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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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, 2002
OR

|     |  |                                                   
|---- |  | --------------------------------------------------
|[  ] |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
|     |  | SECURITIES EXCHANGE ACT OF 1934                   

For the transition period from        to

Commission file number 0-31261

AtheroGenics, Inc.

(Exact name of Registrant as specified in its charter)


|                                                             |  |                                                     
|------------------------------------------------------------ |  | ----------------------------------------------------
|Georgia                                                      |  | 58-2108232                                          
|(State or other jurisdiction of                              |  | (I.R.S. Employer Identification Number)             
|incorporation or organization)                               |  |                                                     
|                                                             |  |                                                     
|8995 Westside Parkway,                                       |  | (678) 336-2500                                      
|Alpharetta, Georgia 30004                                    |  | (Registrants telephone number, including area code)
|(Address of principal executive offices, including zip 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) 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 to Part III of this Form 10-K or any
amendment to this Form 10-K. o

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

The aggregate market value of the 15,154,734 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 28, 2002), was approximately $108,659,443. AtheroGenics has no nonvoting
common equity.

The number of shares outstanding of each of the registrants classes of
common stock, as of March 21, 2003: 36,430,460 (one class).

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 2003 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 on Market Risk                             
|                                      | Item 8. Financial Statements and Supplementary Data                                          
|                                      | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|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                      
|                                      | Item 13. Certain Relationships and Related Transactions                                      
|                                      | Item 14. Controls and Procedures                                                             
|PART IV                              
|                                      | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                           
|CERTIFICATIONS                       
|EX-23.01 CONSENT OF ERNST & YOUNG LLP
|EX-24.01 POWERS OF ATTORNEY          



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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                 |    | 21  
|Item 6.        | Selected Financial Data                                                               |    | 22  
|Item 7.        | Managements Discussion and Analysis of Financial Condition and Results of Operations |    | 23  
|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  |    | 44  
|PART III       |                                                                                       |   
|Item 10.       | Directors and Executive Officers of the Registrant                                    |    | 45  
|Item 11.       | Executive Compensation                                                                |    | 45  
|Item 12.       | Security Ownership of Certain Beneficial Owners and Management                        |    | 45  
|Item 13.       | Certain Relationships and Related Transactions                                        |    | 45  
|Item 14.       | Controls and Procedures                                                               |    | 46  
|PART IV        |                                                                                       |   
|Item 15.       | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |    | 46  
|Signatures     |                                                                                       | 49
|Certifications |                                                                                       | 50

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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, such as 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 technology platform, we have advanced
three drug candidates into clinical development and are pursuing a number of
other pre-clinical 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
buildup of plaque in arterial blood vessel walls. We recently announced that
we are proceeding with the initiation of a pivotal Phase III clinical trial
with our novel, oral anti-inflammatory drug candidate, AGI-1067, for the
treatment of atherosclerosis in patients with coronary heart disease. The
clinical trial will be referred to as ARISE (Aggressive Reduction of
Inflammation Stops Events). The ARISE trial will be conducted in cardiac
centers throughout the United States, Canada, South Africa and the United
Kingdom, and will evaluate the impact of AGI-1067 on important clinical outcome
measures including death due to coronary heart disease; myocardial infarction,
or heart attack; stroke; coronary re-vascularization; and unstable angina, or
chest pain, in patients who have coronary heart disease. The study will 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 have occurred. The acceleration of our Phase III clinical trial
program follows the successful End of Phase II meeting held with the U.S. Food
and Drug Administration mid-2002. The ARISE trial follows the positive
findings of our Phase II CART-1 clinical trial.

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. In February 2002, we received results from the Phase I clinical
trial, which demonstrated that AGIX-4207 was 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 effect of orally administered AGIX-4207, on
biological markers, or biomarkers, of inflammation in rheumatoid arthritis
patients currently being treated with infusions of infliximab, which goes by the
prescription drug name Remicade®. In October 2001, we commenced a Phase I
clinical trial to assess the safety and tolerability of AGIX-4207 I.V. in
healthy volunteers. AGIX-4207 I.V. is an intravenous drug designed to treat
rheumatoid arthritis patients in whom the rapid attainment of target drug
levels in the blood is desirable. Results from this Phase I clinical trial
demonstrated that single infusions of AGIX-4207 I.V. were safe and well
tolerated in healthy volunteers at all the doses studied, including those doses
that reached targeted blood levels.

Our third v-protectant candidate, AGI-1096, is a novel antioxidant and
selective anti-inflammatory agent that is being developed to address the
accelerated inflammation of grafted blood vessels, known as arteritis, common
in chronic organ transplant rejection. We commenced a Phase I clinical trial
in February 2002 to assess the safety and tolerability of AGI-1096 in healthy
volunteers. In September 2002 we announced positive results from this trial
which demonstrated that AGI-1096 was safe and well tolerated over the
escalating single oral doses studied. Subjects reached targeted blood levels of
AGI-1096 that were equivalent to those seen in successful pre-clinical models
of organ transplant rejection.

We have identified additional potential v-protectant candidates to
treat other chronic inflammatory diseases, including asthma. We are evaluating
these v-protectant candidates to choose 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

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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.

In June 2001, we entered into a worldwide exclusive license agreement with
National Jewish Medical and Research Center of Denver, Colorado to discover and
develop novel therapeutics based on MEK kinases (MEKKs) and related technology
for the treatment of inflammation. MEKKs are a family of intracellular
signaling molecules that we believe play an important role in
immuno-inflammatory diseases, such as asthma. Other licensed technology
focuses on several naturally occurring substances and their application in the
development of a potential treatment for asthma. We believe these new
technologies will provide a second broad platform for the discovery and
development of a new class of anti-inflammatory drug candidates.

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 have
recently proceeded with the initiation of 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 recently completed enrollment in a 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. For example, we expect our
license agreement with National Jewish Medical and Research Center to
provide us with a new, complementary platform for the discovery and
development of drug candidates to treat inflammatory diseases.                                                                                                 
|
| |  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                           

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:

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| |  |  | 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,
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 causes
inflammation in the lining, or synovium, of the joints and/or other internal
organs. The joint lining thickens and may produce warmth, swelling and pain in
the joint. Rheumatoid arthritis is a chronic disease that tends to persist for
many years, typically affects many different joints throughout the body, and
can cause damage to the cartilage, bone, tendons and ligaments of the joints.
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. 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.

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,

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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.

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.              |  | Rheumatoid arthritis       |  | Phase I clinical trial  
|                            |  |                            |  |                         
|AGI-1096                    |  | Organ 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                

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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 pre-clinically 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 pre-clinical 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.

Data from a post-study IVUS analysis of reference vessels, the blood
vessels of coronary arteries that were not targets of angioplasty procedures,
indicated lumen volumes actually increased for patients who received either of
the top two doses of AGI-1067. In contrast, patients on placebo had decreased
lumen volumes, consistent with the expected progression of atherosclerosis.

Based on the results of a subsequent End of Phase II meeting with 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 preparing to initiate Phase III clinical
trials.

The Phase III ARISE trial will be 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.

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AGIX-4207

Rheumatoid arthritis is a common auto-immune disease that affects joints
and arterial blood vessels. 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 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 in patients currently being treated with infusions of the drug
Remicade®.

The trial will evaluate 24 patients, who are currently being treated for
rheumatoid arthritis with the prescribed dosing regimen of Remicade®, every
six-to-eight weeks, and who meet American College of Rheumatology response
criteria. This Phase II trial will be the first to provide safety and efficacy
information about the biological effect of AGIX-4207 in patients with
rheumatoid arthritis.

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 risks 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. In October 2001, we began a Phase I
clinical trial to assess the safety and tolerability of AGIX-4207 I.V. in
healthy volunteers. In April 2002, we received results that 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 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. In
February 2002, we commenced a Phase I clinical trial to assess the safety and
tolerability of AGI-1096 in healthy volunteers. In September 2002, we received
results 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.

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AGI-Series for Respiratory Diseases

According to the American Lung Association, approximately 17 million
adults and children in the United States currently suffer from asthma. The
American Lung Association reports that in 1999 the combined direct and indirect
costs of asthma in the United States were approximately $12 billion. 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 and with the acute exacerbation of
asthma, and 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 components
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.

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.                                                                                                                                                                                                                                                                                                                                                                                                                                    

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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.

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.

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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 one U.S.
patent application, 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. Any patents issuing from
these applications 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 one U.S.
patent application, and associated non-U.S. patent filings which describe
AGI-1096 and its use to treat disorders mediated by VCAM-1. Any patents
issuing from the application will expire in 2018. We also own a patent
application claiming the use of AGI-1096 to treat organ transplant rejection.

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.

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

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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 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.

Exclusive License Agreement with Schering-Plough

In October 1999, we entered into a worldwide exclusive license agreement
with Schering-Plough. This agreement consisted of contracts with two
Schering-Plough affiliates. 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. The reacquisition of these rights will permit us to expedite
the clinical development process for AGI-1067. With the termination of this
license agreement, Schering-Plough will have no further rights to the
technology or financial obligations to us.

As a result of the reacquisition of the rights and termination of the
license agreement, we will now be responsible for all research and development
costs associated with AGI-1067, along with the manufacture and
commercialization of products that we develop containing AGI-1067. We
are currently developing
AGI-1067 internally, although we plan to enter into future collaborative agreements with
third parties for all or part of that development and commercialization.

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.

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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 other 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 Aventis
Pharmaceuticals, Inc., Genentech, 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.

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

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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 pre-clinically.                                                                                                                                                                                                                                                                                                                         
|
| |  |  | 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 use the new drug.
|
| |  |  | Phase IV clinical trials support marketing of the drug for its
approved indication. Phase IV clinical trials generate data to allow
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
candidate drug product. 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 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 protect 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

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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 2002, 2001 and 2000 were $22.8
million, $16.9 million and $12.8 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 $40 million. The expense
associated with this trial, when combined with our other operating activities
and on-going clinical programs, is estimated to result in net cash usage in
2003 of $43 million to $48 million.

