
Bioscience at Georgia Institute of
Technology                  
|                                          |  |                                                                                                                                                                                                                
|Robert D. Rosenberg, M.D., Ph.D.          |  | Chief, Molecular Medicine Unit, Beth
Israel Deaconess Medical Center,
Whitehead Professor of Biology,
Massachusetts Institute of Technology
and William B. Castle Professor of
Medicine, Harvard Medical School
|                                          |  |                                                                                                                                                                                                                
|Clinical Advisory Board:                  |  |                                                                                                                                                                                                                
|                                          |  |                                                                                                                                                                                                                
|William Virgil Brown, M.D.                |  | Chief of Medicine and Primary Care,
Veterans Affairs Medical Center,
Emory University School of Medicine                                                                                                      
|                                          |  |                                                                                                                                                                                                                
|Harvey M. Golomb, M.D.                    |  | Chairman and Professor Lowell T.
Coggeshall, Professor in Medical
Sciences, The University of Chicago                                                                                                          
|                                          |  |                                                                                                                                                                                                                
|Joseph L. Witzum, M.D.                    |  | Professor of Medicine Director, La
Jolla Specialized Center of Research
in Molecular Medicine and
Atherosclerosis                                                                                              

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Forward-Looking Statements and Risks Related to Our Company and Business

The Private Securities Litigation Reform Act of 1995 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
verbal 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, including projections of our future results of operations or of 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 our then current views and assumptions
regarding future events and operating performance, and speak only as of their
dates. We undertake 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:

If AGI-1067 fails in clinical trials, we may not be able to generate
future revenues or become profitable.

AGI-1067 is our lead compound. This compound could fail in clinical trials
if we are unable to show it is effective or if it causes unacceptable side
effects in the patients we treated. Failure in clinical trials for AGI-1067
would have a material adverse effect on our ability to generate revenue or
become profitable.

We have a history of operating losses, and we may not generate revenue or
achieve profitability in the future.

Our ability to generate revenue and achieve profitability depends on our
ability, alone or with collaborators, to complete successfully the development
of our product candidates, conduct preclinical tests in animals and clinical
trials in human beings, obtain the necessary regulatory approvals, and
manufacture and market the resulting drugs. We have experienced operating
losses since we began operations in 1994. As of December 31, 2003, we had an
accumulated deficit of approximately $142.5 million. We expect to incur
additional operating losses over the next several years and expect cumulative
losses to increase substantially as our research and development, preclinical,
clinical, manufacturing and marketing efforts expand. Except for an initial
licensing fee and research and development revenue paid to us under a license
agreement that has since been terminated, we have had no significant revenue to
date.

If we need additional financing and cannot obtain it, we may not be able
to develop or market our products.

We may encounter increased costs due to unanticipated changes in our
product development or commercialization plans. If these costs exceed our
available funds, we will need to seek additional financing. If additional funds
are not available, we may need to delay clinical studies, curtail operations or
obtain funds through collaborative arrangements that may require us to
relinquish rights to certain of our products or potential markets.

If we do not successfully develop our other product candidates, we will
have limited ability to generate revenue.

All of our other programs, AGIX-4207, AGIX-4207 I.V. and AGI-1096, are in
early stages of development, and subject to the risks of failure inherent in
developing drug products based on new technologies. We do not expect any of our
potential product candidates to be commercially available until at least 2006.
Our drug discovery efforts may not produce any other proprietary product
candidates.

If we fail to demonstrate adequately the safety and efficacy of a product
candidate, we will not be able to commercialize that product candidate.

We cannot assure you that any product candidate we develop, alone or with
others, will prove safe and effective in clinical trials and will meet all of
the applicable regulatory requirements needed to receive regulatory approval.
If we fail to adequately demonstrate safety and efficacy for any product
candidate, we will not be able to commercialize that product candidate. Our
failure to produce a product candidate will materially adversely affect our
revenue opportunities. We will need to conduct significant research,
preclinical testing and clinical trials before we can file product approval
applications with the FDA and similar regulatory authorities in other
countries. Preclinical testing and clinical trials are long, expensive and
uncertain processes. We may spend several years completing our testing for any
particular product candidate, and failure can occur at any stage.

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The FDA or we may suspend our clinical trials at any time if either of us
believes that we are exposing the subjects participating in these trials to
unacceptable health risks. The FDA or institutional review boards at the
medical institutions and healthcare facilities where we sponsor clinical trials
may suspend any trial indefinitely if they find deficiencies in the conduct of
these trials. We must conduct clinical trials in accordance with the FDAs Good
Clinical Practices. The FDA and these institutional review boards have
authority to oversee our clinical trials and the FDA may require large numbers
of test subjects. In addition, we must manufacture the product candidates that
we use in our clinical trials under the FDAs Good Manufacturing Practices.

Even if we achieve positive results in early clinical trials, these
results do not necessarily predict final results. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after achieving positive results in earlier trials. Negative or
inconclusive results or adverse medical events during a clinical trial could
cause the FDA or us to terminate a clinical trial or require that we repeat it.

Also, even if the FDA approves a New Drug Application for any of our
product candidates, the resulting product may not be accepted in the
marketplace. Physicians, patients, payors or the medical community in general
may be unwilling to accept, utilize or recommend any of our products. In
addition, after approval and use in an increasing number of patients, our
products could show side effect profiles that limit their usefulness or require
their withdrawal although the drugs did not show the side effect profile in
Phase I through Phase III clinical trials.

We may experience delays in our clinical trials that could adversely
affect our financial results and our commercial prospects.

We do not know whether planned clinical trials will begin on time or
whether we will complete any of our clinical trials on schedule or at all.
Product development costs to us and our collaborators will increase if we have
delays in testing or approvals or if we need to perform more or larger clinical
trials than planned. Significant delays may adversely affect our financial
results and the commercial prospects for our products, and delay our ability to
become profitable. We typically rely on third party clinical investigators at
medical institutions and healthcare facilities to conduct our clinical trials
and, as a result, we may face additional delaying factors outside our control.

Because we cannot predict whether or when we will obtain regulatory
approval to commercialize our product candidates, we cannot predict the timing
of any future revenue from these product candidates.

We cannot commercialize any of our product candidates, including AGI-1067,
AGIX-4207, AGIX-4207 I.V. and AGI-1096, to generate revenue until the
appropriate regulatory authorities have reviewed and approved the applications
for the product candidates. We cannot assure you that the regulatory agencies
will complete their review processes in a timely manner or that we will obtain
regulatory approval for any product candidate we or our collaborators develop.
Satisfaction of regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Regulatory approval processes outside the
United States include all of the risks associated with the FDA approval
process. In addition, we may experience delays or rejections based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review.

If we do not comply with applicable regulatory requirements in the
manufacture and distribution of our products, we may incur penalties that may
inhibit our ability to commercialize our products and adversely affect our
revenue.

Our failure to comply with applicable FDA or other regulatory requirements
including manufacturing, quality control, labeling, safety surveillance,
promoting and reporting may result in criminal prosecution, civil penalties,
recall or seizure of our products, total or partial suspension of production or
an injunction, as well as other regulatory action against our potential
products or us. Discovery of previously unknown problems with a product,
supplier, manufacturer or facility may result in restrictions on the sale of
our products, including a withdrawal of such products from the market.

Our failure to protect adequately or enforce our intellectual property
rights or secure rights to third party patents could materially adversely
affect our proprietary position in the marketplace or prevent the
commercialization of our products.

Our patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved. In addition, we may not be able to obtain
patent rights on products, treatment methods or manufacturing processes that we
may develop or to which we may obtain license or other rights. Even if we do

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obtain patents, they may not adequately protect the technology we own or
in-license. In addition, others may challenge, seek to invalidate, infringe or
circumvent any patents we own or in-license, and rights we receive under those
patents may not provide competitive advantages to us.

Our commercial success will depend in part on our ability to manufacture,
use, sell and offer to sell our product candidates and proposed product
candidates without infringing patents or other proprietary rights of others. We
may not be aware of all patents or patent applications that may impact our
ability to make, use or sell any of our product candidates or proposed product
candidates. For example, U.S. patent applications do not publish until 18
months from their priority date. Further, we may not be aware of published or
granted conflicting patent rights. Any conflicts resulting from patent
applications and patents of others could significantly reduce the coverage of
our patents and limit our ability to obtain meaningful patent protection. If
others obtain patents with conflicting claims, we may need to obtain licenses
to these patents or to develop or obtain alternative technology. We may not be
able to obtain any licenses or other rights to patents, technology or know-how
necessary to conduct our business as described in this report. Any failure to
obtain such licenses could delay or prevent us from developing or
commercializing our drug candidates or proposed product candidates, which would
adversely affect our business.

Litigation or patent interference proceedings may be necessary to enforce
any of our patents or other proprietary rights, or to determine the scope and
validity or enforceability of the proprietary rights of others. The defense and
prosecution of patent and intellectual property claims are both costly and time
consuming, even if the outcome is favorable to us. Any adverse outcome could
subject us to significant liabilities, require us to license disputed rights
from others, or require us to cease selling our future products.

Our commercial success will also depend on our ability to manufacture,
use, sell and offer to sell our product candidates and proposed product
candidates without breaching our agreements with our patent licensees. We have
obtained exclusive licenses to technologies from Emory University, covering
aspects of our v-protectant technology; The Regents of the University of
California, covering aspects of our diagnostic technology; and National Jewish,
covering aspects of our MEKK technology platform. Our exclusive license with
Emory University requires us to take steps to commercialize the licensed
technology in a timely manner. If we fail to meet these obligations, Emory
University can convert our exclusive license to a non-exclusive license, can
grant others non-exclusive rights in the licensed technology or can require us
to sublicense aspects of the licensed technology. Our license agreement with
The Regents of the University of California also includes a requirement that we
develop the licensed technology within certain time limits. If we fail to meet
these time limits, they can terminate our license. Further, The Regents of the
University of California are primarily responsible for patent prosecution of
the technology we license from them, and we are required to reimburse them for
the costs they incur in performing these activities. As a result, we do not
have the ability to control these activities. Our license agreement with
National Jewish requires us to develop the licensed technology in a timely
manner. If we fail to meet these obligations, some or all of the licensed
technology may revert to National Jewish.

We also rely upon trade secrets, proprietary know-how and technological
advances which we seek to protect through agreements with our collaborators,
employees and consultants. These persons and entities could breach our
agreements, for which we may not have adequate remedies. In addition, others
could become aware of our trade secrets or proprietary know-how through
independent discovery or otherwise.

If our competitors 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, we may have limited commercial opportunities.

Our competitors include large pharmaceutical and medical device companies
and more established biotechnology companies. These competitors have
significant resources and expertise in research and development, manufacturing,
testing, obtaining regulatory approvals and marketing. Potential competitors
also include academic institutions, government agencies, and other public and
private research organizations that conduct research, seek patent protection
and establish collaborative arrangements for research, development,
manufacturing and commercialization. It is possible that any of these
competitors could develop technologies or products that would render our
technologies or product candidates obsolete or non-competitive, which could
adversely affect our revenue potential.

Third parties failure to synthesize and manufacture our product
candidates to our specifications could delay our clinical trials or hinder our
commercialization prospects.

We currently have no manufacturing facilities to synthesize or manufacture
our product candidates, nor do we intend to develop these capabilities in the
near future. Our reliance on third parties for these services exposes us to
several risks that could delay our clinical trials or hinder our
commercialization prospects. These risks include the following:

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| |  |  | A finding that a third party did not comply with applicable
governmental regulations.Manufacturers of pharmaceutical products are
subject to continual review and periodic inspections by regulatory
agencies. Failure of one of our third party manufacturers to comply
with applicable regulatory requirements, whether or not related to our
product candidates, could result in sanctions against our potential
products, including recall or seizure, total or partial suspension of
production or injunction.           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A failure to synthesize and manufacture our product candidates in
accordance with our product specifications.For example, a starting
material used in the manufacturing process of AGI-1067 is probucol,
which physicians previously prescribed as a cholesterol-lowering agent
but which its manufacturer withdrew from the market for efficacy
reasons. The occurrence of a rare side effect with chronic dosing of
probucol requires that we maintain a very low maximal amount of
probucol in the manufacture of AGI-1067.
|
| |  |  | A failure to deliver product candidates in sufficient quantities or
in a timely manner.Any failure by our third party manufacturers to
supply our requirements for clinical trial materials or commercial
product, or supply these materials in a timely manner could jeopardize
the scheduled initiation or completion of these clinical trials and
could have a material adverse effect on our ability to generate
revenue.                                                                                                 

In addition, our continued dependence on third parties for the synthesis
and manufacture of our future products may subject us to costs outside of our
control, which could adversely affect our future profitability and our ability
to commercialize products on a timely and competitive basis.

If we are unable to create sales, marketing and distribution capabilities
or enter into agreements with third parties to perform these functions, we will
not be able to commercialize our future product candidates.

We currently have no sales, marketing or distribution capabilities.
Therefore, in order to commercialize our product candidates, we must either
develop our own sales, marketing and distribution capabilities or collaborate
with a third party to perform these functions. We have no experience in
developing, training or managing a sales force and will incur substantial
additional expenses in doing so. The cost of establishing and maintaining a
sales force may exceed its cost effectiveness. In addition, we will compete
with many companies that currently have extensive and well-funded marketing and
sales operations. Our marketing and sales efforts may be unable to compete
successfully against these companies.

