##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                       
|---------- |  | --------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                       
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the fiscal year ended December 31,
	2001                                          
|          
|or        
|          
|o          |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934   
|          
|           |  | For the transition period
	from          to                                           

Commission file number 0-31261



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AtheroGenics, Inc.

(Exact name of Registrant as specified in its
charter)


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

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

None


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

Common Stock, No Par Value


Common Stock Purchase Rights


Indicate by check mark whether the registrant
(1) 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 þ          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

The aggregate market value of the voting stock
held by non-affiliates of the registrant based on the last sale
price for such stock on the Nasdaq National Market at
March 20, 2002: $95,404,999.

The number of shares outstanding of each of the
registrants classes of common stock, as of March 20,
2002: 27,898,873 (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 2002 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                                     
|PART IV                                                                                      
|                                                                                              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                    
|SIGNATURES                                                                                   
|Form of Third Amended and Restated Bylaws                                                    
|Promissory Note and Stock Pledge Agreement                                                   
|Consent of Ernst & Young LLP.                                                                
|Powers of Attorney                                                                           



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##### Table of Contents



ATHEROGENICS, INC

FORM 10-K

INDEX

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1.    |  | Business                                                                               |    |      | 2  | 
|Item 2.    |  | Properties                                                                             |    |      | 22 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 22 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 22 | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
	Related Shareholder Matters                 |    |      | 23 | 
|Item 6.    |  | Selected Financial Data                                                                |    |      | 24 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 25 | 
|Item 7A    |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |    |      | 29 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                            |    |      | 30 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 48 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 48 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 48 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 48 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 48 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 48 | 
|Signatures |  |                                                                                        | 51 |     

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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 preclinical programs.

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

AGI-1067 is our v-protectant candidate that is
most advanced in clinical development. AGI-1067 is designed to
benefit patients with coronary artery 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 positive findings of a Phase II
clinical trial, CART-1 (Canadian Antioxidant Restenosis Trial),
that assessed in 305 patients the safety and effectiveness of
AGI-1067 for the treatment of post-angioplasty restenosis. An
analysis of the results indicated that six months after
angioplasty, the blood vessels of patients who received AGI-1067
had larger openings, measured as luminal diameters of their
coronary arteries, than those who received placebo. CART-1 data
also suggested that AGI-1067 may actually reverse the
progression of atherosclerosis. In December 2001, we initiated a
CART-2 Phase IIb clinical trial for AGI-1067. CART-2 is a
500-patient clinical trial, which examines the effect of
12 months of AGI-1067 therapy on restenosis and
atherosclerosis following angioplasty. An additional six-month
Phase IIb trial, called DART-1 (Diabetes Atherosclerosis
and Restenosis Trial), is being initiated to examine the effects
of AGI-1067 on restenosis and atherosclerosis in Type 2
diabetics. Our Phase II clinical trial program follows the
successful completion of seven Phase I clinical trials
comprising more than 150 men and women.

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 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 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.

Our third v-protectant candidate, AGI-1096, is a
novel antioxidant and selective anti-inflammatory agent which is
being developed to address the accelerated inflammation of the
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.

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 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.

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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.

Inflammation and Disease

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

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



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

Atherosclerosis is a common 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. There are currently no medications available for
physicians to treat directly the underlying chronic inflammation
of atherosclerosis.

Atherosclerosis of the blood vessels of the heart
is called coronary artery disease or heart disease. Treatment
for coronary artery disease often progresses to therapeutic
procedures, including angioplasty or bypass surgery, to
re-establish an effective blood supply to the heart. Angioplasty
corrects the blockage by the inflation of a balloon delivered by
catheter, with or without the placement of a stent, a small
cylindrical mesh device, at the site of the obstructing plaque.
After angioplasty, the artery opened by the procedure often
re-narrows. Significant re-narrowing may cause angina, a heart
attack, or require a repeat angioplasty. Inflammation plays an
important role in this re-narrowing called restenosis. There is
currently no medical treatment for restenosis. Recently, several
companies have announced results from clinical trials showing
that drug coated stents may be effective in significantly
reducing restenosis. These drug coated stents have not been
given approval for use in the United States.