Employees

We currently have 85 full-time employees, including 66 in research and
development. The employee group includes 26 employees with Ph.D.s, five with
M.D.s and 17 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                                                                                              

14



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##### Table of Contents



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 show it is ineffective or 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, 2002, we had an
accumulated deficit of approximately $89.2 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
15Table of Contentsin other countries. Pre-clinical 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.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. We
do not plan to start Phase III clinical trials without receiving regulatory
approval of the clinical trial protocol, qualifying the clinical sites,
delivering materials produced by commercial scale processes to the clinical
site, as well as completing other related clinical start-up activities.
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.16Table of ContentsOur 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
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 new 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.17Table of ContentsThird 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:
    
    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 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 85 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 institutions18Table of Contentsand 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 have an employment agreement.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.19Table of Contents
Item 2.PropertiesOur 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 aggregate commitment
under this long-term, non-cancelable lease is approximately $8 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 aggregate commitment
under this long-term, non-cancelable lease is approximately $346,000. We have
the option to renew this lease under mutually agreeable terms.
Item 3.Legal ProceedingsWe are not currently a party to any legal proceedings.
Item 4.Submission of Matters to a Vote of Security HoldersNone.20Table of Contents
PART II
Item 5.Market for Registrants Common Equity and Related Shareholder MattersCommon Stock InformationOur common stock has been traded on the Nasdaq National Market under the
symbol AGIX since August 9, 2000. Prior to that time, there was no public
market for the common stock. 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, 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 | 
|Year ended December 31, 2001 |                |  |              |      |     |  |   |     
|                             | First quarter  |  | $            | 7.13 |     |  | $ | 5.25 | 
|                             | Second quarter |  |              | 7.25 |     |  |   | 4.53 | 
|                             | Third quarter  |  |              | 6.76 |     |  |   | 3.95 | 
|                             | Fourth quarter |  |              | 6.10 |     |  |   | 2.71 | 

As of March 3, 2003, there were approximately 3,500 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.

Changes in Securities and Use of Proceeds

The Securities and Exchange Commission declared our Registration Statement
on Form S-1 (File No. 333-31140) effective August 8, 2000. The net proceeds
from the sale of the 6.9 million shares of common stock registered pursuant to
the Registration Statement (including the exercise of the underwriters
over-allotment option) were $49.4 million after deducting underwriting
discounts of $3.9 million and offering expenses of $1.9 million.

We have used and expect to continue to use the proceeds from our initial
public offering for research and development activities, including clinical
trials, process development and manufacturing support, and for general
corporate purposes, including working capital. A portion of the proceeds may
be used to acquire or invest in complementary businesses, products or
technologies. As of December 31, 2002, the proceeds have been applied toward:



| |  |  | purchases of fixed assets and leasehold improvements, $2.3 million;                        
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | operating activities, $37.0 million; and                                                   
|
| |  |  | investments in highly liquid, interest bearing, investment grade securities, $10.1 million.

21



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##### Table of Contents






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,
|                                                                               |                                             |   |                          |            |                        
|                                                                               |                                             |   |                          |            | 2002                    |            | 2001        |            | 2000 |            | 1999        |            | 1998
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |     
|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 *                  |   |                          | 22,838,066 |                         |            |             | 16,884,027 |      |            |             | 12,815,788 |      |            |             | 9,041,345 |  |            |             | 8,954,904 | 
|                                                                               | General and administrative *                |   |                          | 4,070,189  |                         |            |             | 3,979,813  |      |            |             | 3,035,559  |      |            |             | 2,593,017 |  |            |             | 1,573,807 | 
|                                                                               | Amortization of deferred
stock compensation |   |                          | 1,976,872  |                         |            |             | 2,652,031  |      |            |             | 7,972,728  |      |            |             | 85,480    |  |            |             |          | 
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |           | 
|                                                                               |                                             |   | Total operating expenses |            |                         | 28,885,127 |             |            |      | 23,515,871 |             |            |      | 23,824,075 |             |           |  | 11,719,842 |             |           |  | 10,528,711 | 
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |           | 
|Operating loss                                                                 |                                             |   | (28,885,127              | )          |                         |            | (20,006,331 | )          |      |            | (15,664,372 | )          |      |            | (10,372,633 | )         |  |            | (10,528,711 | )        
|Net interest income (expense)                                                  |                                             |   | 919,620                  |            |                         |            | 2,366,748   |            |      |            | 1,714,850   |            |      |            | (60,617     | )         |  |            | (205,130    | )        
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |           | 
|Net loss                                                                       |                                             | $ | (27,965,507              | )          |                         | $          | (17,639,583 | )          |      | $          | (13,949,522 | )          |      | $          | (10,433,250 | )         |  | $          | (10,733,841 | )        
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |           | 
|Basic and diluted net loss per share                                           |                                             | $ | (1.00                    | )          |                         | $          | (0.68       | )          |      | $          | (1.30       | )          |      | $          | (4.27       | )         |  | $          | (4.45       | )        
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |           | 
|Shares used in computing basic and
diluted net loss per share                  |                                             |   | 27,978,705               |            |                         |            | 26,010,347  |            |      |            | 10,747,773  |            |      |            | 2,443,237   |           |  |            | 2,409,948   |          
|                                                                               |                                             |   |                          |            |                         |            |             |            |      |            |             |            |      |            |             |           |  |            |             |          
|                                                                              
|*Exclusive of amounts
recorded as amortization of deferred stock compensation:
|                                                                              
|                                                                               | Research and development                    |   | $                        | 908,061    |                         |            | $           | 940,053    |      |            | $           | 1,856,932  |      |            | $           | 23,649    |  |            | $           |          | 
|                                                                               | General and administrative                  |   | $                        | 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 ending December 31, 2002.

|                                            |  |              |             |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |             |  
|------------------------------------------- |  | ------------ | ----------- | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2002         |             | 2001 |  | 2000 |             | 1999 |  | 1998
|                                            |  |              |             |      |  |      |             |      |  |     
|Balance Sheet Data:                         |  |              |             |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |             |  
|Cash and cash equivalents                   |  | $            | 32,132,329  |      |  | $    | 28,682,050  |      |  | $    | 26,463,070  |   |  | $ | 13,409,450  |   |  | $ | 3,686,423   |  
|Short-term investments                      |  |              | 2,538,802   |      |  |      | 29,757,945  |      |  |      | 27,518,169  |   |  |   |            |   |  |   |            |  
|Working capital (deficiency)                |  |              | 30,009,013  |      |  |      | 55,056,263  |      |  |      | 52,422,951  |   |  |   | 9,651,239   |   |  |   | (4,259,366  | )
|Total assets                                |  |              | 37,952,044  |      |  |      | 62,255,278  |      |  |      | 57,598,951  |   |  |   | 15,717,214  |   |  |   | 5,341,816   |  
|Long-term obligations, less
current portion |  |              | 572,492     |      |  |      |            |      |  |      | 84,907      |   |  |   | 61,854      |   |  |   | 163,262     |  
|Deferred stock compensation                 |  |              | (1,243,786  | )    |  |      | (2,975,314  | )    |  |      | (5,930,880  | ) |  |   | (1,809,680  | ) |  |   |            |  
|Accumulated deficit                         |  |              | (89,243,494 | )    |  |      | (61,277,987 | )    |  |      | (43,638,404 | ) |  |   | (29,688,882 | ) |  |   | (19,255,632 | )
|Total shareholders equity (deficit)        |  |              | 32,493,713  |      |  |      | 58,294,812  |      |  |      | 54,271,686  |   |  |   | (29,288,600 | ) |  |   | (18,973,881 | )

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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 Form 10-K. 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 three drug candidates into development,
AGI-1067, AGIX-4207 and AGI-1096, and are progressing on a number of other
pre-clinical 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
product revenue.

We have incurred significant losses since we began operations and, as of
December 31, 2002, had an accumulated deficit of $89.2 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.

In October 1999, we entered into an exclusive licensing agreement with
Schering-Plough Corporation covering our lead compound, AGI-1067. Under terms
of the agreement, Schering-Plough obtained exclusive worldwide rights to
AGI-1067 and related compounds. Schering-Plough was responsible for all costs
of development and commercialization and paid us an initial licensing fee. In
October 2001, we reacquired all rights to AGI-1067 and related technology and
terminated the license agreement.

In June 2001, we entered into a worldwide exclusive license agreement with
National Jewish Medical and Research Center of Denver, Colorado to discover and
develop novel therapeutics based on MEK kinases, enzymes that participate in a
broad range of cellular activities, and related technology for the treatment of
inflammation. We expect these new technologies to provide a second broad
platform for the discovery and development of a new class of anti-inflammatory
drug candidates.

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.

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 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. Revenues that had not been invoiced were reflected as unbilled
receivables.

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Stock-Based Compensation

AtheroGenics has elected to follow Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), in
accounting for its stock-based employee compensation plans, rather than the
alternative fair value accounting method provided for under 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.
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.

In connection with the grant of certain options to employees, AtheroGenics
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 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.

In connection with the grant of certain options and warrants to
non-employees during 2001 and 2002, AtheroGenics 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.

Results of Operations

Comparison of Years Ended December 31, 2002 and 2001

Revenues

There were no revenues during 2002, compared to $3.5 million in 2001.
Last years revenue 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%, is
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 are start-up expenditures related to
organizing the ARISE Phase III clinical trial, which are 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 is due to the
deferred stock compensation being amortized using the graded vesting method,
which results in higher amortization in the earlier years. The decrease is
partially offset by re-measuring options and warrants granted to consultants to
current fair market value, in accordance with EITF Issue No.  96-18.

24



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Net Interest Income

Net interest income was $919,620 in 2002, compared to $2.4 million in
2001. The decrease in net interest income is a reflection of lower investment
balances and lower average interest rates.

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. The net operating loss carryforwards and the research and
development credit carryforwards will expire between 2010 and 2023. The
maximum annual use of the net operating loss carryforwards is limited in
situations where changes occur in our stock ownership. 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 not completed an
analysis of Internal Revenue Code Section 382 limitations on the cumulative net
operating loss carryforward. However, 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. If a change in ownership has occurred, there will be an annual
limitation; however, this limitation is not expected to result in a loss of the
deferred tax benefit.