To the extent we seek sales, marketing and distribution alliances for our
future products, we face risks including the following:



| |  |  | we may not be able to find collaborators, enter into alliances
on favorable terms or enter into alliances that will be commercially
successful;    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any collaborator might, at its discretion, limit the amount of
resources and time it devotes to marketing our products; and                        
|
| |  |  | any collaborator may terminate its agreement with us and
abandon our products at any time for any reason, regardless of the
terms of the agreement.

Our failure to attract, retain and motivate skilled personnel and
cultivate key academic collaborations could materially adversely affect our
research and development efforts.

We are a small company with 97 full-time employees. If we are unable to
continue to attract, retain and motivate highly qualified management and
scientific personnel and to develop and maintain important relationships with
leading academic institutions and scientists, we may not be able to achieve our
research and development objectives. Competition for personnel and academic
collaborations is intense. Loss of the services of any of our key scientific
personnel and, in particular, Dr. Russell M. Medford, our President and Chief
Executive Officer, could adversely affect progress of our research and
development programs. Dr. Medford is the only employee with whom we currently
have an employment agreement, although we are in the process of entering into
employment agreements with our other senior executives.

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Our failure to obtain an adequate level of reimbursement or acceptable
prices for our products could diminish our revenues.

Our ability to commercialize our future products successfully, alone or
with collaborators, will depend in part on the extent to which reimbursement
for the products will be available from:



| |  |  | government and health administration authorities;
| | - |  | -------------------------------------------------
|
| |  |  | private health insurers; and                     
|
| |  |  | other third party payors.                        

Government and other third party payors increasingly are attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new drugs. Third party private health insurance coverage may
not be available to patients for any of our future products.

The continuing efforts of government and other third party payors to
contain or reduce the costs of healthcare through various means may limit our
commercial opportunity. For example, in some countries other than the United
States, pricing and profitability of prescription pharmaceuticals are subject
to government control. In the United States, we expect proposals to implement
similar government control to continue. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. Cost control initiatives could decrease the price
that we or any potential collaborators could receive for any of our future
products and could adversely affect our profitability.

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 testing and marketing of medicinal products entail an inherent risk of
product liability. Clinical trial subjects, consumers, healthcare providers, or
pharmaceutical companies or others selling our future products could bring
product liability claims against us. We cannot assure you that we will be able
to acquire or maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us.

Our quarterly operating results may fluctuate, causing volatility in our
stock price.

Our product candidates are now in research and various stages of
development or clinical trials. Accordingly, we do not receive any revenues
from sales of these product candidates. Our results of operations historically
have fluctuated on a quarterly basis, which we expect to continue. Our results
of operations at any given time will be based primarily on the following
factors:



| |  |  | the status of development of our various product candidates;                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | whether we enter into collaboration agreements and the timing and
accounting treatment of payments, if any, to us under those agreements;
|
| |  |  | whether and when we achieve specified development or commercialization
milestones; and                                                   
|
| |  |  | the addition or termination of research programs or funding support.                                                                     

We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. These fluctuating results may cause the price of our stock to
fluctuate, perhaps substantially.

Conversion of our $100 million principal amount, 4.5% convertible notes
will dilute the ownership interest of existing shareholders and could adversely
affect the market price of our common stock.

The conversion of some or all of our outstanding 4.5% convertible notes
will dilute the ownership interests of existing shareholders. Any sales in the
public market of the common stock issuable upon such conversion could adversely
affect prevailing market prices of our common stock. In addition, the existence
of the notes may encourage short selling by market participants.

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Item 2.Properties

Our scientific and administration facility encompasses approximately
27,000 square feet in Alpharetta, Georgia. We lease our facility pursuant to a
long-term lease agreement that expires in 2009 and our remaining aggregate
commitment under this long-term, non-cancelable lease is approximately $6
million. This lease may be extended at our option to 2019.

In November 2001, we leased a facility in Norcross, Georgia encompassing
approximately 5,800 square feet. We lease this laboratory facility pursuant to
a long-term lease agreement that expires in 2004 and our remaining aggregate
commitment under this long-term, non-cancelable lease is approximately
$103,000. We have the option to renew this lease under mutually agreeable
terms.




Item 3.Legal Proceedings

We are not currently a party to any legal proceedings.




Item 4.Submission of Matters to a Vote of Security Holders

None.




PART II




Item 5.Market for Registrants Common Equity and Related Shareholder Matters

Common Stock Information

Our common stock is traded on the Nasdaq National Market under the symbol
AGIX. The following table sets forth the range of high and low reported last
sale price per share of our common stock as quoted on the Nasdaq National
Market for each period indicated.

|                             |                |  |              |       |     |  |   |       | 
|---------------------------- | -------------- |  | ------------ | ----- | --- |  | - | ----- | 
|                             |                |  | Common Stock
|                             |                |  | High         |       | Low
|                             |                |  |              |       |    
|Year ended December 31, 2003 |                |  |              |       |     |  |   |      
|                             | First quarter  |  | $            | 9.84  |     |  | $ | 6.41  | 
|                             | Second quarter |  |              | 15.11 |     |  |   | 8.79  | 
|                             | Third quarter  |  |              | 18.65 |     |  |   | 12.12 | 
|                             | Fourth quarter |  |              | 18.43 |     |  |   | 13.15 | 
|Year ended December 31, 2002 |                |  |              |       |     |  |   |      
|                             | First quarter  |  | $            | 7.71  |     |  | $ | 5.51  | 
|                             | Second quarter |  |              | 8.35  |     |  |   | 6.27  | 
|                             | Third quarter  |  |              | 7.47  |     |  |   | 4.71  | 
|                             | Fourth quarter |  |              | 7.41  |     |  |   | 5.65  | 

As of March 1, 2004, there were approximately 5,600 holders of our common
stock. This number includes beneficial owners of our common stock whose shares
are held in the names of various dealers, clearing agencies, banks, brokers and
other fiduciaries.

Dividend Policy

We have never declared or paid any dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to finance our
operations and do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.

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Item 6.Selected Financial Data

The selected financial data set forth below should be read in conjunction
with our financial statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations,
included in this annual report. The historical results are not necessarily
indicative of the operating results to be expected in the future.

|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |            |           | 
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | -------------- | ---------- | ----------------------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | --------- | ----------- | ---------- | ---------- | --------- | ----------- | --------- | ---------- | --------- | 
|                                                                                                              |                                             |                          |                |            | Year Ended December 31,
|                                                                                                              |                                             |                          |                |            |                        
|                                                                                                              |                                             |                          |                |            | 2003                    |   | 2002        |            | 2001       |   | 2000        |            | 1999      
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |           
|Statement of Operations Data:                                                                                 |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |          
|Revenues:                                                                                                     |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |          
|                                                                                                              | License fees                                |                          | $              |           |                         |   | $           |           |            |   | $           | 1,111,111  |            |           | $           | 3,333,333  |            |           | $           | 555,556   |           
|                                                                                                              | Research and development                    |                          |                |           |                         |   |             |           |            |   |             | 2,398,429  |            |           |             | 4,826,370  |            |           |             | 791,653   |           
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|                                                                                                              |                                             |                          | Total revenues |            |                         |  |             |            |            |  |             |            |            | 3,509,540 |             |            |            | 8,159,703 |             |           |            | 1,347,209 | 
|Operating expenses:                                                                                           |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |          
|                                                                                                              | Research and development *                  |                          |                | 45,721,087 |                         |   |             | 22,838,066 |            |   |             | 16,884,027 |            |           |             | 12,815,788 |            |           |             | 9,041,345 |           
|                                                                                                              | General and administrative *                |                          |                | 5,504,650  |                         |   |             | 4,070,189  |            |   |             | 3,979,813  |            |           |             | 3,035,559  |            |           |             | 2,593,017 |           
|                                                                                                              | Amortization of deferred
stock compensation |                          |                | 1,365,898  |                         |   |             | 1,976,872  |            |   |             | 2,652,031  |            |           |             | 7,972,728  |            |           |             | 85,480    |           
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|                                                                                                              |                                             | Total operating expenses |                |            | 52,591,635              |   |             |            | 28,885,127 |   |             |            | 23,515,871 |           |             |            | 23,824,075 |           |             |           | 11,719,842 |          
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|Operating loss                                                                                                |                                             |                          | (52,591,635    | )          |                         |   | (28,885,127 | )          |            |   | (20,006,331 | )          |            |           | (15,664,372 | )          |            |           | (10,372,633 | )        
|Interest and other income                                                                                     |                                             |                          | 1,258,216      |            |                         |   | 962,040     |            |            |   | 2,366,748   |            |            |           | 1,714,850   |            |            |           | 342,178     |          
|Interest expense                                                                                              |                                             |                          | (1,954,402     | )          |                         |   | (42,420     | )          |            |   |            |            |            |           |            |            |            |           | (402,795    | )        
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|Net loss                                                                                                      |                                             | $                        | (53,287,821    | )          |                         | $ | (27,965,507 | )          |            | $ | (17,639,583 | )          |            | $         | (13,949,522 | )          |            | $         | (10,433,250 | )        
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|Basic and diluted net loss per share                                                                          |                                             | $                        | (1.49          | )          |                         | $ | (1.00       | )          |            | $ | (0.68       | )          |            | $         | (1.30       | )          |            | $         | (4.27       | )        
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|Shares used in computing basic and
diluted net loss per share                                                 |                                             |                          | 35,770,994     |            |                         |   | 27,978,705  |            |            |   | 26,010,347  |            |            |           | 10,747,773  |            |            |           | 2,443,237   |          
|                                                                                                              |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |           |           
|*Exclusive of amounts recorded as amortization of
deferred stock compensation which was allocable as follows: |                                             |                          |                |            |                         |   |             |            |            |   |             |            |            |           |             |            |            |           |             |          
|                                                                                                              | Research and development                    |                          | $              | 939,873    |                         |   | $           | 908,061    |            |   | $           | 940,053    |            |           | $           | 1,856,932  |            |           | $           | 23,649    |           
|                                                                                                              | General and administrative                  |                          | $              | 426,025    |                         |   | $           | 1,068,811  |            |   | $           | 1,711,978  |            |           | $           | 6,115,796  |            |           | $           | 61,831    |           

The following table contains a summary of our balance sheet data for the
five years ended December 31, 2003.

|                                            |  |              |              |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |             |  
|------------------------------------------- |  | ------------ | ------------ | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2003         |              | 2002 |  | 2001 |             | 2000 |  | 1999
|                                            |  |              |              |      |  |      |             |      |  |     
|Balance Sheet Data:                         |  |              |              |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |             |  
|Cash and cash equivalents                   |  | $            | 72,058,249   |      |  | $    | 32,132,329  |      |  | $    | 28,682,050  |   |  | $ | 26,463,070  |   |  | $ | 13,409,450  |  
|Short-term investments                      |  |              | 59,525,679   |      |  |      | 2,538,802   |      |  |      | 29,757,945  |   |  |   | 27,518,169  |   |  |   |            |  
|Working capital                             |  |              | 124,848,687  |      |  |      | 30,009,013  |      |  |      | 55,056,263  |   |  |   | 52,422,951  |   |  |   | 9,651,239   |  
|Total assets                                |  |              | 138,836,746  |      |  |      | 37,952,044  |      |  |      | 62,255,278  |   |  |   | 57,598,951  |   |  |   | 15,717,214  |  
|Long-term obligations, less
current portion |  |              | 100,083,622  |      |  |      | 572,492     |      |  |      |            |   |  |   | 84,907      |   |  |   | 61,854      |  
|Deferred stock compensation                 |  |              | (505,708     | )    |  |      | (1,243,786  | )    |  |      | (2,975,314  | ) |  |   | (5,930,880  | ) |  |   | (1,809,680  | )
|Accumulated deficit                         |  |              | (142,531,315 | )    |  |      | (89,243,494 | )    |  |      | (61,277,987 | ) |  |   | (43,638,404 | ) |  |   | (29,688,882 | )
|Total shareholders equity (deficit)        |  |              | 30,377,006   |      |  |      | 32,493,713  |      |  |      | 58,294,812  |   |  |   | 54,271,686  |   |  |   | (29,288,600 | )

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Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion should be read in conjunction with our financial
statements and related notes included in this annual report. In this report,
AtheroGenics, we, us and our refer to AtheroGenics, Inc.

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, such as atherosclerosis, rheumatoid arthritis and
asthma. Based on our proprietary vascular protectant, or v-protectant,
technology platform, we have advanced four drug development programs into
clinical trials. Our lead compound, AGI-1067, is being evaluated in the Phase
III clinical trial called ARISE (Aggressive Reduction of Inflammation Stops
Events) as an oral therapy for the treatment of atherosclerosis. AGIX-4207,
our second clinical compound, is a novel, oral agent being tested in a Phase II
clinical trial called OSCAR (Oral Suppression of Cellular Inflammation
Attenuates Rheumatoid Arthritis) as a treatment for rheumatoid arthritis.
AGIX-4207 I.V. is an intravenous rheumatoid arthritis treatment that has
completed a Phase I clinical trial. AGI-1096 is a novel, oral agent that is
being developed for the prevention of organ transplant rejection in
collaboration with Fujisawa Pharmaceutical Co., Ltd. In addition to these
compounds, we are progressing on a number of other preclinical programs.

To date, we have devoted substantially all of our resources to research
and development. We have not derived any commercial revenues from product
sales and, excluding the effect of certain license fees of a non-recurring
nature, expect to incur significant losses in most years prior to deriving any
such product revenue. We have funded our operations primarily through sales of
equity and debt securities.