Rheumatoid arthritis is a chronic inflammatory
disease of the joints. Rheumatoid arthritis is marked by
stiffness, pain, limitations to activity and the destruction of
joints, including knees and wrists. Present therapy for
rheumatoid arthritis includes non-steroidal anti-inflammatory
drugs, corticosteroids, and drugs designed to slow the
progression of disease, termed disease modifying anti-rheumatic
drugs (DMARDs). DMARDs include drugs that were originally
designed to treat cancer, such as methotrexate. DMARDs have
serious side

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effects. Recently, two new DMARDs developed by
other companies, Enbrel(R) (etanercept) and Remicade(R)
(infliximab), have been shown to improve the signs and symptoms
of patients 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 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. The current treatment for prevention of
organ transplant rejection focuses on the use of powerful
immunosuppressive drugs such as cyclosporin A, tacrolimus and
rapamycin (sirolimus). These drugs, which are initiated during
the acute rejection phase, need to be taken continuously after
the transplant, often cause side effects, and may still lead to
long-term rejection of the transplant. Immunosuppressants may
also impair the recipients immune system in order to
reduce the immune response against the transplant. The
Scientific Registry of Transplant Recipients reports that even
with the use of immunosuppressants, patients run the risk of
losing a donated organ during the first three years following
transplantation, and roughly 50 percent of patients have
functioning organ transplants after approximately ten years.

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

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

V-Protectant Technology

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

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V-Protectants Block Activation of VCAM-1

In Cells That Line Blood Vessels


|                     |  |                     
|-------------------- |  | --------------------
|Activation of VCAM-1 |  | Inhibition of VCAM-1

(V-Protectants Block Chart)



| |                                                          
| | ---------------------------------------------------------
| | 1  Inflammatory agent attaches to
	cell surface receptor 
| | 2  Receptor changes generate oxidant
	signals inside cell
| | 3  Oxidant signals stimulate gene to
	produce VCAM-1     
| | 4  Cell produces VCAM-1
	proteins                        
| | 5  VCAM-1 migrates to cell
	surface                      
| | 6  White blood cells attach to
	VCAM-1 on cell surface   

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 will seek initially to
	rapidly develop AGI-1067 for the treatment and prevention of
	restenosis and the progression of atherosclerosis in patients
	with coronary artery 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, solid organ transplant rejection
	and other diseases. We recently completed a Phase I clinical
	trial with a v-protectant compound, AGIX-4207, for the treatment
	of rheumatoid arthritis. We commenced Phase I clinical trials
	for AGIX-4207 I.V., an intravenously administered drug for the
	treatment of rheumatoid arthritis, and AGI-1096, a v-protectant
	developed for the prevention of solid 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 recent 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.                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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               |                       | Restenosis, atherosclerosis      |                    | Phase IIb clinical trial
|                            | AGIX-4207              |                       | Rheumatoid arthritis             |                    | Phase I clinical trial  
|                            | AGIX-4207 I.V          |                       | Rheumatoid arthritis             |                    | Phase I clinical trial  
|                            | AGI-1096               |                       | Solid organ transplant rejection |                    | Phase I clinical trial  
|                            | Oral product candidate |                       | Chronic asthma                   |                    | Research                
|                           
|DIAGNOSTICS                 |                        |                       |                                  |                   
|                            | OXYKINE® assay         |                       | Atherosclerosis                  |                    | Clinical testing        
|                           
|FUNCTIONAL GENOMICS PROGRAM |                        | Inflammatory diseases |                                  | Research          
|                           
|MEKK TECHNOLOGY PLATFORM    |                        | Inflammatory diseases |                                  | Research          
|                           

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



| |         
| | --------
| | AGI-1067

AGI-1067, our lead v-protectant product
candidate, is a small molecular weight compound that patients
take orally once per day. In preclinical testing, AGI-1067
demonstrated the following three biological properties that we
believe will benefit patients with atherosclerosis:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | AGI-1067 blocks production of
	VCAM-1.We believe that decreased
	VCAM-1 production will diminish atherosclerosis and restenosis.
|
| |  | AGI-1067 is a potent
	antioxidant.AGI-1067 protects LDL
	cholesterol from converting into a harmful inflammatory agent.         
|
| |  | AGI-1067 lowers LDL
	cholesterol.LDL cholesterol lowering
	reduces the risk of developing atherosclerosis.                      

According to the American Heart Association, more
than 12.6 million people in the United States have coronary
artery disease, including approximately 1.1 million who
have heart attacks every year. In order to make a definitive
diagnosis in patients with suspected coronary artery disease, a
specially trained cardiologist or radiologist performs a
diagnostic procedure called angiography in which the
cardiologist injects dye through an intravenous catheter to
image the coronary arteries. Angiography can reveal coronary
artery disease that may require an invasive procedure.
Physicians perform this invasive procedure, called angioplasty,
more than one million times annually worldwide. This procedure
consists of placing a balloon-tipped catheter into the coronary
artery and mechanically re-opening the blood vessel by expanding
the balloon under very high

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pressure. In addition, cardiologists may opt to
treat some of these coronary artery blockages by inserting a
stent to keep the blood vessel open after the cardiologist
removes the catheter.