Comparison of Years Ended December 31, 2001 and 2000

Revenues

Total revenues were $3.5 million in 2001, compared to $8.2 million in
2000. License fees of $1.1 million and $3.3 million during 2001 and 2000,
respectively, were attributable to an exclusive license agreement signed in
October 1999. These amounts represent the earned portion of the $5.0 million
initial license fee, which was amortized over 18 months. Amortization of the
license fee was completed in April 2001. Research and development revenues
related to the license agreement were $2.4 million in 2001 and $4.8 million in
2000. The lower research and development revenues reflect reduced activities
due to the completion of the CART-1 Phase II clinical trial for AGI-1067.
There will be no further revenues from this license agreement which was
terminated in October 2001.

Expenses

Research and Development.Research and development expenses, excluding
amortization of deferred stock compensation, were $16.9 million in 2001,
compared to $12.8 million in 2000. The increase of $4.1 million, or 32%, is
primarily due to increased pre-clinical and clinical studies including the
Phase I studies for AGIX-4207 and AGIX-4207 I.V., two formulations of a
compound being developed for the treatment of rheumatoid arthritis, and
AGI-1096, a compound being developed for the treatment of organ transplant
rejection.

General and Administrative.General and administrative expenses,
excluding amortization of deferred stock compensation, were $4.0 million in
2001, compared to $3.0 million in 2000. The increase of $1.0 million, or 33%,
is primarily due to costs related to operating as a public company, including
legal fees and investor relations activities.

Amortization of Deferred Stock Compensation.During 2001, we recorded
non-cash deferred stock compensation of approximately $1.1 million for warrants
granted in connection with a licensing agreement with National Jewish Medical
and Research Center and options granted for the addition of new members to our
Scientific Advisory Board. The fair value of the warrants and options 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 individual warrants and options, generally five years, using the
graded vesting method. The fair value of the options and warrants is
re-measured at each measurement date. Amortization of deferred stock
compensation was $2.7 million in 2001, of which $940,053 was attributable to
research and development expenses and $1.7 million was attributable to general
and administrative expenses. In 2000, amortization of deferred stock
compensation was $8.0 million, of which $1.9 million was attributable to
research and development expenses and $6.1 million was attributable to general
and administrative expenses.

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Net Interest Income

Net interest income was $2.4 million in 2001, compared to $1.7 million in
2000. This increase is primarily due to an increased level of investments with
funds received from our initial public offering in August 2000 and our private
placement financing in June 2001, offset by lower interest rates earned on
invested funds.

Income Taxes

As of December 31, 2001, we had net operating loss carryforwards and research
and development credit carryforwards of $50.4 million and $1.5 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 and payments received from a licensing agreement. At
December 31, 2002, we had cash, cash equivalents and short-term investments of
$34.7 million, compared with $58.4 million at December 31, 2001. Working
capital at December 31, 2002 was $30.0 million, compared to $55.1 million at
December 31, 2001. The decrease in cash, cash equivalents, short-term
investments and working capital is primarily due to the use of funds for
operating purposes and the purchase of equipment.

Net cash used in operating activities was $24.2 million in 2002, compared
to $12.8 million in 2001. The increase in the use of cash in operating
activities is principally due to expenditures to support our current Phase II
clinical trials for AGI-1067 for atherosclerosis and post-angioplasty
restenosis and AGIX-4207 for rheumatoid arthritis. We expect that our cash
expenditures to conduct clinical trials will increase substantially throughout
2003, due primarily to the Phase III clinical trial for AGI-1067.

Net cash provided by investing activities was $26.5 million in 2002,
compared to $3.8 million used in investing activities in 2001. 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, partially offset by the purchase of
equipment and leasehold improvements. 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 $1.2 million in 2002,
compared to $18.8 million provided by financing activities in 2001. 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) in the amount of up to $5.0 million to be used for working capital
requirements. Borrowings under this line of credit bear interest at the Banks
prime rate plus 1.50% floating rate and will become due 30 months from closing.
At December 31, 2002 there was no outstanding balance on the revolving credit
facility. We also entered into an equipment loan facility with the Bank in the
amount of up to $2.5 million to be used to finance existing and new equipment
purchases. Borrowings under the equipment loan facility bear interest rates
that were fixed at the time of each advance, and each advance matures in 33
months from the date of the advance. At December 31, 2002, there was an
outstanding balance of approximately $1.0 million on the equipment loan
facility and the weighted average interest rate was 7.68%. Also, in
conjunction with these facilities, we are required to maintain a $15 million
compensating cash balance in an account with the Bank.

On February 3, 2003, AtheroGenics 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 $48.1 million.

The following table summarizes our long-term contractual obligations:

|                                         |  |      |           |           |  |           |           |            |  |   |           |  |  |   |           | 
|---------------------------------------- |  | ---- | --------- | --------- |  | --------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                         |  | 2003 |           | 2004-2005 |  | 2006-2007 |           | Thereafter
|                                         |  |      |           |           |  |           |           |           
|Operating leases, net of sublease income |  | $    | 1,058,939 |           |  | $         | 2,086,674 |            |  | $ | 2,273,790 |  |  | $ | 1,326,378 | 
|Long-term debt                           |  |      | 434,637   |           |  |           | 572,492   |            |  |   |          |  |  |   |          | 
|                                         |  |      |           |           |  |           |           |            |  |   |           |  |  |   |           | 
|Total contractual obligations            |  | $    | 1,493,576 |           |  | $         | 2,659,166 |            |  | $ | 2,273,790 |  |  | $ | 1,326,378 | 
|                                         |  |      |           |           |  |           |           |            |  |   |           |  |  |   |           | 

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Based upon the current status of our product development and
commercialization plans, we believe that our existing cash and cash
equivalents, the proceeds from our recent public offering, along with our
revolving credit facility and equipment loan facility with Silicon Valley Bank,
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.                                           

Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections(SFAS 145), which clarifies the
criteria under which extinguishment of debt can be considered as extraordinary,
rescinds the related Statement Nos. 4, 44 and 64, and makes technical
corrections to other Statements of Financial Standards. We adopted SFAS No. 145
in January 2003. We believe the adoption of SFAS No. 145 will not have a
material effect on our future results of operations

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146), which requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and nullifies EITF Issue No. 94-3. We adopted
SFAS 146 in January 2003, but do not expect the adoption to have a
material effect on
our future results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure(SFAS 148), that amends
SFAS 123, to provide alternative methods of transition to SFAS 123s fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim
Financial Reporting, to require 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. SFAS 148 does
not amend SFAS 123 to require companies to account for employee stock options
using the fair value method. SFAS 148 is effective for fiscal years beginning
after December 15, 2002. We have adopted the new disclosure provisions in
accordance with SFAS 148 as discussed in the footnotes to the financial
statements included in this annual report.




Item 7A.Quantitative and Qualitative Disclosures on 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.

Our primary interest rate exposure results from changes in the base rates
that are used to determine the applicable interest rate on the equipment loan
facility with Silicon Valley Bank.

27



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##### Table of Contents



The following table summarizes information on our equipment loan facility.
The table presents maturity of the debt and projected annual average interest
rates.

|                          |                       |  |      |         |      |  |      |         |       |  |                   |        |   |  |   |           |  |  |             |           | 
|------------------------- | --------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ----- |  | ----------------- | ------ | - |  | - | --------- |  |  | ----------- | --------- | 
|                          |                       |  |      |         |      |  |      |         |       |  |                   |        |   |  |   |           |  |  | Value as of
|                          |                       |  | 2003 |         | 2004 |  | 2005 |         | Total |  | December 31, 2002
|                          |                       |  |      |         |      |  |      |         |       |  |                  
|Long-term debt-fixed rate |                       |  |      |         |      |  |      |         |       |  |                   |        |   |  |   |           |  |  |             |          
|                          | Maturity              |  | $    | 434,637 |      |  | $    | 488,870 |       |  | $                 | 83,622 |   |  | $ | 1,007,129 |  |  | $           | 1,007,129 | 
|                          | Average interest rate |  |      | 7.68    | %    |  |      | 7.68    | %     |  |                   | 7.68   | % |  |   |           |  |  |             |           | 




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 (Deficit) |  |  | 32 | 
|Statements of Cash Flows                     |  |  | 33 | 
|Notes to Financial Statements                |  |  | 34 | 

28



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##### Table of Contents



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, 2002 and 2001, and the related statements of operations,
shareholders equity (deficit) and cash flows for each of the three years in
the period ended December 31, 2002. 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, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.