We have incurred significant losses since we began operations and, as of
December 31, 2003, had an accumulated deficit of $142.5 million. We cannot
assure you whether or when we will become profitable. We expect to continue to
incur significant operating losses over the next several years as we continue
to incur increasing research and development costs. We expect that losses will
fluctuate from quarter to quarter and that these fluctuations may be
substantial. Our ability to achieve profitability depends upon 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.

Critical Accounting Policies

We have identified the following policies as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations are
discussed throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Research and Development Accrual

As part of the process of preparing our financial statements, we are
required to estimate expenses that we believe we have incurred, but have not
yet been billed for. This process involves identifying services and activities
that have been performed by third-party vendors on our behalf and estimating
the level to which they have been performed and the associated cost incurred
for such service as of each balance sheet date in our financial statements.
Examples of expenses for which we accrue based on estimates we make include
fees for professional services, such as those provided by certain clinical
research organizations and investigators in conjunction with clinical trials,
and fees owed to contract manufacturers in conjunction with the manufacture of
clinical trial materials. We must sometimes estimate the date on which certain
services commence and/or the level of services performed on or before a given
date and the cost of such services. We make these estimates based upon the
facts and circumstances known to us at the time and in accordance with
generally accepted accounting principles.

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Revenue Recognition

License fees, which are nonrefundable, are recognized when the related
license agreements specify that no further efforts or obligations are required
of us. We had committed to perform certain research and development activities
as part of a license agreement, which has been terminated; accordingly, the
upfront license payment was amortized over the anticipated time period to
conduct these activities. Revenues under research and development arrangements
were recognized as the research and development activities were performed
pursuant to the terms of the related agreements. These revenues were billed
quarterly and the related payments were not refundable.

Stock-Based Compensation

We have elected to follow Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees(APB
25), in accounting for our
stock-based employee compensation plans, rather than the alternative fair value
accounting method provided for under Statement of Financial Accounting
Standards (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. We account 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.

In connection with the grant of certain options to employees, we have
recorded non-cash deferred stock compensation of approximately $14 million
since 1999, representing the difference between the exercise price and the
deemed fair value of our common stock on the dates these stock options were
granted. Deferred stock compensation is included as a reduction of
shareholders equity and is being amortized to expense using the graded vesting
method. The graded vesting method provides for vesting of each portion of the
overall award over its respective vesting period, and results in higher vesting
in earlier years than straight-line vesting.

In connection with the grant of certain options and warrants to
non-employees during 2001 and 2002, we recorded non-cash deferred stock
compensation of approximately $1.3 million. The fair value of the options and
warrants for purposes of this calculation was determined by using the
Black-Scholes option valuation model. The fair value of the options and
warrants is re-measured at each measurement date, based on the then current
fair value of our common stock.

Results of Operations

Comparison of Years Ended December 31, 2003 and 2002

Revenues

There were no revenues during 2003 or 2002. We may receive revenues in
the future related to potential licensing agreements with pharmaceutical
companies for our compounds or programs.

Expenses

Research and Development.Research and development expenses, excluding
amortization of deferred stock compensation, were $45.7 million in 2003,
compared to $22.8 million in 2002. The increase of $22.9 million, or 100%, is
primarily due to increased expenditures for the AGI-1067 ARISE Phase III
clinical trial and the AGIX-4207 OSCAR Phase II clinical trial, such as
manufacturing activities for clinical drug supply, study monitoring and
payments to clinical investigators. Also contributing to the increase are the
ongoing patient related costs for the AGI-1067 CART-2 Phase IIb clinical trial.

We expect that research and development expenses will continue to increase
in 2004. This increase will be primarily related to activities surrounding the
AGI-1067 ARISE Phase III clinical trial.

General and Administrative.General and administrative expenses,
excluding amortization of deferred stock compensation, were $5.5 million in
2003, compared to $4.1 million in 2002. The increase of $1.4 million, or 35%,
is primarily due to an increase in directors and officers insurance premiums,
consulting fees and business development expenses related to partnering
activities.

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Amortization of Deferred Stock Compensation.Amortization of deferred
stock compensation was $1.4 million in 2003, compared to $2.0 million in 2002.
The decrease in 2003 compared to 2002 is primarily due to the deferred stock
compensation being amortized using the graded vesting method, which results in
higher amortization in the earlier years, partially offset by re-measuring
options and warrants granted to consultants based on our current, higher fair
market value.

Interest and Other Income

Interest and other income is primarily comprised of interest income earned
on our cash and short-term investments. Interest and other income was $1.3
million in 2003, compared to $962,040 in 2002. The increase is due to the
increased amount of invested funds received from our follow-on offering in
February 2003 and our convertible debt offering in August 2003.

Interest Expense

Interest expense was $2.0 million in 2003 compared to $42,420 in 2002.
The increase in interest expense is primarily comprised of interest expense
resulting from our $100 million long-term convertible debt, issued in August
2003.

Income Taxes

As of December 31, 2003, we had net operating loss carryforwards and
research and development credit carryforwards of $129.5 million and $4.0
million, respectively, available to offset future regular and alternative
taxable income. The net operating loss carryforwards and the research and
development credit carryforwards will expire between 2010 and 2024. Because of
our lack of earnings history, the resulting deferred tax assets have been fully
offset by a valuation allowance. The utilization of the loss and credit
carryforwards to reduce future income taxes will depend on our ability to
generate sufficient taxable income prior to the expiration of the net operating
loss carryforwards and research and development credit carryforwards. We have
completed an analysis of Internal Revenue Code Section 382 limitations on the
cumulative net operating loss carryforward. The annual limitations are not
expected to prevent utilization of the net operating loss carryforward due to
significant increases in value indicated by the successive issuances of our
stock.

Comparison of Years Ended December 31, 2002 and 2001

Revenues

There were no revenues during 2002, compared to $3.5 million in 2001.
Revenue in 2001 reflected the amortization of a $5.0 million license fee
payment and research and development revenue attributable to a license
agreement that was terminated in October 2001.

Expenses

Research and Development.Research and development expenses, excluding
amortization of deferred stock compensation, were $22.8 million in 2002,
compared to $16.9 million in 2001. The increase of $6.0 million, or 35%, was
primarily due to increased expenditures for the Phase II clinical trials for
AGI-1067 and AGIX-4207 for items such as patient costs and clinical drug
supply. Also contributing to the increase were start-up expenditures related
to organizing the ARISE Phase III clinical trial, which were primarily related
to commercial formulation, manufacturing bulk drug supply and the hiring of
additional employees in preparation for the planned clinical trials.

General and Administrative.General and administrative expenses,
excluding amortization of deferred stock compensation, were $4.1 million in
2002, compared to $4.0 million in 2001. The increase of $90,376, or 2%,
reflects an increase in business development activities offset in part by lower
expenditures for professional fees.

Amortization of Deferred Stock Compensation.Amortization of deferred
stock compensation was $2.0 million in 2002, of which $908,061 was attributable
to research and development expenses and $1.1 million was attributable to
general and administrative expenses. In 2001, amortization of deferred stock
compensation was $2.7 million, of which $940,053 was attributable to research
and development expenses and $1.7 million was attributable to general and
administrative expenses. The decrease in 2002 compared to 2001 was 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 re-measuring options and warrants granted to consultants to
current fair market value, in accordance with EITF Issue No. 96-18.

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Interest and Other Income

Interest income was $962,040 in 2002, compared to $2.4 million in 2001.
The decrease in interest income was a reflection of lower investment balances
and lower average interest rates.

Interest Expense

Interest expense was $42,420 in 2002 was due to the interest on the
equipment loan facility.

Income Taxes

As of December 31, 2002, we had net operating loss carryforwards and
research and development credit carryforwards of $76.3 million and $2.3
million, respectively, available to offset future regular and alternative
taxable income.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through sales
of equity securities, convertible notes and payments received from a licensing
agreement. At December 31, 2003, we had cash, cash equivalents and short-term
investments of $131.6 million, compared with $34.7 million and $58.4 million at
December 31, 2002 and 2001, respectively. Working capital at December 31, 2003
was $124.8 million, compared to $30.0 million and $55.1 million at December 31,
2002 and 2001, respectively. The increase in cash, cash equivalents,
short-term investments and working capital for the year ended December 31, 2003
is primarily due to funds received from our follow-on stock offering in
February 2003 of approximately $48.4 million and our convertible debt offering
in August 2003 of approximately $96.7 million. The decrease in cash, cash
equivalents, short-term investments and working capital for the year ended 2002
from 2001 is due to the use of funds for operating purposes.

Net cash used in operating activities was $48.6 million in 2003 compared
to $24.2 million in 2002 and $12.8 million in 2001. The increase in the use of
cash in operating activities is principally due to funding a net loss of $53.3
million and an increase in prepaid expense of $1.0 million, partially offset by
an increase in the research and development accrual of $2.0 million and accrued
liabilities of $1.6 million. The increase in cash needed to fund the net loss
is primarily attributable to 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
is being expensed when service is performed. As a result of our ongoing Phase
III ARISE clinical trial for AGI-1067 and the expected increase in cash usage,
we anticipate that prepaid expenses and the research and development accrual
may fluctuate more significantly than in previous periods. We anticipate net
cash usage in 2004 for ARISE and our other on-going preclinical and clinical
programs, as well as our other operating activities, to be in a range of $63.0
million to $67.0 million, subject to the impact of a corporate partnering
arrangement for AGI-1067.

Net cash used in investing activities was $57.5 million in 2003 compared
to net cash provided by investing activities of $26.5 million in 2002 and $3.8
million used in investing activities in 2001. Net cash used in investing
activities during 2003 consisted primarily of net purchases of
available-for-sale securities. Net cash provided by investing activities
during 2002 consisted primarily of the sales of available-for-sale securities,
with the proceeds reinvested in interest-bearing cash equivalents. Net cash
used in investing activities during 2001 consisted primarily of net purchases
of available-for-sale securities, and purchases of equipment and leasehold
improvements.

Net cash provided by financing activities was $146.1 million in 2003
compared to $1.2 million in 2002 and $18.8 million in 2001. Net cash provided
by financing activities in 2003 consisted of primarily of $48.4 million
received from our follow-on stock offering in February 2003 and $96.7 million
received from our convertible debt offering in August 2003. Net cash provided
by financing activities in 2002 consisted primarily of proceeds from an
equipment loan facility and exercise of common stock options. Net cash
provided by financing activities in 2001 consisted primarily of $18.8 million
received from the private placement of our common stock in June 2001.

In March 2002, we entered into a revolving credit facility with Silicon
Valley Bank (the Bank) for up to a maximum amount of $5.0 million to be used
for working capital requirements. The revolving credit facility was not used,
and as such, we terminated it in December 2003. We also entered into an
equipment loan facility, as modified in June 2003, with the Bank for up to a
maximum amount of $2.5 million to be used to finance existing and new equipment
purchases. The borrowing period under the

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equipment loan facility, as modified, expired on September 30, 2003. At
December 31, 2003, there was an outstanding balance of approximately $563,000
on the equipment loan facility and the weighted average interest rate was 7.7%
per year.

In February 2003, we completed a public offering of approximately 8.3
million shares of common stock (including the exercise of the underwriters
over-allotment option) that raised net proceeds of approximately $48.4 million.

In August 2003, we issued $100 million in aggregate principal amount of
4.5% convertible notes due 2008 through a Rule 144A private placement to
qualified institutional buyers. These notes initially are convertible into our
common stock at a conversion rate of 65.1890 shares per $1,000 principal amount
of notes, or approximately $15.34 per share. Net proceeds were approximately
$96.7 million. We intend 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 have been
invested in interest-bearing, investment grade securities. As of December 31,
2003, we have recorded $1.7 million of interest expense related to the notes,
which is due March 1, 2004.

We have a contract with an organization that is currently conducting our
Phase II and Phase III clinical trials for AGI-1067. We will be required to
pay a percentage of the remaining balance of the contract in the unlikely event
that we terminate the contract. As of December 31, 2003, the termination fee
would have been approximately $1.0 million had we elected to terminate at that
time.

The following table summarizes our long-term contractual obligations as of
December 31, 2003:

|                        |                                          |                               |   |                        |             |      |   |           |           |           |   |            |           |  |   |             |             |  |   |         |         | 
|----------------------- | ---------------------------------------- | ----------------------------- | - | ---------------------- | ----------- | ---- | - | --------- | --------- | --------- | - | ---------- | --------- |  | - | ----------- | ----------- |  | - | ------- | ------- | 
|                        |                                          |                               |   | Payments Due by Period
|                        |                                          |                               |   | Total                  |             | 2004 |   | 2005-2006 |           | 2007-2008 |   | Thereafter
|                        |                                          |                               |   |                        |             |      |   |           |           |           |   |           
|Contractual obligations |                                          |                               |   |                        |             |      |   |           |           |           |   |            |           |  |   |             |             |  |   |        
|                        | Operating leases, net of sublease income |                               | $ | 5,723,230              |             |      | $ | 1,063,794 |           |           | $ | 2,152,011  |           |  | $ | 2,314,723   |             |  | $ | 192,702 |        
|                        | Long-term debt                           |                               |   | 100,563,061            |             |      |   | 479,439   |           |           |   | 83,622     |           |  |   | 100,000,000 |             |  |   |        |        
|                        |                                          |                               |   |                        |             |      |   |           |           |           |   |            |           |  |   |             |             |  |   |        
|                        |                                          | Total contractual obligations |   | $                      | 106,286,291 |      |   | $         | 1,543,233 |           |   | $          | 2,235,633 |  |   | $           | 102,314,723 |  |   | $       | 192,702 | 
|                        |                                          |                               |   |                        |             |      |   |           |           |           |   |            |           |  |   |             |             |  |   |        

Based upon the current status of our product development and
commercialization plans, we believe that our existing cash and cash equivalents
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;
|
| |  |  | competing technological and market developments; and                                         
|
| |  |  | our ability to establish new licensing agreements.                                           

We have historically accessed the capital markets from time to time to
raise adequate funds for operating needs and cash reserves. Although we
believe we have adequate cash for at least the next 12 months, we may access
capital markets when we believe market conditions or company needs merit doing
so.