Angioplasty does not cure coronary artery
disease, nor does it treat the underlying chronic inflammation.
In fact, angioplasty induces an inflammatory response that
contributes to its failure in approximately 30 percent of
patients who undergo the procedure. This process of
re-narrowing, or post-angioplasty restenosis, is a major
clinical problem that limits the effectiveness of the procedure.
Restenosis following balloon angioplasty occurs due to local
damage to the coronary artery. The development of stents and the
ongoing research and development activities with respect to
catheter improvement have not eradicated the problem of
restenosis, but have introduced the new problem of in-stent
restenosis which is particularly difficult to treat. In-stent
restenosis occurs when the cells that surround the stent
proliferate and fill the opening of the vessel. Drug coated
stents are currently being tested in clinical trials and in
limited trials have shown to be very effective in reducing
restenosis in patients who can use these devices.

Our initial development targets are
post-angioplasty restenosis and atherosclerosis. 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.

We have completed preclinical testing in multiple
species to establish the therapeutic properties of AGI-1067. Our
preclinical results indicated that, dosed orally, AGI-1067
blocked VCAM-1 production, blocked damage from oxidants and
prevented atherosclerosis. In addition, AGI-1067 reduced LDL
cholesterol comparably to and in combination with statins, which
are widely used cholesterol-lowering drugs. In preclinical
testing, AGI-1067 lowered bad cholesterol, increased
good cholesterol and blocked atherosclerosis in a
year-long preclinical model of progression of atherosclerosis.

Based upon our successful completion of
preclinical testing, we studied AGI-1067 in seven Phase I
clinical trials comprising 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 the course of these studies we gave AGI-1067 in
combination with other drug classes commonly used in patients
with atherosclerosis. In these seven clinical trials, six of
which we conducted under the Investigational New Drug
application for cholesterol lowering, some subjects reported
mild nausea during the first few doses of AGI-1067, but the
nausea abated while they continued to take the drug. Overall,
the subjects tolerated AGI-1067 well, with no dose or
use-limiting side effects. These clinical trial results, which
showed that patients tolerated AGI-1067 well alone and in
combination with other drugs, supported our progression to Phase
II clinical trials.

In May 2001, we completed testing of our Phase II
clinical trial, CART-1, that assessed in 305 patients the safety
and effectiveness of AGI-1067 for the treatment of
post-angioplasty restenosis. An analysis of the results
indicated that six months after angioplasty, the blood vessels
of patients who received AGI-1067 had greater luminal diameters
of their coronary arteries than those who received placebo. This
improvement showed a statistically significant dose response. At
the highest dose of AGI-1067, the increase in the size of the
target blood vessel was similar to that achieved with probucol,
the active control drug in CART-1, which has been shown in
previous clinical studies to reduce restenosis rates
significantly following angioplasty without the use of a stent.
CART-1 also suggested that AGI-1067 may actually reverse the
progression of atherosclerosis. In November 2001 at the American
Heart Association Scientific Sessions, CART-1 data were
presented from a post-study intravascular ultrasound analysis of
reference vessels (blood vessels of coronary arteries that were
not targets of angioplasty procedures) which indicated lumen
volumes 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. In December 2001, we initiated a
Phase IIb CART-2 clinical trial for AGI-1067. CART-2 is a
500-patient clinical trial, which examines the effect of
12 months of AGI-1067 therapy on restenosis and
atherosclerosis following angioplasty. An additional six-month
Phase IIb clinical trial, called DART-1, is being initiated to
examine the effects of AGI-1067 on restenosis and
atherosclerosis in Type 2 diabetics.

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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. Rheumatoid arthritis and related diseases cost the U.S.
economy more than $65 billion annually in direct and
indirect costs. 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.

Treatment of patients with rheumatoid arthritis
progresses from pain relievers to increasingly toxic
immunosuppressants, called disease modifiers. We will evaluate
our v-protectant for the treatment of patients who are receiving
moderate disease modifying therapy to determine whether
AGIX-4207 will permit decreasing the use of toxic drugs while
maintaining the patients clinical status.

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.



| |         
| | --------
| | 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 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 solid organ transplant rejection.
These therapies, however, may place patients at increased risk
for infection. The vascular protection provided by our drug
candidate may protect solid 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.