| | /s/ Ernst & Young LLP
| | ---------------------

Atlanta, Georgia
February 5, 2003

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##### Table of Contents



ATHEROGENICS, INC.
BALANCE SHEETS

|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |            |             | 
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------- | ------------ | ----------- | --------- | ----------- | ---------- | ----------- | 
|                                                                                       |                                                                             |                                                           |                                                                              |             | December 31,
|                                                                                       |                                                                             |                                                           |                                                                              |             |             
|                                                                                       |                                                                             |                                                           |                                                                              |             | 2002         |             | 2001     
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |          
|Assets                                                                                 |                                                                             |                                                           |                                                                              |             |              |             |           |            
|Current assets:                                                                        |                                                                             |                                                           |                                                                              |             |              |             |           |            
|                                                                                       | Cash and cash equivalents                                                   |                                                           | $                                                                            | 32,132,329  |              |             | $         | 28,682,050  |           
|                                                                                       | Short-term investments                                                      |                                                           |                                                                              | 2,538,802   |              |             |           | 29,757,945  |           
|                                                                                       | Prepaid expenses, notes receivable and other current assets                 |                                                           |                                                                              | 223,721     |              |             |           | 576,734     |           
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           
|                                                                                       |                                                                             | Total current assets                                      |                                                                              |             | 34,894,852   |             |           |             | 59,016,729 |            
|Equipment and leasehold improvements, net of accumulated depreciation
and amortization |                                                                             |                                                           | 2,825,267                                                                    |             |              |             | 2,915,512 |            
|Notes receivable, net of current portion                                               |                                                                             |                                                           | 231,925                                                                      |             |              |             | 323,037   |            
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           
|                                                                                       |                                                                             | Total assets                                              |                                                                              | $           | 37,952,044   |             |           | $           | 62,255,278 |            
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |            
|Liabilities and Shareholders Equity                                                   |                                                                             |                                                           |                                                                              |             |              |             |           |            
|Current liabilities:                                                                   |                                                                             |                                                           |                                                                              |             |              |             |           |            
|                                                                                       | Accounts payable                                                            |                                                           | $                                                                            | 1,959,295   |              |             | $         | 1,121,550   |           
|                                                                                       | Accrued compensation                                                        |                                                           |                                                                              | 957,056     |              |             |           | 902,571     |           
|                                                                                       | Accrued research and development costs                                      |                                                           |                                                                              | 945,506     |              |             |           | 1,307,435   |           
|                                                                                       | Accrued liabilities                                                         |                                                           |                                                                              | 589,345     |              |             |           | 541,809     |           
|                                                                                       | Current portion of equipment loan facility and capitalized lease obligation |                                                           |                                                                              | 434,637     |              |             |           | 87,101      |           
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           
|                                                                                       |                                                                             | Total current liabilities                                 |                                                                              |             | 4,885,839    |             |           |             | 3,960,466  |            
|Equipment loan facility, net of current portion                                        |                                                                             |                                                           | 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  |                                                                              |             |              |             |           |             |            |            
|                                                                                       |                                                                             |                                                           | 28,133,560 and 27,834,773 shares at December 31, 2002
and 2001, respectively |             |              | 122,182,607 |           |             |            | 121,723,102 | 
|                                                                                       |                                                                             | Warrants                                                  |                                                                              |             | 798,076      |             |           |             | 771,713    |            
|                                                                                       |                                                                             | Deferred stock compensation                               |                                                                              |             | (1,243,786   | )           |           |             | (2,975,314 | )          
|                                                                                       | Accumulated deficit                                                         |                                                           |                                                                              | (89,243,494 | )            |             |           | (61,277,987 | )         
|                                                                                       | Accumulated other comprehensive income                                      |                                                           |                                                                              | 310         |              |             |           | 53,298      |           
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           
|                                                                                       |                                                                             | Total shareholders equity                                |                                                                              |             | 32,493,713   |             |           |             | 58,294,812 |            
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           
|                                                                                       |                                                                             | Total liabilities and shareholders equity                |                                                                              | $           | 37,952,044   |             |           | $           | 62,255,278 |            
|                                                                                       |                                                                             |                                                           |                                                                              |             |              |             |           |             |           

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

30



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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS

|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |            | 
|------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ----------- | ----------------------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                |                                             |                          |             | Year Ended December 31,
|                                                                                |                                             |                          |             |                        
|                                                                                |                                             |                          |             | 2002                    |            | 2001 |             | 2000      
|                                                                                |                                             |                          |             |                         |            |      |             |           
|Revenues:                                                                       |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                | License fees                                |                          | $           |                        |            |      | $           | 1,111,111  |            |   | $           | 3,333,333  |           
|                                                                                | Research and development                    |                          |             |                        |            |      |             | 2,398,429  |            |   |             | 4,826,370  |           
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|                                                                                |                                             | Total revenues           |             |                         |           |      |             |            | 3,509,540  |   |             |            | 8,159,703  | 
|Operating expenses:                                                             |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                                | Research and development *                  |                          |             | 22,838,066              |            |      |             | 16,884,027 |            |   |             | 12,815,788 |           
|                                                                                | General and administrative *                |                          |             | 4,070,189               |            |      |             | 3,979,813  |            |   |             | 3,035,559  |           
|                                                                                | Amortization of deferred stock compensation |                          |             | 1,976,872               |            |      |             | 2,652,031  |            |   |             | 7,972,728  |           
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|                                                                                |                                             | Total operating expenses |             |                         | 28,885,127 |      |             |            | 23,515,871 |   |             |            | 23,824,075 | 
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|Operating loss                                                                  |                                             |                          | (28,885,127 | )                       |            |      | (20,006,331 | )          |            |   | (15,664,372 | )         
|Net interest income                                                             |                                             |                          | 919,620     |                         |            |      | 2,366,748   |            |            |   | 1,714,850   |           
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|Net loss                                                                        |                                             | $                        | (27,965,507 | )                       |            | $    | (17,639,583 | )          |            | $ | (13,949,522 | )         
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|Net
loss per share  basic and diluted                                          |                                             | $                        | (1.00       | )                       |            | $    | (0.68       | )          |            | $ | (1.30       | )         
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |            |           
|Weighted average shares outstandingbasic and diluted                           |                                             |                          | 27,978,705  |                         |            |      | 26,010,347  |            |            |   | 10,747,773  |           
|                                                                                |                                             |                          |             |                         |            |      |             |            |            |   |             |           
|                                                                               
|* Exclusive of amounts recorded as amortization of deferred stock compensation:
|                                                                               
|Research and development                                                        |                                             | $                        | 908,061     |                         |            | $    | 940,053     |            |            | $ | 1,856,932   |           
|General and administrative                                                      |                                             | $                        | 1,068,811   |                         |            | $    | 1,711,978   |            |            | $ | 6,115,796   |           

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

31



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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)



|                                                                                                                 |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------ |  | -------- | ----------- | ------------ |  | - | ------- | - |  | - | ----------- | -
|                                                                                                                 |  | Common Stock |            |        |  |          |             | Deferred    
|                                                                                                                 |  |              |            |        |  |          |             | Stock       
|                                                                                                                 |  | Shares       |            | Amount |  | Warrants |             | Compensation
|                                                                                                                 |  |              |            |        |  |          |             |             
|Balance at January 1, 2000                                                                                       |  |              | 2,536,543  |        |  | $        | 2,209,962   |              |  | $ |        |   |  | $ | (1,809,680  | )
|Issuance of common stock for exercise of stock options
at $.30 to $.38 per share                                 |  |              | 602,650    |        |  |          | 185,788     |              |  |   |        |   |  |   |            |  
|Issuance of common stock for services                                                                            |  |              | 11,000     |        |  |          | 85,438      |              |  |   |        |   |  |   |            |  
|Issuance of common stock, net of issuance
cost of $5,770,749                                                     |  |              | 6,900,000  |        |  |          | 49,429,251  |              |  |   |        |   |  |   |            |  
|Deferred stock compensation related to
stock option grants                                                       |  |              |           |        |  |          | 12,093,928  |              |  |   |        |   |  |   | (12,093,928 | )
|Amortization of deferred stock compensation                                                                      |  |              |           |        |  |          |            |              |  |   |        |   |  |   | 7,972,728   |  
|Preferred stock conversion                                                                                       |  |              | 13,859,102 |        |  |          | 39,604,288  |              |  |   |        |   |  |   |            |  
|Preferred stock warrant conversion                                                                               |  |              |           |        |  |          |            |              |  |   | 225,713 |   |  |   |            |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Unrealized gain on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|Balance at December 31, 2000                                                                                     |  |              | 23,909,295 |        |  |          | 103,608,655 |              |  |   | 225,713 |   |  |   | (5,930,880  | )
|Issuance of common stock for exercise of stock options
at $.30 to $.38 per share                                 |  |              | 335,478    |        |  |          | 108,764     |              |  |   |        |   |  |   |            |  
|Issuance of common stock for services                                                                            |  |              | 5,000      |        |  |          | 29,778      |              |  |   |        |   |  |   |            |  
|Issuance of common stock, net of issuance
cost of $1,788,310                                                     |  |              | 3,585,000  |        |  |          | 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   |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Unrealized gain on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|Balance at December 31, 2001                                                                                     |  |              | 27,834,773 |        |  |          | 121,723,102 |              |  |   | 771,713 |   |  |   | (2,975,314  | )
|Issuance of common stock for exercise of stock options
at $.30 to $5.00 per share                                |  |              | 262,654    |        |  |          | 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   |  
|Net loss                                                                                                         |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Unrealized loss on available-for-sale securities                                                                 |  |              |           |        |  |          |            |              |  |   |        |   |  |   |            |  
|Comprehensive loss                                                                                               |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|                                                                                                                 |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  
|Balance at December 31, 2002                                                                                     |  |              | 28,133,560 |        |  | $        | 122,182,607 |              |  | $ | 798,076 |   |  | $ | (1,243,786  | )
|                                                                                                                 |  |              |            |        |  |          |             |              |  |   |         |   |  |   |             |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                 |  |             |             |               |  |             |         |               |  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ------------- |  | ----------- | ------- | ------------- |  | - | ----------- | -
|                                                                                                                 |  |             |             |               |  | Accumulated |         | Total        
|                                                                                                                 |  |             |             |               |  | Other       |         | Shareholders
|                                                                                                                 |  | Accumulated |             | Comprehensive |  | Equity     
|                                                                                                                 |  | Deficit     |             | Income        |  | (Deficit)  
|                                                                                                                 |  |             |             |               |  |            
|Balance at January 1, 2000                                                                                       |  | $           | (29,688,882 | )             |  | $           |        |               |  | $ | (29,288,600 | )
|Issuance of common stock for exercise of stock options
at $.30 to $.38 per share                                 |  |             |            |               |  |             |        |               |  |   | 185,788     |  
|Issuance of common stock for services                                                                            |  |             |            |               |  |             |        |               |  |   | 85,438      |  
|Issuance of common stock, net of issuance
cost of $5,770,749                                                     |  |             |            |               |  |             |        |               |  |   | 49,429,251  |  
|Deferred stock compensation related to
stock option grants                                                       |  |             |            |               |  |             |        |               |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |             |            |               |  |             |        |               |  |   | 7,972,728   |  
|Preferred stock conversion                                                                                       |  |             |            |               |  |             |        |               |  |   | 39,604,288  |  
|Preferred stock warrant conversion                                                                               |  |             |            |               |  |             |        |               |  |   | 225,713     |  
|Net loss                                                                                                         |  |             | (13,949,522 | )             |  |             |        |               |  |   | (13,949,522 | )
|Unrealized gain on available-for-sale securities                                                                 |  |             |            |               |  |             | 6,602   |               |  |   | 6,602       |  
|                                                                                                                 |  |             |             |               |  |             |         |               |  |   |             |  
|Comprehensive loss                                                                                               |  |             |             |               |  |             |         |               |  |   | (13,942,920 | )
|                                                                                                                 |  |             |             |               |  |             |         |               |  |   |             |  
|Balance at December 31, 2000                                                                                     |  |             | (43,638,404 | )             |  |             | 6,602   |               |  |   | 54,271,686  |  
|Issuance of common stock for exercise of stock options
at $.30 to $.38 per share                                 |  |             |            |               |  |             |        |               |  |   | 108,764     |  
|Issuance of common stock for services                                                                            |  |             |            |               |  |             |        |               |  |   | 29,778      |  
|Issuance of common stock, net of issuance
cost of $1,788,310                                                     |  |             |            |               |  |             |        |               |  |   | 18,825,440  |  
|Deferred stock compensation for issuance of
stock options and warrants related to a
technology license agreement |  |             |            |               |  |             |        |               |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |             |            |               |  |             |        |               |  |   | 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                                                                                     |  |             | (61,277,987 | )             |  |             | 53,298  |               |  |   | 58,294,812  |  
|Issuance of common stock for exercise of stock options
at $.30 to $5.00 per share                                |  |             |            |               |  |             |        |               |  |   | 240,524     |  
|Issuance of common stock for exercise of warrants                                                                |  |             |            |               |  |             |        |               |  |   |            |  
|Deferred stock compensation for re-measurement of
stock options related to a consulting agreement                |  |             |            |               |  |             |        |               |  |   |            |  
|Adjustments to market value for variable stock options
and warrants issued to non-employees                      |  |             |            |               |  |             |        |               |  |   |            |  
|Amortization of deferred stock compensation                                                                      |  |             |            |               |  |             |        |               |  |   | 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                                                                                     |  | $           | (89,243,494 | )             |  | $           | 310     |               |  | $ | 32,493,713  |  
|                                                                                                                 |  |             |             |               |  |             |         |               |  |   |             |  