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Item 7A.Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the fair value of the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued
with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the fair value of the principal amount of our
investment will probably decline. To minimize this risk in the future, we
intend to continue to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, all of
which have a minimum investment rating of A1/P1, money market funds, and
government and non-government debt securities. The average duration of all of
our investments has generally been less than one year. Due to the short-term
nature of these investments, we believe we have no material exposure to
interest rate risk arising from our investments.

The following table summarizes the maturity of the debt and projected
annual average interest rates on our equipment loan facility and convertible
notes as of December 31, 2003.

|                          |                       |  |      |         |           |  |           |        |       |  |      |             |   |  |   |             |  |  |              |             | 
|------------------------- | --------------------- |  | ---- | ------- | --------- |  | --------- | ------ | ----- |  | ---- | ----------- | - |  | - | ----------- |  |  | ------------ | ----------- | 
|                          |                       |  |      |         |           |  |           |        |       |  |      |             |   |  |   |             |  |  | Value as of 
|                          |                       |  |      |         |           |  |           |        |       |  |      |             |   |  |   |             |  |  | December 31,
|                          |                       |  | 2004 |         | 2005-2006 |  | 2007-2008 |        | Total |  | 2003
|                          |                       |  |      |         |           |  |           |        |       |  |     
|Long-term debt-fixed rate |                       |  |      |         |           |  |           |        |       |  |      |             |   |  |   |             |  |  |              |            
|                          | Maturity              |  | $    | 479,439 |           |  | $         | 83,622 |       |  | $    | 100,000,000 |   |  | $ | 100,563,061 |  |  | $            | 123,813,061 | 
|                          | Average interest rate |  |      | 7.7     | %         |  |           | 7.7    | %     |  |      | 4.5         | % |  |   |             |  |  |              |             | 

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Item 8.Financial Statements and Supplementary Data

ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS

Contents

|                                   |  |  |    | 
|---------------------------------- |  |  | -- | 
|Report of Independent Auditors     |  |  | 29 | 
|Balance Sheets                     |  |  | 30 | 
|Statements of Operations           |  |  | 31 | 
|Statements of Shareholders Equity |  |  | 32 | 
|Statements of Cash Flows           |  |  | 33 | 
|Notes to Financial Statements      |  |  | 34 | 

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
AtheroGenics, Inc.

We have audited the accompanying balance sheets of AtheroGenics, Inc. as
of December 31, 2003 and 2002, and the related statements of operations,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AtheroGenics, Inc. at
December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.

(ERNST & YOUNG LLP)

Atlanta, Georgia
February 10, 2004

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ATHEROGENICS, INC.
BALANCE SHEETS

|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |             |             | 
|-------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ------------ | ----------- | ---- | --------- | ----------- | ----------- | 
|                                                                                       |                                                            |                                                                                                                                      |             | December 31,
|                                                                                       |                                                            |                                                                                                                                      |             |             
|                                                                                       |                                                            |                                                                                                                                      |             | 2003         |             | 2002
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |     
|Assets                                                                                 |                                                            |                                                                                                                                      |             |              |             |      |           |            
|Current assets:                                                                        |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       | Cash and cash equivalents                                  |                                                                                                                                      | $           | 72,058,249   |             |      | $         | 32,132,329  |            
|                                                                                       | Short-term investments                                     |                                                                                                                                      |             | 59,525,679   |             |      |           | 2,538,802   |            
|                                                                                       | Prepaid expenses                                           |                                                                                                                                      |             | 1,144,006    |             |      |           | 166,995     |            
|                                                                                       | Notes receivable and other current assets                  |                                                                                                                                      |             | 496,871      |             |      |           | 56,726      |            
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       |                                                            | Total current assets                                                                                                                 |             |              | 133,224,805 |      |           |             | 34,894,852  | 
|Equipment and leasehold improvements, net of accumulated depreciation
and amortization |                                                            |                                                                                                                                      | 2,520,790   |              |             |      | 2,825,267 |            
|Other assets                                                                           |                                                            |                                                                                                                                      | 3,091,151   |              |             |      | 231,925   |            
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |             |            
|                                                                                       |                                                            | Total assets                                                                                                                         |             | $            | 138,836,746 |      |           | $           | 37,952,044  | 
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |             |            
|Liabilities and Shareholders Equity                                                   |                                                            |                                                                                                                                      |             |              |             |      |           |            
|Current liabilities:                                                                   |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       | Accounts payable                                           |                                                                                                                                      | $           | 1,778,187    |             |      | $         | 1,959,295   |            
|                                                                                       | Accrued research and development costs                     |                                                                                                                                      |             | 2,961,085    |             |      |           | 945,506     |            
|                                                                                       | Accrued liabilities                                        |                                                                                                                                      |             | 2,118,500    |             |      |           | 589,345     |            
|                                                                                       | Accrued compensation                                       |                                                                                                                                      |             | 1,038,907    |             |      |           | 957,056     |            
|                                                                                       | Current portion of equipment loan facility                 |                                                                                                                                      |             | 479,439      |             |      |           | 434,637     |            
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |             |            
|                                                                                       |                                                            | Total current liabilities                                                                                                            |             |              | 8,376,118   |      |           |             | 4,885,839   | 
|Convertible notes payable                                                              |                                                            |                                                                                                                                      | 100,000,000 |              |             |      |          |            
|Equipment loan facility, net of current portion                                        |                                                            |                                                                                                                                      | 83,622      |              |             |      | 572,492   |            
|Shareholders equity                                                                   |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       | Preferred stock, no par value: Authorized5,000,000 shares |                                                                                                                                      |             |             |             |      |           |            |            
|                                                                                       | Common stock, no par value:                                |                                                                                                                                      |             |              |             |      |           |             |            
|                                                                                       |                                                            | Authorized100,000,000 shares; issued and outstanding 
36,763,407 and 28,133,560 shares at December 31, 2003
and 2002, respectively |             |              | 172,452,536 |      |           |             | 122,182,607 | 
|                                                                                       | Warrants                                                   |                                                                                                                                      |             | 950,588      |             |      |           | 798,076     |            
|                                                                                       | Deferred stock compensation                                |                                                                                                                                      |             | (505,708     | )           |      |           | (1,243,786  | )          
|                                                                                       | Accumulated deficit                                        |                                                                                                                                      |             | (142,531,315 | )           |      |           | (89,243,494 | )          
|                                                                                       | Accumulated other comprehensive income                     |                                                                                                                                      |             | 10,905       |             |      |           | 310         |            
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       |                                                            | Total shareholders equity                                                                                                           |             |              | 30,377,006  |      |           |             | 32,493,713  | 
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |            
|                                                                                       |                                                            | Total liabilities and shareholders equity                                                                                           |             | $            | 138,836,746 |      |           | $           | 37,952,044  | 
|                                                                                       |                                                            |                                                                                                                                      |             |              |             |      |           |            

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

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ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS

|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |            |            | 
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ----------- | ----------------------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                                              |                                             |                          |             | Year Ended December 31,
|                                                                                                              |                                             |                          |             |                        
|                                                                                                              |                                             |                          |             | 2003                    |            | 2002 |             | 2001      
|                                                                                                              |                                             |                          |             |                         |            |      |             |           
|Revenues:                                                                                                     |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                                              | License fees                                |                          | $           |                        |            |      | $           |           |            |   | $           | 1,111,111  |           
|                                                                                                              | Research and development                    |                          |             |                        |            |      |             |           |            |   |             | 2,398,429  |           
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                                              |                                             | Total revenues           |             |                         |           |      |             |            |           |   |             |            | 3,509,540  | 
|Operating expenses:                                                                                           |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                                              | Research and development *                  |                          |             | 45,721,087              |            |      |             | 22,838,066 |            |   |             | 16,884,027 |           
|                                                                                                              | General and administrative *                |                          |             | 5,504,650               |            |      |             | 4,070,189  |            |   |             | 3,979,813  |           
|                                                                                                              | Amortization of deferred stock compensation |                          |             | 1,365,898               |            |      |             | 1,976,872  |            |   |             | 2,652,031  |           
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                                              |                                             | Total operating expenses |             |                         | 52,591,635 |      |             |            | 28,885,127 |   |             |            | 23,515,871 | 
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|Operating loss                                                                                                |                                             |                          | (52,591,635 | )                       |            |      | (28,885,127 | )          |            |   | (20,006,331 | )         
|Interest and other income                                                                                     |                                             |                          | 1,258,216   |                         |            |      | 962,040     |            |            |   | 2,366,748   |           
|Interest expense                                                                                              |                                             |                          | (1,954,402  | )                       |            |      | (42,420     | )          |            |   |            |           
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|Net loss                                                                                                      |                                             | $                        | (53,287,821 | )                       |            | $    | (27,965,507 | )          |            | $ | (17,639,583 | )         
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|Net loss per sharebasic and diluted                                                                          |                                             | $                        | (1.49       | )                       |            | $    | (1.00       | )          |            | $ | (0.68       | )         
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|Weighted average shares outstandingbasic and diluted                                                         |                                             |                          | 35,770,994  |                         |            |      | 27,978,705  |            |            |   | 26,010,347  |           
|                                                                                                              |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|*Exclusive of amounts recorded as amortization of deferred stock
compensation which was allocable as follows: |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                                              | Research and development                    |                          | $           | 939,873                 |            |      | $           | 908,061    |            |   | $           | 940,053    |           
|                                                                                                              | General and administrative                  |                          | $           | 426,025                 |            |      | $           | 1,068,811  |            |   | $           | 1,711,978  |           

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

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ATHEROGENICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY

|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------ |  | -------- | ----------- | ------------ |  | ----------- | -------- | ------------- |  | ------------- | ---------- | ----- |  | - | ------------ | - |  | ----------- | ------- | - |  | - | ----------- | -
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  | Accumulated |         |   |  |  
|                                                                                                                 |  | Common Stock |            |        |  |          |             | Deferred     |  |             |          |               |  | Other         |            | Total
|                                                                                                                 |  |              |            |        |  |          |             | Stock        |  | Accumulated |          | Comprehensive |  | Shareholders
|                                                                                                                 |  | Shares       |            | Amount |  | Warrants |             | Compensation |  | Deficit     |          | Income        |  | Equity       
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |              
|Balance at January 1, 2001                                                                                       |  |              | 23,909,295 |        |  | $        | 103,608,655 |              |  | $           | 225,713  |               |  | $             | (5,930,880 | )     |  | $ | (43,638,404  | ) |  | $           | 6,602   |   |  | $ | 54,271,686  |  
|Issuance of common stock for exercise of stock options
at $.30 to $.38 per share                                 |  |              | 335,478    |        |  |          | 108,764     |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 108,764     |  
|Issuance of common stock for services                                                                            |  |              | 5,000      |        |  |          | 29,778      |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 29,778      |  
|Issuance of common stock, net of issuance
cost of $1,788,310                                                     |  |              | 3,585,000  |        |  |          | 18,825,440  |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 18,825,440  |  
|Deferred stock compensation for issuance of
stock options and warrants related to a
technology license agreement |  |              |           |        |  |          | 546,200     |              |  |             | 546,000  |               |  |               | (1,092,200 | )     |  |   |             |   |  |             |        |   |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |              |           |        |  |          | (1,395,735  | )            |  |             |         |               |  |               | 4,047,766  |       |  |   |             |   |  |             |        |   |  |   | 2,652,031   |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   | (17,639,583  | ) |  |             |        |   |  |   | (17,639,583 | )
|Unrealized gain on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             | 46,696  |   |  |   | 46,696      |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   | (17,592,887 | )
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Balance at December 31, 2001                                                                                     |  |              | 27,834,773 |        |  |          | 121,723,102 |              |  |             | 771,713  |               |  |               | (2,975,314 | )     |  |   | (61,277,987  | ) |  |             | 53,298  |   |  |   | 58,294,812  |  
|Issuance of common stock for exercise of stock options
at $.30 to $5.00 per share                                |  |              | 262,654    |        |  |          | 240,524     |              |  |             |        |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 240,524     |  
|Issuance of common stock for exercise of warrants                                                                |  |              | 36,133     |        |  |          | 78,637      |              |  |             | (78,637  | )             |  |               |           |       |  |   |             |   |  |             |        |   |  |   |            |  
|Deferred stock compensation for re-measurement of
stock options related to a consulting agreement                |  |              |           |        |  |          | 235,956     |              |  |             |         |               |  |               | (235,956   | )     |  |   |             |   |  |             |        |   |  |   |            |  
|Adjustments to market value for variable stock options
and warrants issued to non-employees                      |  |              |           |        |  |          | 16,229      |              |  |             | 105,000  |               |  |               | (121,229   | )     |  |   |             |   |  |             |        |   |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |              |           |        |  |          | (111,841    | )            |  |             |         |               |  |               | 2,088,713  |       |  |   |             |   |  |             |        |   |  |   | 1,976,872   |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   | (27,965,507  | ) |  |             |        |   |  |   | (27,965,507 | )
|Unrealized loss on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             | (52,988 | ) |  |   | (52,988     | )
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   | (28,018,495 | )
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Balance at December 31, 2002                                                                                     |  |              | 28,133,560 |        |  |          | 122,182,607 |              |  |             | 798,076  |               |  |               | (1,243,786 | )     |  |   | (89,243,494  | ) |  |             | 310     |   |  |   | 32,493,713  |  
|Issuance of common stock for exercise of stock options
at $.30 to $8.25 per share                                |  |              | 340,395    |        |  |          | 1,382,972   |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 1,382,972   |  
|Issuance of common stock for exercise of warrants                                                                |  |              | 9,452      |        |  |          | 150,400     |              |  |             | (150,400 | )             |  |               |           |       |  |   |             |   |  |             |        |   |  |   |            |  
|Issuance of common stock, net of issuance
cost of $3,264,905                                                     |  |              | 8,280,000  |        |  |          | 48,411,649  |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             |        |   |  |   | 48,411,649  |  
|Adjustments to market value for variable stock options
and warrants issued to non-employees                      |  |              |           |        |  |          | 324,908     |              |  |             | 302,912  |               |  |               | (627,820   | )     |  |   |             |   |  |             |        |   |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |              |           |        |  |          |            |              |  |             |         |               |  |               | 1,365,898  |       |  |   |             |   |  |             |        |   |  |   | 1,365,898   |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   | (53,287,821  | ) |  |             |        |   |  |   | (53,287,821 | )
|Unrealized gain on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |             |         |               |  |               |           |       |  |   |             |   |  |             | 10,595  |   |  |   | 10,595      |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   | (53,277,226 | )
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  
|Balance at December 31, 2003                                                                                     |  |              | 36,763,407 |        |  | $        | 172,452,536 |              |  | $           | 950,588  |               |  | $             | (505,708   | )     |  | $ | (142,531,315 | ) |  | $           | 10,905  |   |  | $ | 30,377,006  |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |             |          |               |  |               |            |       |  |   |              |   |  |             |         |   |  |   |             |  