8



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| |                                     
| | ------------------------------------
| | AGI-Series for Respiratory
	Diseases

According to the American Lung Association,
approximately 24.7 million adults and children in the United
States have been diagnosed with asthma in their lifetime. From
1980 to 1994, the prevalence of this disease increased by over
75%. Asthma morbidity and mortality continue to rise in spite of
massive public health efforts. The American Lung Association
reports that in 1999 the combined direct and indirect costs of
asthma in the United States were approximately
$12.7 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.



| |                         
| | ------------------------
| | Diagnostic Assay Program

Based on our v-protectant technology platform, we
have designed a simple and proprietary blood test that measures
a circulating blood marker for atherosclerosis. We plan to
conduct tests on human blood samples to establish whether this
new marker, called OXYKINE®, is an accurate and useful
diagnostic tool. We believe OXYKINE® will allow physicians
to determine whether a patient has active and progressive
atherosclerosis and whether the disease is responding to medical
therapy. We are not aware of any diagnostic tools that meet this
profile.

Research Program

We have built a robust research program using our
demonstrated expertise in functional genomics, molecular
biology, cell biology, physiology, pharmacology, biochemistry,
and analytical and synthetic chemistry, bioengineering and
medicine.

Our 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 a
	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.

9



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To develop new classes of v-protectant drugs
	based on the novel therapeutic targets identified by our
	functional genomics program.We are
	identifying enzymes and other molecular targets that either
	control or are controlled by oxidant signals. We believe these
	discoveries will enable our chemists to synthesize the next
	generation of v- protectants. We intend to use these enzymes and
	other molecular targets for both internal efforts and as
	strategic collaboration assets.
|
| |  | To develop a second broad platform for the
	discovery and development of a new class of anti-inflammatory
	drug candidates.As a result of
	entering into the license agreement with National Jewish Medical
	and Research Center in June 2001, we plan to expand our research
	program in the future to include the discovery and development
	of new drug candidates through the exploitation of the licensed
	technology.                                                                      

Patents and Intellectual Property

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



| |                        
| | -----------------------
| | V-Protectant Technology

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

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

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

10



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expires. We may terminate the agreement at any
time upon prior notice to The Regents of the University of
California. We must indemnify The Regents of the University of
California for all losses and claims arising out of our use of
the license. In addition, we have procured commercial liability
insurance in specified amounts customary in the industry naming
the University of California as an insured.


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



| |                          
| | -------------------------
| | AGI-1067 Patent Portfolio

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



| |                           
| | --------------------------
| | AGIX-4207 Patent Portfolio

Our patent coverage on AGIX-4207 is based on
patent filings that we own and patent filings exclusively
licensed from Emory University. We own 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 this application 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 provisional patent application claiming the
use of AGI-1096 to treat solid 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. Some of these compounds are novel and some represent
new uses for known compounds. 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

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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, which, if the sublicense agreement is executed
within one year following the date of the license agreement with
National Jewish, could be a material percentage of the
sublicense fee.


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.

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

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



| |           
| | ----------
| | Trademarks

The U.S. Patent and Trademark Office issued a
Certificate of Registration for the trademark OXYKINE on
April 10, 2001. The Patent and Trademark Office issued a
Certificate of Registration for the trademark AATHEROGENICS and
DESIGN on November 7, 2000 and issued one for the trademark
AGI on September 19, 2000.

On 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, and intend to vigorously defend our registration in this
matter.

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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 compounds 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. In addition,
Schering-Plough returned all licensed technology to us and
returned all materials related to that technology. 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 currently
plan to undertake internally the development and
commercialization of AGI-1067, although we may decide 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 contract, our bulk
drug supplier is committed to manufacture sufficient quantities
to support development activities for the foreseeable future.

After manufacture, a third party supplier
formulates AGI-1067 into the drug product under current Good
Manufacturing Practice guidelines. We anticipate that this
supplier will be able to provide sufficient formulated drug
product to complete our ongoing and currently planned clinical
trials.