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

32



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##### Table of Contents



ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS

|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |           |            |   |             |  
|--------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | ----------- | --------------------------------------------------- | -------- | ----------------------- | ----------- | --------- | ---------- | ---- | ----------- | --------- | ---------- | - | ----------- | -
|                                                                                        |                                              |                                                     |             |                                                     |          | Year Ended December 31,
|                                                                                        |                                              |                                                     |             |                                                     |          |                        
|                                                                                        |                                              |                                                     |             |                                                     |          | 2002                    |             | 2001      |            | 2000
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |     
|Operating activities                                                                    |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Net loss                                                                                |                                              | $                                                   | (27,965,507 | )                                                   |          | $                       | (17,639,583 | )         |            | $    | (13,949,522 | )        
|Adjustments to reconcile net loss to net cash used
in operating activities:             |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|                                                                                        | Depreciation and amortization                |                                                     |             | 746,949                                             |          |                         |             | 491,973   |            |      |             | 420,192   |           
|                                                                                        | Amortization of deferred stock compensation  |                                                     |             | 1,976,872                                           |          |                         |             | 2,652,031 |            |      |             | 7,972,728 |           
|                                                                                        | Stock issued for services                    |                                                     |             |                                                    |          |                         |             | 29,778    |            |      |             | 85,438    |           
|                                                                                        | Changes in operating assets and liabilities: |                                                     |             |                                                     |          |                         |             |           |            |      |             |           |           
|                                                                                        |                                              | Accounts receivable                                 |             |                                                     |         |                         |             |           | 1,138,244  |      |             |           | (346,591   | )
|                                                                                        |                                              | Prepaid expenses, notes receivable and other
assets |             |                                                     | 444,125  |                         |             |           | (195,297   | )    |             |           | (422,996   | )
|                                                                                        |                                              | Accounts payable                                    |             |                                                     | 837,745  |                         |             |           | 616,559    |      |             |           | (174,151   | )
|                                                                                        |                                              | Accrued liabilities                                 |             |                                                     | (259,908 | )                       |             |           | 1,251,318  |      |             |           | 974,897    |  
|                                                                                        |                                              | Deferred revenues                                   |             |                                                     |         |                         |             |           | (1,111,111 | )    |             |           | (3,333,333 | )
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|                                                                                        |                                              |                                                     |             | Net cash used in operating activities               |          |                         | (24,219,724 | )         |            |      | (12,766,088 | )         |            |   | (8,773,338  | )
|Investing activities                                                                    |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Purchases of equipment and leasehold improvements                                       |                                              |                                                     | (656,704    | )                                                   |          |                         | (1,632,491  | )         |            |      | (738,053    | )        
|Sales (purchases) of short-term investments                                             |                                              |                                                     | 27,166,155  |                                                     |          |                         | (2,193,080  | )         |            |      | (27,511,567 | )        
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|                                                                                        |                                              |                                                     |             | Net cash provided by (used in) investing activities |          |                         | 26,509,451  |           |            |      | (3,825,571  | )         |            |   | (28,249,620 | )
|Financing activities                                                                    |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Proceeds from equipment loan facility                                                   |                                              |                                                     | 1,258,473   |                                                     |          |                         |            |           |            |      |            |          
|Payments on equipment loan facility and capital lease obligation                        |                                              |                                                     | (338,445    | )                                                   |          |                         | (123,565    | )         |            |      | (175,096    | )        
|Proceeds from the issuance and exercise of preferred
stock warrants                     |                                              |                                                     |            |                                                     |          |                         |            |           |            |      | 636,635     |          
|Proceeds from the issuance of common stock                                              |                                              |                                                     |            |                                                     |          |                         | 18,825,440  |           |            |      | 49,429,251  |          
|Proceeds from the exercise of common stock options                                      |                                              |                                                     | 240,524     |                                                     |          |                         | 108,764     |           |            |      | 185,788     |          
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|                                                                                        |                                              |                                                     |             | Net cash provided by financing activities           |          |                         | 1,160,552   |           |            |      | 18,810,639  |           |            |   | 50,076,578  |  
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Increase in cash and cash equivalents                                                   |                                              |                                                     | 3,450,279   |                                                     |          |                         | 2,218,980   |           |            |      | 13,053,620  |          
|Cash and cash equivalents at beginning of year                                          |                                              |                                                     | 28,682,050  |                                                     |          |                         | 26,463,070  |           |            |      | 13,409,450  |          
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Cash and cash equivalents at end of year                                                |                                              | $                                                   | 32,132,329  |                                                     |          | $                       | 28,682,050  |           |            | $    | 26,463,070  |          
|                                                                                        |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Supplemental disclosures of cash flow information                                       |                                              |                                                     |             |                                                     |          |                         |             |           |            |      |             |          
|Interest paid                                                                           |                                              | $                                                   | 50,689      |                                                     |          | $                       | 21,536      |           |            | $    | 30,524      |          
|Equipment purchases under capital lease obligation                                      |                                              |                                                     |            |                                                     |          |                         |            |           |            |      | 222,500     |          
|Options and warrants issued for technology license agreements
and consulting agreements |                                              |                                                     | 235,956     |                                                     |          |                         | 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

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 Standards (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.

Short-term investments consist of certificates of deposit, commercial
paper, government agency notes and corporate notes that will mature between
four and twelve months.

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 their 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.

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. Amounts earned that had not been invoiced were reflected as
unbilled receivables.

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Research and Development and Patent Costs

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

Stock-Based Compensation

AtheroGenics has elected to follow Accounting Principles Board Opinion
(APB) 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.

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

|                                                                                                                |  |      |             |      |  |      |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                                |  | 2002 |             | 2001 |  | 2000
|                                                                                                                |  |      |             |      |  |     
|Net loss, as reported                                                                                           |  | $    | (27,965,507 | )    |  | $    | (17,639,583 | ) |  | $ | (13,949,522 | )
|Add: Stock-based employee compensation expense included
in reported net loss                                    |  |      | 1,495,249   |      |  |      | 2,316,141   |   |  |   | 7,972,728   |  
|Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards |  |      | (3,441,554  | )    |  |      | (3,370,753  | ) |  |   | (8,174,752  | )
|                                                                                                                |  |      |             |      |  |      |             |   |  |   |             |  
|Pro forma net loss                                                                                              |  | $    | (29,911,812 | )    |  | $    | (18,694,195 | ) |  | $ | (14,151,546 | )
|                                                                                                                |  |      |             |      |  |      |             |   |  |   |             |  
|Net loss per share:                                                                                             |  |      |             |      |  |      |             |   |  |   |             |  
|Basic and diluted, as reported                                                                                  |  | $    | (1.00       | )    |  | $    | (0.68       | ) |  | $ | (1.30       | )
|                                                                                                                |  |      |             |      |  |      |             |   |  |   |             |  
|Basic and diluted, pro forma                                                                                    |  | $    | (1.07       | )    |  | $    | (0.72       | ) |  | $ | (1.32       | )
|                                                                                                                |  |      |             |      |  |      |             |   |  |   |             |  

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 $28,018,495, $17,592,887 and $13,942,920 for the years ended December
31, 2002, 2001 and 2000, respectively.

Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13 and Technical Corrections(SFAS 145), which clarifies
the criteria under which extinguishment of debt can be considered as
extraordinary, rescinds the related Statement Nos. 4, 44 and 64, and makes

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technical corrections to other Statements of Financial Standards.
AtheroGenics adopted SFAS No. 145 in January 2003. AtheroGenics believes the
adoption of SFAS No. 145 will not have a material effect on its future results
of operations

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146), which requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and nullifies EITF Issue No. 94-3. AtheroGenics
adopted SFAS 146 in January 2003, but does not expect the adoption to
have a material effect on its future results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure(SFAS 148), that amends
SFAS 123, to provide alternative methods of transition to SFAS 123s fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim
Financial Reporting, to require 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. SFAS 148 does
not amend SFAS 123 to require companies to account for employee stock options
using the fair value method. SFAS 148 is effective for fiscal years beginning
after December 15, 2002. AtheroGenics adopted the new disclosure provisions in
accordance with SFAS 148, as discussed above.