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

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ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS

|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |           |            |   |             |  
|------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ------------------------------------ | ----------- | --------------------------------------------------- | --------- | ----------------------- | ----------- | --------- | -------- | ---- | ----------- | --------- | ---------- | - | ----------- | -
|                                                                                                                               |                                              |                                      |             |                                                     |           | Year Ended December 31,
|                                                                                                                               |                                              |                                      |             |                                                     |           |                        
|                                                                                                                               |                                              |                                      |             |                                                     |           | 2003                    |             | 2002      |          | 2001
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |     
|Operating activities                                                                                                           |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Net loss                                                                                                                       |                                              | $                                    | (53,287,821 | )                                                   |           | $                       | (27,965,507 | )         |          | $    | (17,639,583 | )        
|Adjustments to reconcile net loss to net cash used
in operating activities:                                                    |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|                                                                                                                               | Depreciation and amortization                |                                      |             | 839,503                                             |           |                         |             | 746,949   |          |      |             | 491,973   |           
|                                                                                                                               | Amortization of debt issuance costs          |                                      |             | 217,660                                             |           |                         |             |          |          |      |             |          |           
|                                                                                                                               | Amortization of deferred stock compensation  |                                      |             | 1,365,898                                           |           |                         |             | 1,976,872 |          |      |             | 2,652,031 |           
|                                                                                                                               | Stock issued for services                    |                                      |             |                                                    |           |                         |             |          |          |      |             | 29,778    |           
|                                                                                                                               | Changes in operating assets and liabilities: |                                      |             |                                                     |           |                         |             |           |          |      |             |           |           
|                                                                                                                               |                                              | Accounts receivable                  |             |                                                     |          |                         |             |           |         |      |             |           | 1,138,244  |  
|                                                                                                                               |                                              | Prepaid expenses                     |             |                                                     | (977,011  | )                       |             |           | 23,679   |      |             |           | 206,385    |  
|                                                                                                                               |                                              | Notes receivable and other assets    |             |                                                     | (252,126  | )                       |             |           | 420,446  |      |             |           | (401,682   | )
|                                                                                                                               |                                              | Accounts payable                     |             |                                                     | (181,108  | )                       |             |           | 837,745  |      |             |           | 616,559    |  
|                                                                                                                               |                                              | Accrued research and development     |             |                                                     | 2,015,579 |                         |             |           | (361,929 | )    |             |           | 965,225    |  
|                                                                                                                               |                                              | Accrued liabilities and compensation |             |                                                     | 1,611,006 |                         |             |           | 102,021  |      |             |           | 286,093    |  
|                                                                                                                               |                                              | Deferred revenues                    |             |                                                     |          |                         |             |           |         |      |             |           | (1,111,111 | )
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|                                                                                                                               |                                              |                                      |             | Net cash used in operating activities               |           |                         | (48,648,420 | )         |          |      | (24,219,724 | )         |            |   | (12,766,088 | )
|Investing activities                                                                                                           |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|(Purchases) sales of short-term investments                                                                                    |                                              |                                      | (56,976,282 | )                                                   |           |                         | 27,166,155  |           |          |      | (2,193,080  | )        
|Purchases of equipment and leasehold improvements                                                                              |                                              |                                      | (535,026    | )                                                   |           |                         | (656,704    | )         |          |      | (1,632,491  | )        
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|                                                                                                                               |                                              |                                      |             | Net cash (used in) provided by investing activities |           |                         | (57,511,308 | )         |          |      | 26,509,451  |           |            |   | (3,825,571  | )
|Financing activities                                                                                                           |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Proceeds from the convertible notes                                                                                            |                                              |                                      | 96,735,095  |                                                     |           |                         |            |           |          |      |            |          
|Proceeds from the issuance of common stock                                                                                     |                                              |                                      | 48,411,649  |                                                     |           |                         |            |           |          |      | 18,825,440  |          
|Proceeds from the exercise of common stock options                                                                             |                                              |                                      | 1,382,972   |                                                     |           |                         | 240,524     |           |          |      | 108,764     |          
|Proceeds from equipment loan facility                                                                                          |                                              |                                      |            |                                                     |           |                         | 1,258,473   |           |          |      |            |          
|Payments on equipment loan facility and capital lease obligation                                                               |                                              |                                      | (444,068    | )                                                   |           |                         | (338,445    | )         |          |      | (123,565    | )        
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|                                                                                                                               |                                              |                                      |             | Net cash provided by financing activities           |           |                         | 146,085,648 |           |          |      | 1,160,552   |           |            |   | 18,810,639  |  
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Increase in cash and cash equivalents                                                                                          |                                              |                                      | 39,925,920  |                                                     |           |                         | 3,450,279   |           |          |      | 2,218,980   |          
|Cash and cash equivalents at beginning of year                                                                                 |                                              |                                      | 32,132,329  |                                                     |           |                         | 28,682,050  |           |          |      | 26,463,070  |          
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Cash and cash equivalents at end of year                                                                                       |                                              | $                                    | 72,058,249  |                                                     |           | $                       | 32,132,329  |           |          | $    | 28,682,050  |          
|                                                                                                                               |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Supplemental disclosures of cash flow information                                                                              |                                              |                                      |             |                                                     |           |                         |             |           |          |      |             |          
|Interest paid                                                                                                                  |                                              | $                                    | 61,844      |                                                     |           | $                       | 50,689      |           |          | $    | 21,536      |          
|Re-measurement adjustment for variable options and warrants issued
for technology license agreements and consulting agreements |                                              | $                                    | 627,820     |                                                     |           | $                       | 357,185     |           |          | $    | 1,092,200   |          

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

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Notes to Financial Statements

1. Description of Business and Significant Accounting Policies

Description of Business

AtheroGenics, Inc. (AtheroGenics) was incorporated on November 23, 1993
(date of inception) in the State of Georgia to focus on the discovery,
development and commercialization of novel therapeutics for the treatment of
chronic inflammatory diseases, such as heart disease (atherosclerosis),
rheumatoid arthritis and asthma.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

AtheroGenics considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. AtheroGenics cash
equivalents consist primarily of money market accounts, commercial paper,
government agency notes and corporate notes on deposit with several financial
institutions and the carrying amounts reported in the balance sheets
approximate their fair value.

Short-Term Investments

Short-term investments consist of certificates of deposit, commercial
paper, government agency notes and corporate notes with original maturities
greater than three months and with maturities less than one year.

Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. These investments are accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities(SFAS 115). AtheroGenics has
classified all investments as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported in a separate component of shareholders equity. Realized
gains and losses are included in investment income and are determined on a
specific identification basis.

Fair Value of Financial Instruments and Concentration of Credit Risk

Financial instruments that subject AtheroGenics to concentration of credit
risk consist primarily of cash, cash equivalents and short-term investments.
These assets are maintained by reputable third-party financial institution
custodians. The carrying values reported in the balance sheets for cash, cash
equivalents and short-term investments approximate fair values.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Depreciation of
computer and lab equipment is computed using the straight-line method over the
estimated useful lives of three and five years, respectively. Amortization of
leasehold improvements is recorded over the shorter of: (a) the estimated
useful lives of the related assets; or (b) the lease term.

Research and Development Accrual

AtheroGenics research and development accrual is based on expenses that
are believed to have been incurred, but have not yet been billed for. Examples
of expenses for which AtheroGenics accrued based on its estimates include fees
for professional services, such as those provided by certain clinical research
organizations and investigators in conjunction with clinical trials, and fees
owed to contract manufacturers in conjunction with the manufacture of clinical
trial materials. AtheroGenics must sometimes estimate the date on which
certain services commence and/or the level of services performed on or before a
given date and the cost of such services. AtheroGenics makes these estimates
based upon the facts and circumstances known at the time and in accordance with
generally accepted accounting principles.

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Revenue Recognition

License fees, which are nonrefundable, are recognized when the related
license agreements specify that no further efforts or obligations are required
of AtheroGenics. AtheroGenics had committed to perform certain research and
development activities as part of an exclusive license agreement; accordingly,
the upfront license payment was amortized over the anticipated time period to
conduct such activities. Revenues under research and development arrangements
were recognized as the research and development activities were performed
pursuant to the terms of the related agreements (see Note 2 License
Agreement). These revenues were billed quarterly and the related payments
were not refundable.

Research and Development and Patent Costs

Research and development costs, including all related salaries, clinical
trial expenses, facility costs and expenditures related to obtaining patents,
are charged to expense when incurred.

Stock-Based Compensation

AtheroGenics has elected to follow Accounting Principles Board 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.

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.

|                                                                                                                |                                |   |             |       |      |   |             |       |   |   |             |       |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------ | - | ----------- | ----- | ---- | - | ----------- | ----- | - | - | ----------- | ----- | -
|                                                                                                                |                                |   | 2003        |       | 2002 |   | 2001       
|                                                                                                                |                                |   |             |       |      |   |            
|Net loss, as reported                                                                                           |                                | $ | (53,287,821 | )     |      | $ | (27,965,507 | )     |   | $ | (17,639,583 | )    
|Add: Stock-based employee compensation expense included
in reported net loss                                    |                                |   | 553,309     |       |      |   | 1,495,249   |       |   |   | 2,316,141   |      
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards |                                |   | (3,375,253  | )     |      |   | (3,441,554  | )     |   |   | (3,370,753  | )    
|                                                                                                                |                                |   |             |       |      |   |             |       |   |   |             |      
|Pro forma net loss                                                                                              |                                | $ | (56,109,765 | )     |      | $ | (29,911,812 | )     |   | $ | (18,694,195 | )    
|                                                                                                                |                                |   |             |       |      |   |             |       |   |   |             |      
|Net loss per share:                                                                                             |                                |   |             |       |      |   |             |       |   |   |             |      
|                                                                                                                | Basic and diluted, as reported |   | $           | (1.49 | )    |   | $           | (1.00 | ) |   | $           | (0.68 | )
|                                                                                                                |                                |   |             |       |      |   |             |       |   |   |             |      
|                                                                                                                | Basic and diluted, pro forma   |   | $           | (1.57 | )    |   | $           | (1.07 | ) |   | $           | (0.72 | )
|                                                                                                                |                                |   |             |       |      |   |             |       |   |   |             |      

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The fair value for these options (which are granted with an exercise price
equal to fair market value on the grant date) was estimated using the
Black-Scholes option valuation model with the following assumptions:

|                        |  |         |       |         |  |         |       |   |  |  |       |  
|----------------------- |  | ------- | ----- | ------- |  | ------- | ----- | - |  |  | ----- | -
|                        |  | 2003    |       | 2002    |  | 2001   
|                        |  |         |       |         |  |        
|Expected life           |  | 5 years |       | 5 years |  | 5 years
|Risk free interest rate |  |         | 4.27  | %       |  |         | 3.37  | % |  |  | 4.51  | %
|Volatility              |  |         | 80.18 | %       |  |         | 87.63 | % |  |  | 99.79 | %

Income Taxes

The liability method is used in accounting for income taxes. Deferred
income tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect when the
differences are anticipated to reverse.