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). The Agreement
provided for license fees and milestone payments to be made by Schering-Plough
to AtheroGenics.

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. Under the
Agreement, AtheroGenics granted to Schering-Plough rights to develop, make,
have made, import, export, use, distribute, market, promote, offer for sale and
sell AGI-1067, AtheroGenics lead product candidate, and specified compounds.

To the extent that AtheroGenics performed additional research and
development at Schering-Ploughs request, Schering-Plough paid AtheroGenics for
such research and development. AtheroGenics recognized research and development
revenues of $2,398,429 and $4,826,370 during 2001 and 2000, respectively, in
relation to such requests.

In October 2001, AtheroGenics reacquired all rights to AGI-1067 and
related compounds and terminated the license agreement. As a result,
Schering-Plough returned all licensed technology and all materials related to
that technology.

3. Net Loss Per Share

Net loss per share has been computed according to SFAS No. 128, Earnings
Per Share(SFAS 128), which requires disclosure of basic and diluted earnings
per share. Basic earnings per share excludes any dilutive effects of options,
shares subject to repurchase, warrants, and convertible securities. Diluted
earnings per share includes the impact of potentially dilutive securities.
Because AtheroGenics has had a net loss for each of the years presented, these
securities are antidilutive and, therefore, are not included in the computation
of weighted average shares used in computing diluted loss per share. Following
the guidance given by the Securities and Exchange Commission, common stock and
preferred stock that was issued or granted for nominal consideration prior to
the effective date of AtheroGenics initial public offering must be included in
the calculation of basic and diluted net loss per common share as if these
shares had been outstanding for all periods presented. AtheroGenics has not
issued or granted shares for nominal consideration since its formation.

Basic and diluted pro forma net loss per share for 2000 was computed by
dividing the net loss by the weighted average number of shares of common stock
outstanding plus the conversion of all outstanding convertible preferred stock
into common stock, which occurred upon consummation of AtheroGenics initial
public offering, retroactive to the date of issuance. This information is
included in the following table for comparative purposes.

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The following is a reconciliation of the numerator and denominator of
basic and diluted net loss per share amounts:

|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |             |  
|---------------------------- | ------------------------------------------------------------------------------------------------ |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                             |                                                                                                  |  | Year Ended December 31,
|                             |                                                                                                  |  |                        
|                             |                                                                                                  |  | 2002                    |             | 2001 |  | 2000
|                             |                                                                                                  |  |                         |             |      |  |     
|Basic and diluted:           |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Net loss                                                                                         |  | $                       | (27,965,507 | )    |  | $    | (17,639,583 | ) |  | $ | (13,949,522 | )
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Weighted average shares used in computing basic and
diluted net loss per share                   |  |                         | 27,978,705  |      |  |      | 26,010,347  |   |  |   | 10,747,773  |  
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Basic and diluted net loss per share                                                             |  | $                       | (1.00       | )    |  | $    | (0.68       | ) |  | $ | (1.30       | )
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|Pro forma basic and diluted: |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Shares used above                                                                                |  |                         |             |      |  |      |             |   |  |   | 10,747,773  |  
|                             | Pro forma adjustment to reflect weighted average effect
of assumed conversion of preferred stock |  |                         |             |      |  |      |             |   |  |   | 8,595,672   |  
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Pro forma weighted average shares of common stock outstanding                                    |  |                         |             |      |  |      |             |   |  |   | 19,343,445  |  
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            
|                             | Basic and diluted pro forma loss per share                                                       |  |                         |             |      |  |      |             |   |  | $ | (0.72       | )
|                             |                                                                                                  |  |                         |             |      |  |      |             |   |  |   |            

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,
|                                            |  |                        
|                                            |  | 2002                    |           | 2001 |  | 2000
|                                            |  |                         |           |      |  |     
|Options                                     |  |                         | 3,895,420 |      |  |      | 3,360,660 |  |  |   | 2,858,175 | 
|Warrants                                    |  |                         | 283,622   |      |  |      | 350,290   |  |  |   | 250,290   | 
|                                            |  |                         |           |      |  |      |           |  |  |   |           | 
|Total                                       |  |                         | 4,179,042 |      |  |      | 3,710,950 |  |  |   | 3,108,465 | 
|                                            |  |                         |           |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of options  |  | $                       | 4.06      |      |  | $    | 2.99      |  |  | $ | 1.49      | 
|                                            |  |                         |           |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of warrants |  | $                       | 4.41      |      |  | $    | 4.14      |  |  | $ | 3.40      | 
|                                            |  |                         |           |      |  |      |           |  |  |   |           | 

4. Redeemable Convertible Preferred Stock

AtheroGenics sold shares of Series A, Series B, Series B-1 and Series C
Redeemable Convertible Preferred Stock in various offerings between 1994 and
2000. These shares were convertible into common stock, at a conversion rate of
one-to-one, upon certain qualifying conditions, which included the completion
of an underwritten public offering of AtheroGenics common stock.

On August 8, 2000, AtheroGenics Registration Statement on Form S-1 was
declared effective by the Securities and Exchange Commission. Immediately
prior to the closing of AtheroGenics initial public offering on August 14,
2000, all of the outstanding shares of convertible preferred stock
automatically converted into 13,859,102 shares of common stock. Immediately
following the automatic conversion of preferred stock, amended and restated
articles of incorporation were filed. Under the amended and restated articles
of incorporation, AtheroGenics is authorized to issue 100,000,000 shares of
common stock and 5,000,000 shares of preferred stock.

5. Common Stock

On August 14, 2000, AtheroGenics completed an initial public offering of
6,900,000 shares of common stock (including the exercise of the underwriters
over-allotment option) that raised net proceeds of approximately $49,400,000.

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

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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 $48,100,000. These shares were registered
under a Registration Statement on Form S-3 (Registration No. 333-101174) filed
with the Securities and Exchange Commission in November 2002.

6. 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, 2002,
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.

Effective July 30, 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 authorizes the grant of options for up to 1,474,416 shares of
AtheroGenics common stock. On January 28, 2000, AtheroGenics Board of
Directors authorized an additional 2,250,000 shares to be issued under the 1997
Plan. As of December 31, 2002, AtheroGenics had reserved 2,569,321 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.

Effective April 18, 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, 2002, AtheroGenics
had reserved 2,000,000 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.

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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, 2000   |  |           | 1,785,325 |             |  | $     | .10-.31   |         |  | $        | .28  | 
|Granted                          |  |           | 1,797,850 |             |  |       | .38-9.88  |         |  |          | 2.28 | 
|Exercised                        |  |           | (613,650  | )           |  |       | .10-9.88  |         |  |          | .30  | 
|Canceled                         |  |           | (111,350  | )           |  |       | .30-8.25  |         |  |          | .67  | 
|                                 |  |           |           |             |  |       |           |         |  |          |      | 
|Outstanding at December 31, 2000 |  |           | 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 | 
|                                 |  |           |           |             |  |       |           |         |  |          |      | 

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, 2002.

|                    |           |                     |           |                 |                  |                |                  |             |        |                |                  |      |  |  |           |           |  |  |      |      | 
|------------------- | --------- | ------------------- | --------- | --------------- | ---------------- | -------------- | ---------------- | ----------- | ------ | -------------- | ---------------- | ---- |  |  | --------- | --------- |  |  | ---- | ---- | 
|Options Outstanding |           | Options Exercisable
|                    |           |                    
|                    |           |                     | Number    |                 | Weighted Average |                | Weighted Average |             | Number |                | Weighted Average
|Exercise Price      |           | Outstanding         |           | Remaining Years |                  | Exercise Price |                  | Exercisable |        | Exercise Price
|                    |           |                     |           |                 |                  |                |                  |             |        |               
|$                   | .10-.38   |                     |           | 1,562,840       |                  |                |                  | 6.13        |        |                | $                | .32  |  |  |           | 1,286,322 |  |  | $    | .31  | 
|                    | 4.37-6.05 |                     |           | 1,018,250       |                  |                |                  | 8.59        |        |                |                  | 5.72 |  |  |           | 384,832   |  |  |      | 5.66 | 
|                    | 6.10-7.41 |                     |           | 1,097,280       |                  |                |                  | 9.64        |        |                |                  | 7.08 |  |  |           | 126,950   |  |  |      | 6.36 | 
|                    | 7.55-9.88 |                     |           | 217,050         |                  |                |                  | 8.01        |        |                |                  | 8.02 |  |  |           | 119,005   |  |  |      | 8.05 | 
|                    |           |                     |           |                 |                  |                |                  |             |        |                |                  |      |  |  |           |           |  |  |      |     
|                    |           |                     | 3,895,420 |                 |                  |                | 7.87             |             |        |                | 4.06             |      |  |  | 1,917,109 |           |  |  | 2.26 |     
|                    |           |                     |           |                 |                  |                |                  |             |        |                |                  |      |  |  |           |           |  |  |      |     

During 2000, in connection with the grant of certain options to employees,
AtheroGenics recorded non-cash deferred stock compensation of $12,093,928,
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 2002, 2001 and 2000,
AtheroGenics recorded amortization of deferred stock compensation for these
options of $1,495,249, $2,316,141 and $7,972,728, 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. The fair value of the warrants and options for purposes of this
calculation 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, generally five
years, using the graded vesting method. During 2002, AtheroGenics recorded a
total of $383,664 of amortization of deferred stock compensation for these
warrants and options. The fair value of the options and warrants is
re-measured at each measurement date. At December 31, 2002, 100,000 shares of
common stock were reserved for issuance upon the exercise of these outstanding
warrants.