Comprehensive Income

AtheroGenics computes comprehensive income in accordance with SFAS No.
130, Reporting Comprehensive Income(SFAS 130). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources, such as
unrealized gains and losses on available-for-sale securities. Comprehensive
loss was $53,277,226, $28,018,495 and $17,592,887 for the years ended December
31, 2003, 2002 and 2001, respectively.

Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 was effective immediately for variable
interest entities obtained after January 31, 2003, and otherwise is effective
for the first reporting period ending after March 15, 2004. AtheroGenics does
not expect the adoption of FIN 46 to have a material impact upon its financial
statements.

In May 2003, the FASB 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 did not
have an impact on AtheroGenics financial statements.

2. License Agreement

In October 1999, AtheroGenics entered into an exclusive license agreement
(the Agreement), consisting of contracts with each of Schering Corporation
and Schering-Plough Ltd. (collectively, Schering-Plough). Under the
Agreement, AtheroGenics granted to Schering-Plough rights to develop and
commercialize AGI-1067 and specified compounds.

In November 1999, under the terms of the Agreement, AtheroGenics received
a $5,000,000 nonrefundable license fee for the exclusive worldwide license to
patent rights and licensor know-how held by AtheroGenics. AtheroGenics
amortized the fee over 18 months, which represents the period AtheroGenics
conducted development activities pursuant to the Agreement. Schering-Plough
also paid AtheroGenics $2,398,429 for research and development activities
performed during 2001 related to AGI-1067.

In October 2001, AtheroGenics reacquired all rights to AGI-1067 and
related technology and terminated the license agreement.

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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.

During all periods presented, AtheroGenics had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following at the dates indicated:

|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 
|------------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2003                    |            | 2002 |  | 2001
|                                                        |  |                         |            |      |  |     
|Shares underlying convertible notes                     |  |                         | 6,518,904  |      |  |      |          |  |  |   |          | 
|Options                                                 |  |                         | 4,403,179  |      |  |      | 3,895,420 |  |  |   | 3,360,660 | 
|Warrants                                                |  |                         | 267,622    |      |  |      | 283,622   |  |  |   | 350,290   | 
|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 
|Total                                                   |  |                         | 11,189,705 |      |  |      | 4,179,042 |  |  |   | 3,710,950 | 
|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 
|Conversion price of shares underlying convertible notes |  | $                       | 15.34      |      |  | $    |          |  |  | $ |          | 
|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of options              |  | $                       | 6.27       |      |  | $    | 4.06      |  |  | $ | 2.99      | 
|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of warrants             |  | $                       | 4.32       |      |  | $    | 4.41      |  |  | $ | 4.14      | 
|                                                        |  |                         |            |      |  |      |           |  |  |   |           | 

Because AtheroGenics reported a net loss for all periods presented, shares
associated with the convertible notes, stock options and warrants are not
included because they are antidilutive. Basic and diluted net loss per share
amounts are the same for the periods presented.

4. Common Stock

On June 19, 2001, AtheroGenics completed a private placement of 3,585,000
shares of common stock that raised net proceeds of approximately $18,800,000.

On November 9, 2001, AtheroGenics Board of Directors adopted a
Shareholder Rights Plan declaring a dividend distribution of one common stock
purchase right on each outstanding share of its common stock. Until the rights
become exercisable, the rights will trade automatically with the common stock
of AtheroGenics and separate rights certificates will not be issued. Under the
rights plan, each right consists of an initial right and subsequent rights.
Initial rights will be exercisable only if a person or group acquires 15% or
more of AtheroGenics common stock, whether through open market or private
purchases or consummation of a tender or exchange offer. Any shareholders who
owned, as of November 9, 2001, in excess of 17% of AtheroGenics common stock
will be permitted to acquire up to an aggregate of 20% of AtheroGenics
outstanding common stock without triggering the rights plan. If, following the
exercise of initial rights, a person or group again acquires 15% or more of
AtheroGenics common stock, or a person or group who had previously acquired
15% or more of AtheroGenics common stock acquires an additional 10% or more of
the common stock, the subsequent rights become exercisable. Each right will
initially entitle shareholders to buy eight shares of common stock at an
exercise price equal to 20% of the then current market value of the common
stock, calculated and adjusted according to the terms of the rights plan. The
number of shares that can be purchased upon exercise will increase as the
number of shares held by the bidder increases.

If AtheroGenics is acquired in a merger or other business combination,
each right will entitle its holder to purchase, at the rights then-current
exercise price, a number of the acquiring companys shares equal in value to
those obtainable if the rights were exercisable in AtheroGenics stock.

The rights are intended to enable all shareholders to realize the
long-term value of their investment in AtheroGenics. They will not prevent a
takeover, but should encourage anyone seeking to acquire AtheroGenics to
negotiate with the Board prior to attempting a takeover. The Board of
Directors may redeem any non-exercisable rights at any time at its option at a
redemption price of $.0001 per right. The rights plan expires at the close of
business on November 8, 2011.

On February 3, 2003, AtheroGenics completed a 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.

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5. Stock Options and Warrants

During 1995, AtheroGenics established a stock option plan (the 1995
Plan) which, as amended, provides that options to purchase AtheroGenics
common stock may be granted to employees, directors, consultants or contractors
with exercise prices not less than 75% of the fair values of the shares on the
dates of grant.

The 1995 Plan, as amended, authorizes the grant of options for up to
1,264,084 shares of AtheroGenics common stock, and as of December 31, 2003,
AtheroGenics had reserved 267,800 shares of common stock for future issuance
under the 1995 Plan. Options granted under the 1995 Plan vest over periods
ranging from the date of grant to five years from that date.

During 1997, AtheroGenics established an equity ownership plan (the 1997
Plan) whereby options to purchase AtheroGenics common stock may be granted to
employees, directors, consultants or contractors with exercise prices not less
than the fair value of the shares on the dates of grant. The 1997 Plan, as
amended, authorizes the grant of options for up to 3,724,416 shares of
AtheroGenics common stock. As of December 31, 2003, AtheroGenics had reserved
2,282,147 shares of common stock for issuance under the 1997 Plan. The 1997
Plan allows for grants of non-qualified options, incentive stock options and
shares of restricted stock. Non-qualified options granted under the 1997 Plan
may vest immediately for non-employees, but vest over a four-year period for
employees. Incentive stock options generally vest over four years. The
majority of the stock options granted under the 1997 Plan are incentive stock
options.

During 2001, AtheroGenics established an equity
ownership plan (the 2001 Plan) whereby options to purchase AtheroGenics common stock
may be granted to employees, directors, consultants or contractors with
exercise prices not less than the fair value of the shares on the dates of
grant. The 2001 Plan authorizes the grant of options for up to 2,000,000
shares of AtheroGenics common stock. As of December 31, 2003, AtheroGenics
had reserved 1,946,779 shares of common stock for issuance under the 2001 Plan.
The terms of the 2001 Plan are substantially similar to the terms of the 1997
Plan.

A summary of stock option activity under the 1995 Plan, the 1997 Plan and
the 2001 Plan follows:

|                                 |  |           |           |             |  |       |                |         |  |          |       | 
|-------------------------------- |  | --------- | --------- | ----------- |  | ----- | -------------- | ------- |  | -------- | ----- | 
|                                 |  |           |           |             |  |       |                |         |  | Weighted
|                                 |  | Number of |           |             |  |       |                | Average
|                                 |  | Shares    |           | Price Range |  | Price
|                                 |  |           |           |             |  |      
|Outstanding at January 1, 2001   |  |           | 2,858,175 |             |  | $     | .10-9.88       |         |  | $        | 1.49  | 
|Granted                          |  |           | 1,071,450 |             |  |       | 4.37  -   6.85 |         |  |          | 6.02  | 
|Exercised                        |  |           | (340,478  | )           |  |       | .30  -   6.56  |         |  |          | .41   | 
|Canceled                         |  |           | (228,487  | )           |  |       | .30  -   8.25  |         |  |          | 2.31  | 
|                                 |  |           |           |             |  |       |                |         |  |          |       | 
|Outstanding at December 31, 2001 |  |           | 3,360,660 |             |  |       | .10  -   9.88  |         |  |          | 2.99  | 
|Granted                          |  |           | 1,048,380 |             |  |       | 6.10  -   7.85 |         |  |          | 7.18  | 
|Exercised                        |  |           | (262,654  | )           |  |       | .30  -   5.30  |         |  |          | .92   | 
|Canceled                         |  |           | (250,966  | )           |  |       | .31  -   9.88  |         |  |          | 5.97  | 
|                                 |  |           |           |             |  |       |                |         |  |          |       | 
|Outstanding at December 31, 2002 |  |           | 3,895,420 |             |  |       | .10  -   9.88  |         |  |          | 4.06  | 
|Granted                          |  |           | 986,983   |             |  |       | 7.55  - 16.65  |         |  |          | 14.40 | 
|Exercised                        |  |           | (340,395  | )           |  |       | .30  -   8.25  |         |  |          | 4.06  | 
|Canceled                         |  |           | (138,829  | )           |  |       | .31  - 14.51   |         |  |          | 7.68  | 
|                                 |  |           |           |             |  |       |                |         |  |          |       | 
|Outstanding at December 31, 2003 |  |           | 4,403,179 |             |  |       | .10  - 16.65   |         |  |          | 6.27  | 
|                                 |  |           |           |             |  |       |                |         |  |          |       | 

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The following table summarizes information concerning currently
outstanding and exercisable options granted under the 1995 Plan, the 1997 Plan
and the 2001 Plan as of December 31, 2003.

| |  |                     |             |                     |  |                 |           |                  |  |                  |      |                |  |                  |       |  |  |  |           |  |  |   |      | 
| |  | ------------------- | ----------- | ------------------- |  | --------------- | --------- | ---------------- |  | ---------------- | ---- | -------------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ---- | 
| |  | Options Outstanding |             | Options Exercisable
| |  |                     |             |                    
| |  |                     |             |                     |  | Number          |           | Weighted Average |  | Weighted Average |      | Number         |  | Weighted Average
| |  | Exercise Price      |             | Outstanding         |  | Remaining Years |           | Exercise Price   |  | Exercisable      |      | Exercise Price
| |  |                     |             |                     |  |                 |           |                  |  |                  |      |               
| |  | $                   | .10-    .38 |                     |  |                 | 1,426,400 |                  |  |                  | 5.05 |                |  | $                | .31   |  |  |  | 1,426,400 |  |  | $ | .31  | 
| |  |                     | 4.37-  6.85 |                     |  |                 | 1,084,024 |                  |  |                  | 7.65 |                |  |                  | 5.89  |  |  |  | 651,165   |  |  |   | 5.87 | 
| |  |                     | 7.00-  8.63 |                     |  |                 | 953,322   |                  |  |                  | 8.53 |                |  |                  | 7.50  |  |  |  | 342,620   |  |  |   | 7.68 | 
| |  |                     | 9.10-14.93  |                     |  |                 | 922,933   |                  |  |                  | 9.90 |                |  |                  | 14.45 |  |  |  | 11,196    |  |  |   | 9.40 | 
| |  |                     | 16.52-16.65 |                     |  |                 | 16,500    |                  |  |                  | 9.80 |                |  |                  | 16.56 |  |  |  |          |  |  |   |     | 
| |  |                     |             |                     |  |                 |           |                  |  |                  |      |                |  |                  |       |  |  |  |           |  |  |   |      | 
| |  |                     |             |                     |  |                 | 4,403,179 |                  |  |                  | 7.48 |                |  |                  | 6.27  |  |  |  | 2,431,381 |  |  |   | 2.88 | 
| |  |                     |             |                     |  |                 |           |                  |  |                  |      |                |  |                  |       |  |  |  |           |  |  |   |      | 

In 1999 and 2000, in connection with the grant of certain options to
employees, AtheroGenics recorded non-cash deferred stock compensation of
$13,989,088, representing the difference between the exercise price and the
deemed fair value of AtheroGenics common stock on the dates these stock
options were granted. Deferred stock compensation is included as a reduction
of shareholders equity and is being amortized to expense using the graded
vesting method. The graded vesting method provides for vesting of each portion
of the overall award over its respective vesting period, and results in higher
vesting in earlier years than straight-line vesting. During 2003, 2002 and
2001, AtheroGenics recorded amortization of deferred stock compensation for
these options of $553,309, $1,495,249 and $2,316,141, respectively.

In June 2001, in connection with the grant of certain warrants as part of
a licensing agreement with National Jewish Medical and Research Center and
options granted for the addition of new members to the Scientific Advisory
Board, AtheroGenics recorded non-cash deferred stock compensation of
$1,092,200. In August 2002, in connection with the modification of certain
options held by an employee who changed his status to become a consultant,
AtheroGenics recorded non-cash deferred stock compensation of $235,956. The
fair value of the warrants and options for purposes of these calculations was
determined by using the Black-Scholes model. These amounts are included as a
reduction of shareholders equity and are being amortized over the vesting
periods of the individual warrants and options, five years, using the graded
vesting method, for National Jewish and one year, using the straight-line
method, for the consultant. During 2003 and 2002, an additional $627,820 and
$121,229, respectively, of non-cash deferred stock compensation was recorded
due to re-measurement of the fair value of the options at each measurement
date. During 2003, 2002 and 2001, AtheroGenics recorded a total of $812,589,
$481,623 and $335,890, respectively, of amortization of deferred stock
compensation for these warrants and options. At December 31, 2003, 84,000
shares of common stock were reserved for issuance upon the exercise of these
outstanding warrants.

At December 31, 2003, AtheroGenics had a total of $505,708 remaining to be
amortized over the vesting periods of all of the option grants discussed above.
This amortization will approximate $305,000 in 2004, $154,000 in 2005 and
$47,000 in 2006. During 2002 and 2001, 13,200 shares and 165,500 shares,
respectively, were forfeited and deferred stock compensation was decreased by
$111,841 and $1,395, 735, respectively.

In August 1998, AtheroGenics issued 205,002 warrants in connection with a
bridge loan agreement. These warrants became exercisable on January 1, 1999
for $3.00 per share and expire on August 19, 2008. In February 1999, in
connection with an amendment to the bridge loan agreement, AtheroGenics issued
an additional 200,001 warrants that became exercisable on April 13, 1999 for
$3.00 per share and expire on December 31, 2008. At December 31, 2003,
AtheroGenics had 183,622 shares of common stock reserved for issuance upon the
exercise of these warrants.

39



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6. Short-Term Investments

Short-term investments consist of debt securities classified as
available-for-sale and have maturities greater than 90 days and less than 12
months from the date of acquisition. AtheroGenics has invested primarily in
corporate notes and commercial paper, all of which have a minimum investment
rating of A1/P1, and government agency notes. AtheroGenics had no realized
gains or losses from the sale of investments for the period ended December 31,
2003. The unrealized gains were $10,905 and $310 for 2003 and 2002,
respectively. The following table summarizes the estimated fair value of
AtheroGenics short-term investments:

|                        |  |              |            |      |  |   |           | 
|----------------------- |  | ------------ | ---------- | ---- |  | - | --------- | 
|                        |  | December 31,
|                        |  | 2003         |            | 2002
|                        |  |              |            |     
|Government agency notes |  | $            | 36,415,792 |      |  | $ | 1,000,000 | 
|Corporate notes         |  |              | 20,874,579 |      |  |   |          | 
|Commercial paper        |  |              | 2,194,575  |      |  |   | 1,500,309 | 
|Certificate of deposit  |  |              | 40,733     |      |  |   | 38,493    | 
|                        |  |              |            |      |  |   |           | 
|Total                   |  | $            | 59,525,679 |      |  | $ | 2,538,802 | 
|                        |  |              |            |      |  |   |           | 

All available-for-sale securities held at December 31, 2003, will mature
during 2004.

7. Equipment and Leasehold Improvements

Equipment and leasehold improvements consists of the following:

|                                          |  |              |            |      |  |   |            |  
|----------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                          |  | December 31,
|                                          |  | 2003         |            | 2002
|                                          |  |              |            |     
|Laboratory equipment                      |  | $            | 2,664,192  |      |  | $ | 2,564,534  |  
|Leasehold improvements                    |  |              | 1,563,084  |      |  |   | 1,492,540  |  
|Computer and office equipment             |  |              | 1,474,599  |      |  |   | 1,109,776  |  
|                                          |  |              |            |      |  |   |            |  
|                                          |  |              | 5,701,875  |      |  |   | 5,166,850  |  
|Accumulated depreciation and amortization |  |              | (3,181,085 | )    |  |   | (2,341,583 | )
|                                          |  |              |            |      |  |   |            |  
|                                          |  | $            | 2,520,790  |      |  | $ | 2,825,267  |  
|                                          |  |              |            |      |  |   |            |  

8. 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 $96.7 million, after deducting expenses and underwriters
discounts and commissions. AtheroGenics recorded issuance costs related to the
notes of approximately $3.3 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, AtheroGenics 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.

AtheroGenics filed a shelf registration statement with the Securities and
Exchange Commission that was declared effective on December 22, 2003 covering
the resale of the notes and the common stock issuable upon conversion of the
notes. AtheroGenics has agreed to use its reasonable best efforts 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.

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As of December 31, 2003, AtheroGenics had reserved 6,518,900 shares of
common stock for future issuance in connection with the convertible notes. In
addition, as of December 31, 2003, accrued liabilities included approximately
$1,700,000 of accrued interest related to the convertible notes, which is due
March 1, 2004.

9. Bank Credit Agreements

In March 2002, AtheroGenics entered into a revolving credit facility with
Silicon Valley Bank for up to a maximum amount of $5,000,000 to be used for
working capital requirements. In December 2003, AtheroGenics canceled the line
of credit, which was unused during the entire period.

In addition, in March 2002, AtheroGenics entered into an equipment loan
facility with Silicon Valley Bank for up to a maximum amount of $2,500,000 to
be used to finance existing and new equipment purchases. 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. As of December 31, 2003, there was an outstanding
balance of $563,061 under the equipment loan facility and the weighted average
interest rate was 7.7% per year. The borrowing period for the equipment loan
facility expired in September 2003.

In connection with the revolving credit facility and the equipment loan
facility, AtheroGenics has granted to Silicon Valley Bank a negative pledge on
its intellectual property and on deposits with Silicon Valley Bank and its
affiliates. In December 2003, AtheroGenics and Silicon Valley Bank terminated
all security interests other than this negative pledge in connection with the
equipment loan facility.

Maturities of long-term debt as of December 31, 2003 are as follows:

|           |  |   |             | 
|---------- |  | - | ----------- | 
|2004       |  | $ | 479,439     | 
|2005       |  |   | 83,622      | 
|Thereafter |  |   | 100,000,000 | 
|           |  |   |             | 
|           |  | $ | 100,563,061 | 
|           |  |   |             | 

10. Income Taxes

At December 31, 2003, AtheroGenics had net operating loss carryforwards
and research and development credit carryforwards of $129,470,491 and
$4,010,990, respectively, for income tax purposes, which both begin to expire
in 2010. The significant components of the deferred tax assets are:

|                                 |                           |   |              |            |      |   |             |            | 
|-------------------------------- | ------------------------- | - | ------------ | ---------- | ---- | - | ----------- | ---------- | 
|                                 |                           |   | December 31,
|                                 |                           |   | 2003         |            | 2002
|                                 |                           |   |              |            |     
|Net operating loss carryforwards |                           | $ | 49,198,787   |            |      | $ | 29,000,100  |           
|Deferred stock compensation      |                           |   | 4,374,216    |            |      |   | 3,899,329   |           
|Research credits                 |                           |   | 4,010,990    |            |      |   | 2,311,134   |           
|Other                            |                           |   | 240,266      |            |      |   | 241,093     |           
|                                 |                           |   |              |            |      |   |             |           
|                                 | Total deferred tax assets |   |              | 57,824,259 |      |   |             | 35,451,656 | 
|Valuation allowance              |                           |   | (57,824,259  | )          |      |   | (35,451,656 | )         
|                                 |                           |   |              |            |      |   |             |           
|Net deferred tax assets          |                           | $ |             |            |      | $ |            |           
|                                 |                           |   |              |            |      |   |             |           

Because of AtheroGenics lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased $22,372,603 and $11,215,692 in 2003 and 2002, respectively.

AtheroGenics net operating loss carryforwards may be subject to certain
Internal Revenue Code (IRC) Section 382 limitations on annual utilization in
the event of changes in ownership. These limitations could significantly
reduce the amount of the net operating loss carryforwards available in the
future. AtheroGenics has completed an analysis of IRC Section 382 on the
cumulative net operating loss carryforward. The annual limitations are not
expected to prevent utilization of the net operating loss carryforward due to
the significant increases in value indicated by the successive issues of our
stock.

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11. Leases

On June 19, 1998, AtheroGenics entered into a 10-year operating lease for
office and laboratory space through March 1, 2009. Monthly lease payments of
approximately $89,400 began March 2, 1999, the date occupancy commenced. These
payments are subject to increases during each successive 12-month period based
on changes in the Consumer Price Index (CPI). Future increases in monthly
lease payments due to increases in the CPI are considered to be contingent
rentals, and, therefore, will be charged to expense over the lease term as they
become payable. AtheroGenics may extend the lease term for two successive
five-year periods. AtheroGenics other operating lease obligations are not
significant.

At December 31, 2003, AtheroGenics minimum aggregate commitments (net of
sublease income) under long-term, non-cancelable operating leases are as
follows:

|           |  |       |           |                 |  |     |         |  |  |   |           | 
|---------- |  | ----- | --------- | --------------- |  | --- | ------- |  |  | - | --------- | 
|           |  | Gross |           | Sublease Income |  | Net
|           |  |       |           |                 |  |    
|2004       |  | $     | 1,280,975 |                 |  | $   | 217,181 |  |  | $ | 1,063,794 | 
|2005       |  |       | 1,171,927 |                 |  |     | 183,174 |  |  |   | 988,753   | 
|2006       |  |       | 1,163,258 |                 |  |     |        |  |  |   | 1,163,258 | 
|2007       |  |       | 1,158,516 |                 |  |     |        |  |  |   | 1,158,516 | 
|2008       |  |       | 1,156,207 |                 |  |     |        |  |  |   | 1,156,207 | 
|Thereafter |  |       | 192,702   |                 |  |     |        |  |  |   | 192,702   | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 
|           |  | $     | 6,123,585 |                 |  | $   | 400,355 |  |  | $ | 5,723,230 | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 

Rent expense under operating leases amounted to $946,314, $925,040 and
$835,608 in 2003, 2002 and 2001, respectively.

12. Related Party Transactions

On April 15, 2002, AtheroGenics made a secured loan in the amount of
$123,116 to one of its executive officers, who is also a shareholder. The loan
had an interest rate of 2.88% per annum, the applicable federal rate at the
time of the loan, and was due on April 15, 2005. The loan was secured by
22,500 shares of AtheroGenics common stock. As of December 31, 2003, the loan
has been repaid in full, including accrued interest.

AtheroGenics has a sublease agreement for a portion of its office and
laboratory space with Inhibitex, Inc. The monthly lease payments are
approximately $16,000. The lease term ends on December 31, 2005. The
President and Chief Executive Officer of AtheroGenics and the Chairman of
AtheroGenics Board of Directors are both members of the Inhibitex, Inc. Board
of Directors.

AtheroGenics has a sublease agreement for a portion of its office space
with ATV Management Corp. Monthly lease payments are approximately $3,500.
The lease term ends on July 31, 2005. The Chairman of the Board of Directors
of AtheroGenics is the President and sole shareholder of ATV Management Corp.

13. Employee Benefit Plan

AtheroGenics has a defined contribution plan covering eligible employees,
which is qualified under Section 401(k) of the Internal Revenue Code. Under
the provisions of the plan, eligible participating employees may elect to
contribute up to the maximum amount of tax deferred contribution allowed by the
Internal Revenue Code. AtheroGenics may make a discretionary contribution.
During 2003, AtheroGenics matched 50% of employees contributions, up to a
maximum of 6% of the employees annual base compensation. AtheroGenics
contribution to the plan for 2003, 2002 and 2001 aggregated $161,576, $129,503
and $91,852, respectively. AtheroGenics stock is not an eligible investment
under this plan.

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14. Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited quarterly results of
operations:

|                         |                   |   |                              |       |             |   |             |       |             |   |             |       |   |   |             |       |  
|------------------------ | ----------------- | - | ---------------------------- | ----- | ----------- | - | ----------- | ----- | ----------- | - | ----------- | ----- | - | - | ----------- | ----- | -
|                         |                   |   | Year Ended December 31, 2003
|                         |                   |   | 1st Quarter                  |       | 2nd Quarter |   | 3rd Quarter |       | 4th Quarter
|                         |                   |   |                              |       |             |   |             |       |            
|Net revenues             |                   | $ |                             |       |             | $ |            |       |             | $ |            |       |   | $ |            |      
|Operating loss           |                   |   | (11,672,363                  | )     |             |   | (12,542,414 | )     |             |   | (13,461,425 | )     |   |   | (14,915,433 | )    
|Net loss                 |                   |   | (11,494,701                  | )     |             |   | (12,335,978 | )     |             |   | (13,636,617 | )     |   |   | (15,820,525 | )    
|Net loss per share data: |                   |   |                              |       |             |   |             |       |             |   |             |       |   |   |             |      
|                         | Basic and diluted |   |                              | (0.35 | )           |   |             | (0.34 | )           |   |             | (0.37 | ) |   |             | (0.43 | )

|                         |                   |   |             |       |             |   |                              |       |             |   |            |       |   |   |            |       |  
|------------------------ | ----------------- | - | ----------- | ----- | ----------- | - | ---------------------------- | ----- | ----------- | - | ---------- | ----- | - | - | ---------- | ----- | -
|                         |                   |   |             |       |             |   | Year Ended December 31, 2002 |       |             |   |           
|                         |                   |   | 1st Quarter |       | 2nd Quarter |   | 3rd Quarter                  |       | 4th Quarter
|                         |                   |   |             |       |             |   |                              |       |            
|Net revenues             |                   | $ |            |       |             | $ |                             |       |             | $ |           |       |   | $ |           |      
|Operating loss           |                   |   | (6,868,283  | )     |             |   | (6,841,754                   | )     |             |   | (7,132,780 | )     |   |   | (8,042,310 | )    
|Net loss                 |                   |   | (6,563,715  | )     |             |   | (6,572,494                   | )     |             |   | (6,926,723 | )     |   |   | (7,902,575 | )    
|Net loss per share data: |                   |   |             |       |             |   |                              |       |             |   |            |       |   |   |            |      
|                         | Basic and diluted |   |             | (0.24 | )           |   |                              | (0.24 | )           |   |            | (0.25 | ) |   |            | (0.28 | )

Because of the method used in calculating per share data, the quarterly
per share data will not necessarily add to the per share data as computed for
the year.




Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.




Item 9A.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.

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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

We have set forth information relating to the directors and executive
officers and compliance with Section 16(a) of the Securities Exchange Act of
1934 (the Exchange Act) under the captions, Nominees, Executive Officers
and Directors, Board Meetings and Committees and Section 16(a) Beneficial
Ownership Compliance, respectively, in our proxy statement for our 2004 annual
meeting of shareholders to be held on April 28, 2004. We are incorporating
this information by reference in this Form 10-K. Our definitive proxy
statement will be filed with the Securities and Exchange Commission on March
29, 2004.

Code of Ethics

We have adopted a code of business conduct and ethics for directors,
officers and employees, including our principal executive officer and principal
financial officer, known as the AtheroGenics, Inc. Code of Business Conduct and
Ethics. Shareholders may request a free copy from:



| | AtheroGenics, Inc.
Attention: Investor Relations
8995 Westside Parkway
Alpharetta, Georgia 30004
(678) 336-2500
http://www.investor@atherogenics.com
| | ----------------------------------------------------------------------------------------------------------------------------------------------------




Item 11.Executive Compensation

We have set forth information relating to executive compensation under the
captions Director Compensation, Executive Compensation, Employment
Agreements and Compensation Committee Interlocks and Insider Participation
in the proxy statement referred to in Item 10 above. We are incorporating this
information by reference in this Form 10-K.




Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters

We have set forth information relating to ownership of our common stock by
certain persons and to our equity compensation plans under the caption Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan
Information, respectively,
in the proxy statement referred to in Item 10 above. We
are incorporating this information by reference in this Form 10-K.




Item 13.Certain Relationships and Related Transactions

We have set forth information relating to existing or proposed
relationships or transactions between us and certain of our affiliates under
the caption Certain Relationships and Related Transactions in the proxy
statement referred to in Item 10 above. We are incorporating this information
by reference in this Form 10-K.




Item 14.Principal Accountant Fees and Services

We have set forth information relating to our principal accountant fees
and services under the caption Principal Accountant Fees and Services in the
proxy statement referred to in Item 10 above. We are incorporating this
information by reference in this Form 10-K.

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PART IV


Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) | (1) | Financial Statements, filed as part of this report                                                                                                                                                        
| | --- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |     | Report of Independent Auditors                                                                                                                                                                            
|
| |     |     | Balance Sheets as of December 31, 2003 and 2002                                                                                                                                                           
|
| |     |     | Statements of Operations for the years ended December 31, 2003, 2002 and 2001                                                                                                                             
|
| |     |     | Statements Shareholders Equity for the years ended December 31, 2003, 2002 and 2001                                                                                                                      
|
| |     |     | Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                                                                                                                             
|
| |     |     | Notes to Financial Statements                                                                                                                                                                             
|
| |     | (2) | Financial Statement Schedules                                                                                                                                                                             
|
| |     |     | No financial statement schedules are provided, because the
information called for is not required or is shown either in the
financial statements or the notes thereto.                                    
|
| |     | (3) | Listing of ExhibitsThe response to this portion of Item 15
is submitted below as Item 15(c) of this report.                                                                                              
|
| | (b) |     | Reports on Form 8-K filed in the fourth quarter of 2003:                                                                                                                                                  
|
| |     |     | On October 23, 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 third quarter ended
September 30, 2003.
|
| | (c) |     | Exhibits                                                                                                                                                                                                  

|            |  |   |  |                                                                                                                                                                                                                                                                                       
|----------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                                                           
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|3.01**      |  |  |  | Form of Fourth Amended and Restated Articles of Incorporation of AtheroGenics, Inc.                                                                                                                                                                                                   
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|3.02**      |  |  |  | Form of Third Amended and Restated Bylaws of AtheroGenics, Inc., as amended.                                                                                                                                                                                                          
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|4.01**      |  |  |  | Form of Common Stock Certificate.                                                                                                                                                                                                                                                     
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|4.02**      |  |  |  | Amended and Restated Master Rights Agreement dated October 31, 1995, as amended by
First Amendment dated November 1, 1995; Second Amendment dated July 30, 1996; Third
Amendment dated April 13, 1999; Fourth Amendment dated May 11, 1999; and Fifth
Amendment dated August 30, 1999.
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|4.03**      |  |  |  | Applicable provisions of Fourth Amended and Restated Articles of Incorporation and
Third Amended and Restated Bylaws of AtheroGenics, Inc. (incorporated by reference to
Exhibits 3.01 and 3.02).                                                                                     
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|4.04        |  |  |  | Rights Agreement dated as of November 9, 2001 between AtheroGenics, Inc. and American
Stock Transfer & Trust Company, as Rights Agent (filed as an exhibit of the same number
with AtheroGenics Form 8-K on October 9, 2001 and incorporated herein by reference).                   
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|10.02**+    |  |  |  | Exclusive License Agreement dated July 17, 1998 between The Regents of the University
of California and AtheroGenics, Inc.                                                                                                                                                            
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|10.03**+    |  |  |  | License Agreement dated January 11, 1995 between Emory University and AtheroGenics, Inc.                                                                                                                                                                                              
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|10.04**+    |  |  |  | Patent Purchase Agreement dated April 26, 1995 between AtheroGenics, Inc. and Sampath
Parthasarathy, together with Services Agreement dated April 26, 1995 between
AtheroGenics, Inc. and Sampath Parthasarathy.                                                                      
|            |  |   |  |                                                                                                                                                                                                                                                                                       
|10.05**+    |  |  |  | Sponsored Research Agreement dated October 14, 1996 between Emory University and
AtheroGenics, Inc.                                                                                                                                                                                   

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|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|----------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                                                                                                             
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.07**#    |  |  |  | AtheroGenics, Inc. 1995 Stock Option Plan, together with form of nonqualified stock option
agreement.                                                                                                                                                                                                                                   
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.08**#    |  |  |  | AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by Amendment No. 1 and Amendment
No. 2.                                                                                                                                                                                                                                       
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.09**     |  |  |  | Preferred Shares Purchase Warrant dated August 24, 1998 between AtheroGenics, Inc. and
certain Lenders named therein.                                                                                                                                                                                                                   
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.10**     |  |  |  | Series C Convertible Preferred Stock Purchase Warrants of AtheroGenics, Inc.                                                                                                                                                                                                                                                            
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.11**     |  |  |  | Promissory Note dated April 1, 1999 between Inhibitex, Inc. and AtheroGenics, Inc.                                                                                                                                                                                                                                                      
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.12**++   |  |  |  | Lease Agreement dated June 19, 1998 between Cousins Properties, Inc. and AtheroGenics, Inc.                                                                                                                                                                                                                                             
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.14#      |  |  |  | Employment Agreement dated March 1, 2001 between AtheroGenics, Inc. and Russell M. Medford
(filed as an exhibit of the same number with AtheroGenics Annual Report on Form 10-K for
the year ended December 31, 2000, and incorporated herein by reference).                                                                           
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.15       |  |  |  | Amendment dated January 1, 2001 to Promissory Note dated April 1, 1999 between Inhibitex,
Inc. and AtheroGenics, Inc. (filed as an exhibit of the same number with AtheroGenics
Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein
by reference).                                                
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.16       |  |  |  | Form of Common Stock Purchase Agreement dated as of June 19, 2001 between AtheroGenics,
Inc. and the Purchasers named therein (filed as an exhibit of the same number with
AtheroGenics Registration Statement on Form S-1, Registration No. 333-64228, on July 23,
2001 and incorporated herein by reference).                        
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.17+      |  |  |  | Exclusive License Agreement dated as of June 29, 2001 between AtheroGenics, Inc. and
National Jewish Medical and Research Center (filed as an exhibit with the same number with
Amendment No. 1 to AtheroGenics Registration Statement on Form S-1, Registration No.
333-64228, on June 29, 2001 and incorporated herein by reference).
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.18       |  |  |  | AtheroGenics, Inc. 2001 Equity Ownership Plan (filed as Appendix B to the proxy statement
for AtheroGenics 2001 Annual Shareholders Meeting as filed on March 22, 2001 and
incorporated herein by reference).                                                                                                                         
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.20(a)    |  |  |  | Revolving Promissory Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).                                                                     
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.20(b)    |  |  |  | Equipment Term Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley Bank
(filed as an exhibit of the same number to AtheroGenics Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 and incorporated herein by reference).                                                                           
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.20(c)    |  |  |  | Loan and Security Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).                                                                   
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.20(d)    |  |  |  | Negative Pledge Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon
Valley Bank (filed as an exhibit of the same number to AtheroGenics Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).                                                                     
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.21#      |  |  |  | Promissory Note and Stock Pledge Agreement dated as of April 15, 2002 between
AtheroGenics, Inc. and Mark P. Colonnese (filed as Exhibit 10.21 to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein
by reference).                                                                
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.22#      |  |  |  | Separation and Consulting Agreement and General Release dated as of October 3, 2002
between AtheroGenics, Inc. and Mitchell Glass, M.D. (filed as Exhibit 10.22 to
AtheroGenics Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference).                                          
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.23       |  |  |  | First Loan Modification dated June 20, 2003 between AtheroGenics, Inc. and Silicon Valley
Bank.
(filed as an exhibit of the same number to AtheroGenics Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 and incorporated herein by reference).                                                                       
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.24       |  |  |  | Purchase Agreement dated August 19, 2003 between AtheroGenics, Inc. and the Initial
Purchasers named therein (filed as an exhibit of the same number to AtheroGenics
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated
herein by reference).                                                     

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##### Table of Contents



|            |  |   |  |                                                                                                      
|----------- |  | - |  | -----------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                          
|            |  |   |  |                                                                                                      
|10.25*      |  |  |  | Second Loan Modification dated August 13, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.   
|            |  |   |  |                                                                                                      
|10.26*      |  |  |  | Third Loan Modification dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.  
|            |  |   |  |                                                                                                      
|10.27*      |  |  |  | Negative Pledge Agreement dated December 29, 2003 between AtheroGenics, Inc. and Silicon
Valley Bank.
|            |  |   |  |                                                                                                      
|23.01*      |  |  |  | Consent of Ernst & Young LLP.                                                                        
|            |  |   |  |                                                                                                      
|24.01*      |  |  |  | Powers of Attorney.                                                                                  
|            |  |   |  |                                                                                                      
|31.1*       |  |  |  | Certifications of Chief Executive Officer under Rule 13a-14(a).                                      
|            |  |   |  |                                                                                                      
|31.2*       |  |  |  | Certifications of
Chief Financial Officer under Rule 13a-14(a).                                      
|            |  |   |  |                                                                                                      
|32*         |  |  |  | Certifications of Chief Executive Officer and Chief Financial Officer under Section 1350.            



|*  |  | Filed herewith.                                                                                                                                                                                                                 
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Filed as the exhibit of the same number with AtheroGenics registration
statement on Form S-1, Registration No. 333-31140, declared effective by
the SEC on August 8, 2000, and incorporated herein by reference.               
|  
|+  |  | Certain confidential information contained in this document has been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment under Rule 406 of the Securities Act of
1933, as amended.
|  
|++ |  | We agree to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to this agreement upon request by the
Commission.                                                                                
|  
|#  |  | Management contract or compensatory plan or arrangement.                                                                                                                                                                        

47



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 15, 2004.

| |  |                    |  |                                      
| |  | ------------------ |  | -------------------------------------
| |  | ATHEROGENICS, INC.
| |  |                    |  |                                      
| |  | By:                |  | /s/RUSSELL M. MEDFORD, M.D., PH.D.   
| |  |                    |  |                                      
| |  |                    |  | Russell M. Medford, M.D., Ph.D.      
| |  |                    |  | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                                      |  |                                                                                 |  |               
|----------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|Name                                                  |  | Title                                                                           |  | Date          
|                                                      |  |                                                                                 |  |               
|Principal Executive Officer:                          |  |                                                                                 |  |               
|                                                     
|/s/RUSSELL M. MEDFORDRussell M. Medford               |  | President and Chief Executive
Officer, Director                                 |  | March 15, 2004
|                                                     
|Principal Financial and Principal
Accounting Officer: |  |                                                                                 |  |               
|                                                     
|/s/MARK P. COLONNESEMark P. Colonnese                 |  | Senior Vice President of Finance
and Administration and Chief
Financial Officer |  | March 15, 2004
|                                                     
|Additional Directors:                                 |  |                                                                                 |  |               
|                                                     
|*Michael A. Henos                                     |  | Director                                                                        |  | March 15, 2004
|                                                     
|*R. Wayne Alexander                                   |  | Director                                                                        |  | March 15, 2004
|                                                     
|*David Bearman                                        |  | Director                                                                        |  | March 15, 2004
|                                                     
|*Vaughn D. Bryson                                     |  | Director                                                                        |  | March 15, 2004
|                                                     
|*T. Forcht Dagi                                       |  | Director                                                                        |  | March 15, 2004
|                                                     
|*Arthur M. Pappas                                     |  | Director                                                                        |  | March 15, 2004
|                                                     
|*William A. Scott                                     |  | Director                                                                        |  | March 15, 2004
|                                                     
|*Stephen G. Sudovar                                   |  | Director                                                                        |  | March 15, 2004

|     |  |                     
|---- |  | --------------------
|*By: |  | /s/MARK P. COLONNESE
|     |  |                     
|     |  | Mark P. Colonnese   
|     |  | Attorney-in-fact    

48