In August 2002, in connection with the modification of certain options
held by an employee who changed in status to become a consultant, AtheroGenics
recorded non-cash deferred stock compensation of $235,956. The fair value of
the options for purposes of this calculation was determined by using the
Black-Scholes model. These amounts are included as a reduction of
shareholders equity and

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are being amortized over the vesting periods of the individual options, which
is approximately one year, using the straight-line
method. During 2002, AtheroGenics recorded a total of $97,959 of
amortization of deferred stock compensation for these options. The fair value
of the options is re-measured at each measurement date. At December 31, 2002,
59,050 shares of common stock were reserved for issuance upon the exercise of
these outstanding options.

At December 31, 2002, AtheroGenics had a total of $1,243,786 remaining to
be amortized over the vesting periods of the option grants discussed above.
This amortization will approximate $990,000 in 2003, $156,000 in 2004, $75,000
in 2005 and $23,000 in 2006. During 2002 and 2001, 13,200 and 165,500 shares,
respectively, were forfeited and deferred stock compensation was decreased by
$111,841 and $1,395,735, respectively.

Pro forma information regarding net income is required by SFAS 123, which
also requires that the information be determined as if AtheroGenics had
accounted for the employee stock options granted subsequent to December 31,
1994 under the fair value method. The fair value for these options (which are
granted with an exercise price equal to fair market value as determined by the
board of directors on the grant date) was estimated at the date of grant using
the Black-Scholes option valuation model with the following weighted average
assumptions for 2002, 2001 and 2000: risk-free interest rates of 3.37%, 4.51%
and 6.36%, respectively; no dividend yield; a weighted average expected life of
the options of five years; and volatility factors of the expected market price
of AtheroGenics common stock of 87.63%, 99.79% and 20.85%, respectively.

For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options vesting periods. The
weighted average fair values of options granted during 2002, 2001 and 2000
equal $5.14, $4.60 and $1.16, respectively. Pro forma net loss and net loss per
share are as follows:

|                                                 |  |                         |             |      |  |      |             |   |  |   |             |  
|------------------------------------------------ |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                 |  | Year Ended December 31,
|                                                 |  | 2002                    |             | 2001 |  | 2000
|                                                 |  |                         |             |      |  |     
|Pro forma net loss                               |  | $                       | (29,911,812 | )    |  | $    | (18,694,195 | ) |  | $ | (14,151,546 | )
|Pro forma net loss per share (basic and diluted) |  |                         | (1.07       | )    |  |      | (0.72       | ) |  |   | (1.32       | )

In August 1998, in connection with a bridge loan agreement, AtheroGenics
issued to lenders warrants for 205,002 shares of Series B Redeemable
Convertible Preferred Stock. 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 the lenders additional warrants to purchase
200,001 shares of Series C Redeemable Convertible Preferred Stock. The
warrants became exercisable on April 13, 1999 for $3.00 per share and expire on
December 31, 2008.

The Series B and Series C Redeemable Convertible Preferred Stock were
subsequently converted into common stock at a conversion rate of one-to-one
upon the completion of AtheroGenics initial public offering in August 2000.
At such time, the warrants became exercisable for common stock. At December
31, 2002, 183,622 shares of common stock were reserved for issuance upon the
exercise of outstanding warrants.

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7. 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,
2002. The unrealized gains were $310 and $53,298 for 2002 and 2001,
respectively. The following table summarizes the estimated fair value of
AtheroGenics short-term investments:

|                        |  |              |           |      |  |   |            | 
|----------------------- |  | ------------ | --------- | ---- |  | - | ---------- | 
|                        |  | December 31,
|                        |  | 2002         |           | 2001
|                        |  |              |           |     
|Government agency notes |  | $            | 1,000,000 |      |  | $ | 16,096,749 | 
|Corporate notes         |  |              |          |      |  |   | 7,122,703  | 
|Commercial paper        |  |              | 1,500,309 |      |  |   | 6,500,000  | 
|Certificate of deposit  |  |              | 38,493    |      |  |   | 38,493     | 
|                        |  |              |           |      |  |   |            | 
|Total                   |  | $            | 2,538,802 |      |  | $ | 29,757,945 | 
|                        |  |              |           |      |  |   |            | 

All available-for-sale securities held at December 31, 2002, will mature
during 2003.

8. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

|                                          |  |              |            |      |  |   |            |  
|----------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                          |  | December 31,
|                                          |  | 2002         |            | 2001
|                                          |  |              |            |     
|Laboratory equipment                      |  | $            | 2,564,534  |      |  | $ | 1,861,221  |  
|Leasehold improvements                    |  |              | 1,492,540  |      |  |   | 1,420,579  |  
|Computer and office equipment             |  |              | 1,109,776  |      |  |   | 968,329    |  
|Construction in progress                  |  |              |           |      |  |   | 309,384    |  
|                                          |  |              |            |      |  |   |            |  
|                                          |  |              | 5,166,850  |      |  |   | 4,559,513  |  
|Accumulated depreciation and amortization |  |              | (2,341,583 | )    |  |   | (1,644,001 | )
|                                          |  |              |            |      |  |   |            |  
|                                          |  | $            | 2,825,267  |      |  | $ | 2,915,512  |  
|                                          |  |              |            |      |  |   |            |  

9. Bank Credit Agreements

In March 2002, AtheroGenics entered into a revolving credit facility with
Silicon Valley Bank (the Bank) for up to a maximum amount of $5,000,000 to be
used for working capital requirements. Under the terms of the facility,
interest on advances is charged at the Banks prime rate plus 1.50% per year,
provided that certain liquidity levels are maintained; otherwise interest will
be charged at prime rate plus 2.0% per year. Amounts borrowed under the
revolving credit facility may be repaid and reborrowed at any time and from
time to time during the term of the facility. The revolving line of credit
terminates on September 5, 2004 and all outstanding amounts and accrued
interest will be due and payable on that date. As of December 31, 2002, there
were no outstanding balances under the revolving credit facility.

In addition, in March 2002, AtheroGenics entered into an equipment loan
facility with the Bank for up to a maximum amount of $2,500,000 to be used to
finance existing and new equipment purchases. Under the terms of the facility,
AtheroGenics may request up to six equipment advances until December 6, 2002.
The interest rate on the equipment advances was equal to the greater of (1) the
Banks prime rate plus 3.0% or (2) 7.5% per year and was fixed at the time of
each advance. Amounts borrowed under the equipment loan facility are repaid in
33 equal installments of principal and interest beginning on the first business
day of the month following an advance. As of December 31, 2002, there was an
outstanding balance of $1,007,129 under the equipment loan facility and the
weighted average interest rate was 7.68%.

As collateral for the revolving credit facility and for the equipment loan
facility, AtheroGenics granted to the Bank a security interest in all of its
assets other than its intellectual property, and granted a negative pledge on
its intellectual property. Also, in conjunction with these facilities,
AtheroGenics is required to maintain a $15,000,000 compensating cash balance in
an account with the Bank.

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Maturities of long-term debt as of December 31, 2002 are as follows:

|     |  |   |           | 
|---- |  | - | --------- | 
|2003 |  | $ | 434,637   | 
|2004 |  |   | 488,870   | 
|2005 |  |   | 83,622    | 
|     |  |   |           | 
|     |  | $ | 1,007,129 | 
|     |  |   |           | 

10. Income Taxes

At December 31, 2002, AtheroGenics had net operating loss carryforwards
and research and development credit carryforwards of $76,316,052 and
$2,311,134, respectively, for income tax purposes, which both begin to expire
in 2010. The significant components of the deferred tax assets are:

|                                 |                           |   |              |            |      |   |             |            | 
|-------------------------------- | ------------------------- | - | ------------ | ---------- | ---- | - | ----------- | ---------- | 
|                                 |                           |   | December 31,
|                                 |                           |   | 2002         |            | 2001
|                                 |                           |   |              |            |     
|Net operating loss carryforwards |                           | $ | 29,000,100   |            |      | $ | 19,147,887  |           
|Deferred stock compensation      |                           |   | 3,899,329    |            |      |   | 3,284,001   |           
|Research credits                 |                           |   | 2,311,134    |            |      |   | 1,544,330   |           
|Other                            |                           |   | 241,093      |            |      |   | 259,746     |           
|                                 |                           |   |              |            |      |   |             |           
|                                 | Total deferred tax assets |   |              | 35,451,656 |      |   |             | 24,235,964 | 
|Valuation allowance              |                           |   | (35,451,656  | )          |      |   | (24,235,964 | )         
|                                 |                           |   |              |            |      |   |             |           
|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 $11,215,692 and $8,718,402 in 2002 and 2001, respectively.

AtheroGenics net operating loss carryforwards may be subject to certain
Internal Revenue Code 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 not completed an analysis of IRC Section 382 on the cumulative
net operating loss carryforward. However, 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. If a change in ownership has occurred, there will be an annual accrual
limitation; however, this limitation is not expected to result in a loss of the
deferred tax benefit.

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.

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At December 31, 2002, AtheroGenics minimum aggregate commitments (net of
sublease income) under long-term, non-cancelable operating leases are as
follows:

|           |  |       |           |                 |  |     |         |  |  |   |           | 
|---------- |  | ----- | --------- | --------------- |  | --- | ------- |  |  | - | --------- | 
|           |  | Gross |           | Sublease Income |  | Net
|           |  |       |           |                 |  |    
|2003       |  | $     | 1,270,377 |                 |  | $   | 211,438 |  |  | $ | 1,058,939 | 
|2004       |  |       | 1,250,456 |                 |  |     | 177,858 |  |  |   | 1,072,598 | 
|2005       |  |       | 1,144,923 |                 |  |     | 130,847 |  |  |   | 1,014,076 | 
|2006       |  |       | 1,136,895 |                 |  |     |        |  |  |   | 1,136,895 | 
|2007       |  |       | 1,136,895 |                 |  |     |        |  |  |   | 1,136,895 | 
|Thereafter |  |       | 1,326,378 |                 |  |     |        |  |  |   | 1,326,378 | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 
|           |  | $     | 7,265,924 |                 |  | $   | 520,143 |  |  | $ | 6,745,781 | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 

Rent expense under operating leases amounted to $925,040, $835,608 and
$786,452 in 2002, 2001 and 2000, respectively.

Equipment and leasehold improvements include the following amounts for
leases that have been capitalized at December 31, 2002 and 2001:

|                              |  |      |          |      |  |   |          |  
|----------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                              |  | 2002 |          | 2001
|                              |  |      |          |     
|Lab equipment                 |  | $    | 972,500  |      |  | $ | 972,500  |  
|Less accumulated amortization |  |      | (972,500 | )    |  |   | (837,162 | )
|                              |  |      |          |      |  |   |          |  
|                              |  | $    |         |      |  | $ | 135,338  |  
|                              |  |      |          |      |  |   |          |  

Amortization of leased assets is included in depreciation and amortization
expense.

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
bears interest at a rate of 2.88% per annum, the applicable federal rate at the
time of the loan, and is due on April 15, 2005. The loan is secured by 22,500
shares of AtheroGenics common stock. As a result of the Sarbanes-Oxley Act of
2002, AtheroGenics no longer makes loans to its executive officers that are
prohibited by the Act.

AtheroGenics has a sublease agreement for a portion of its office and
laboratory space with Inhibitex, Inc. The monthly lease payments were
approximately $21,000 in 2002. In 2003, under a revised sublease agreement
that reduces the amount of office space, the monthly lease payments are
approximately $11,000. 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, 2004. 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 15% of their salary (up to the maximum amount of tax deferred
contribution allowed by the Internal Revenue Code). AtheroGenics may make a
discretionary contribution. During 2002, AtheroGenics matched 50% of
employees contributions, up to a maximum of 6% of the employees annual base
compensation. AtheroGenics contribution to the plan for 2002, 2001 and 2000
aggregated $129,503, $91,852 and $62,093, 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, 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 | )

|                         |                   |   |             |       |             |   |                              |       |             |   |            |       |   |   |            |       |  
|------------------------ | ----------------- | - | ----------- | ----- | ----------- | - | ---------------------------- | ----- | ----------- | - | ---------- | ----- | - | - | ---------- | ----- | -
|                         |                   |   |             |       |             |   | Year Ended December 31, 2001 |       |             |   |           
|                         |                   |   | 1st Quarter |       | 2nd Quarter |   | 3rd Quarter                  |       | 4th Quarter
|                         |                   |   |             |       |             |   |                              |       |            
|Net revenues             |                   | $ | 1,430,422   |       |             | $ | 481,245                      |       |             | $ | 538,511    |       |   | $ | 1,059,362  |      
|Operating loss           |                   |   | (3,884,934  | )     |             |   | (4,537,847                   | )     |             |   | (5,456,025 | )     |   |   | (6,127,525 | )    
|Net loss                 |                   |   | (3,100,628  | )     |             |   | (3,949,277                   | )     |             |   | (4,862,219 | )     |   |   | (5,727,459 | )    
|Net loss per share data: |                   |   |             |       |             |   |                              |       |             |   |            |       |   |   |            |      
|                         | Basic and diluted |   |             | (0.13 | )           |   |                              | (0.16 | )           |   |            | (0.18 | ) |   |            | (0.21 | )

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.

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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 under the captions Executive Officers and Directors, Nominees and
Section 16(a) Beneficial Ownership Reporting Compliance, respectively, in our
proxy statement for our 2003 annual meeting of shareholders to be held on May
8, 2003. 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 31, 2003.




Item 11.Executive Compensation

We have set forth information relating to executive compensation under the
caption Executive Compensation, Director Compensation, Employment
Agreement, Report of the Compensation Committee, Stock Performance Graph
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

The following table sets forth certain information with respect to
securities authorized for issuance under equity compensation plans as of
December 31, 2002.

|                                                       |  |                                      |           |                           |  |                           |      |  |  |  |         | 
|------------------------------------------------------ |  | ------------------------------------ | --------- | ------------------------- |  | ------------------------- | ---- |  |  |  | ------- | 
|                                                       |  | Equity Compensation Plan Information |           |                           |  |                          
|                                                       |  |                                      |           | Number of securities     
|                                                       |  |                                      |           | remaining available for  
|                                                       |  | Number of securities to be           |           | Weighted-average exercise |  | future issuance under    
|                                                       |  | be issued upon exercise of           |           | price of outstanding      |  | equity compensation plans
|                                                       |  | outstanding options                  |           | options, warrants         |  | (excluding securities    
|                                                       |  | warrants and rights                  |           | and rights                |  | reflected in column (a)) 
|                                                       |  | (a)                                  |           | (b)                       |  | (c)                      
|                                                       |  |                                      |           |                           |  |                          
|Equity compensation plans approved
by shareholders     |  |                                      | 3,895,420 |                           |  | $                         | 4.33 |  |  |  | 923,901 | 
|Equity compensation plans not approved
by shareholders |  |                                      | 250,000   |                           |  |                           | 0.14 |  |  |  | 17,800  | 
|                                                       |  |                                      |           |                           |  |                           |      |  |  |  |         | 
|Total                                                  |  |                                      | 3,895,420 |                           |  | $                         | 4.06 |  |  |  | 941,701 | 
|                                                       |  |                                      |           |                           |  |                           |      |  |  |  |         | 

The 1995 Equity Ownership Plan is the only equity compensation plan of
AtheroGenics that was adopted without approval of AtheroGenics shareholders.
The description of this plan may be found above in note 6 Stock Options and
Warrants to the notes to our financial statements

We have also set forth information relating to ownership of our common
stock by certain persons under the caption Security Ownership of Certain
Beneficial Owners and Management 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.

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Item 14.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-14(c) and 15d-14(c)) for AtheroGenics. Our
disclosure controls and procedures include our internal controls, as that
term is used in Section 302 of the Sarbanes-Oxley Act of 2002 and described in
the Security and Exchange Commissions Release No. 34-46427 (August 29, 2002).
Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing date of this annual 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 controls.There were no significant changes in our
internal controls or in other factors that could significantly affect those
controls subsequent to the date of the evaluation. As a result, there were no
corrective actions to be taken.




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, 2002 and 2001                                                                                                                       
|
| |        |  | Statements of Operations for the years ended December 31, 2002, 2001 and 2000                                                                                         
|
| |        |  | Statements Shareholders Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000                                                                        
|
| |        |  | Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                                                                                         
|
| |        |  | 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 2002:                                                                                                              
|
| |        |  | None.                                                                                                                                                                 
|
| | (c)    |  | Exhibits                                                                                                                                                              

|        |  |   |  |                                                                                                                                                                                                                                                                                        |  |  |  | 
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |   |  | 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).                                                                                     

46



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##### Table of Contents



|          |  |   |  |                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|--------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit   |  |   |  | Description                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|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.                                                                                                                                                                                                                                     
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|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.                                                                                                                                                                                                                                             
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.13**++ |  |  |  | Master Equipment Lease dated November 1, 1995 between Phoenix Leasing Incorporated and
AtheroGenics, Inc.                                                                                                                                                                                                                               
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.14***  |  |  |  | Employment Agreement dated March 1, 2001 between AtheroGenics, Inc. and Russell M. Medford.                                                                                                                                                                                                                                             
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.15***  |  |  |  | Amendment dated January 1, 2001 to Promissory Note dated April 1, 1999 between Inhibitex,
Inc. and AtheroGenics, Inc.                                                                                                                                                                                                                   
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|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).                                                                                                                         
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|10.19***  |  |  |  | Promissory Note and Stock Pledge Agreement dated as of December 26, 2001 between
AtheroGenics, Inc. and Mitchell Glass.                                                                                                                                                                                                                 
|          |  |   |  |                                                                                                                                                                                                                                                                                                                                         
|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).                                                                

47



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##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                |  |  |  | 
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |   |  | Description                                                                                                                                                                                                                                                                                    |  |  |  | 
|        |  |   |  |                                                                                                                                                                                                                                                                                                |  |  |  | 
|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).
|        |  |   |  |                                                                                                                                                                                                                                                                                               
|23.01*  |  |  |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                 
|        |  |   |  |                                                                                                                                                                                                                                                                                               
|24.01*  |  |  |  | Powers of Attorney.                                                                                                                                                                                                                                                                           



|*   |  | 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.               
|   
|*** |  | Filed as an exhibit of the same number with AtheroGenics Annual Report
on Form 10-K for the year ended December 31, 2001, 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.                                                                                

48



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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 28, 2003.

| |  |                    |  |                                                                    
| |  | ------------------ |  | -------------------------------------------------------------------
| |  | 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 28, 2003
|                                                      |  |                                                                                   |  |               
|Principal Financial and Principal
Accounting Officer: |  |                                                                                   |  |               
|                                                      |  |                                                                                   |  |               
|/s/MARK P. COLONNESEMark P. Colonnese                 |  | Senior Vice President of Finance
 and Administration and Chief
 Financial Officer |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|Additional Directors:                                 |  |                                                                                   |  |               
|                                                      |  |                                                                                   |  |               
|*Michael A. Henos                                     |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*R. Wayne Alexander                                   |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*David Bearman                                        |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*Vaughn D. Bryson                                     |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*T. Forcht Dagi                                       |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*Arthur M. Pappas                                     |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*William A. Scott                                     |  | Director                                                                          |  | March 28, 2003
|                                                      |  |                                                                                   |  |               
|*Stephen G. Sudovar                                   |  | Director                                                                          |  | March 28, 2003



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



49



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##### Table of Contents






CERTIFICATIONS

I, Russell M. Medford, President and Chief Executive Officer, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of AtheroGenics,
Inc.;                                                                                                                                                                                                                                                  
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  
|

| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 28, 2003

|                                     
|-------------------------------------
|/s/ RUSSELL M. MEDFORD               
|                                     
|Russell M. Medford                   
|President and Chief Executive Officer

50



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##### Table of Contents



I, Mark Colonnese, Senior Vice President of Finance and Administration and
Chief Financial Officer, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of AtheroGenics,
Inc.;                                                                                                                                                                                                                                                  
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  
|

| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 28, 2003

|                                          
|------------------------------------------
|/s/ MARK P. COLONNESE                     
|                                          
|Mark P. Colonnese                         
|Senior Vice President of Finance and      
|Administration and Chief Financial Officer

51