We plan to establish manufacturing agreements
with third parties that comply with Good Manufacturing Practice
guidelines for bulk drug substance and oral or intravenous
formulations of our 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

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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. We believe
	that our recently completed Phase II clinical trial
	demonstrates that we are maintaining this important
	first-to-clinic competitive advantage.
|
| |  | Third, we believe our scientific, development and
	licensing expertise strongly positions us to acquire promising
	technologies and products discovered outside AtheroGenics.                                                                                                                                                                                                       

Governmental Regulation

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

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I clinical trials explore safety, blood
	levels, metabolism and the potential for interaction with other
	drugs. Phase I typically proceeds from healthy volunteers into
	patients with the target disease and comprises up to
	approximately 200 total subjects.                                                                                                            
|
| |  | Phase II clinical trials establish a dose for
	future testing and marketing in an adequate number of patients
	with the target disease. The clinical trials may include
	hundreds of patients who have the target disease and who are
	receiving a range of background medications. In addition, Phase
	II clinical trials verify the mechanisms of action proposed
	preclinically.
|
| |  | Phase III clinical trials usually include two
	adequate and well controlled studies in the target population.
	For most chronic diseases, drug companies study a few thousand
	patients to assure a broadly applicable assessment of safety and
	efficacy.                                                                                                                         

At the successful conclusion of Phase III, drug
companies may submit a product license application, called a New
Drug Application in the United States. Upon accepting the
submission, the FDA or non-

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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 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 2001,
2000 and 1999 were $16.9 million, $12.8 million and
$9.0 million, respectively.

Employees

We currently have 79 full-time employees,
including 62 in research and development. The employee group
includes 24 employees with Ph.D.s, six with M.D.s and 14 with
Masters degrees. We believe that our employee relations are good.

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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 |  | Professor and Chairman of the Department of
	Medicine, Emory University School of Medicine                                                                                                            
|                                         
|Victor J. Dzau, M.D.                      |  | Hershey 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 Harrison, M.D                       |  | Director, Cardiology and Bernard Marcus Professor
	of Medicine, Emory University                                                                                                                      
|                                         
|Gary L. Johnson, Ph.D                     |  | Professor, Department of Pharmacology, University
	of Colorado Health Science Center                                                                                                                  
|                                         
|Dennis Liotta, Ph.D                       |  | Samuel Candler Dobbs Professor of Chemistry,
	Emory University School of Medicine                                                                                                                     
|                                         
|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           |  | 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.     |  | Professor and Chairman, Department of Medicine,
	and Director, Section of Hematology/ Oncology, The University of
	Chicago
|                          
|Joseph L. Witzum, M.D.     |  | Professor of Medicine and Endocrinology,
	University of California at San Diego                                           

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

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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, 2001, we had an accumulated
deficit of approximately $61.3 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 that Schering-Plough
paid to us, we have had no significant revenue to date.



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

All of our other programs 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 2005. In addition, other
than AGIX-4207, AGIX-4207 I.V. and AGI-1096, product candidates
for which we are currently in Phase I clinical trials, our
drug discovery efforts may not produce any other proprietary
product candidates.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | We will not be able to commercialize our
	product candidates if we fail to demonstrate adequately their
	safety and efficacy.

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.
We will need to conduct significant research, preclinical
testing and clinical trials before we can file product approval
applications with the FDA and similar regulatory authorities in
other countries. Preclinical testing and clinical trials are
long, expensive and uncertain processes. We may spend several
years completing our testing for any particular product
candidate, and failure can occur at any stage.

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.

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

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



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

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



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

We cannot commercialize any of our product
candidates, including AGI-1067, AGIX-4207, AGIX-4207 I.V. and
AGI-1096, 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.



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will incur additional expenses for
	research and development of AGI-1067 as a result of the
	termination of our license agreement with Schering-Plough, which
	could adversely impact our development of other product
	candidates and could materially adversely affect our financial
	liquidity.

Because we have terminated our exclusive license
agreement with Schering-Plough, we will now be responsible for
all of the costs related to the continuing research and
development of AGI-1067, which were

18



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previously reimbursed by Schering-Plough under
the terms of the license agreement. These additional research
and development expenses will result in the reduction of our
available cash, which could adversely impact our ability to
commence or continue other research and development projects, or
could cause delays in the development of AGI-1067 or other
projects.




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

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

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could breach our agreements, for which we may not
have adequate remedies. In addition, others could become aware
of our trade secrets or proprietary know-how through independent
discovery or otherwise.




| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our competitors develop and market
	anti-inflammatory products that are more effective, have fewer
	side effects or are less expensive than our current or future
	product candidates, we may have limited commercial
	opportunities.

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



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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

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



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | 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.

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

The 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.




Item 2.     Properties

Our scientific and administration facility
encompasses approximately 27,000 square feet in Alpharetta,
Georgia. We lease our facility pursuant to a long-term lease
agreement that expires in 2009 and our 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
Proceedings

We are not currently a party to any legal
proceedings.




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

None.

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PART II




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

Common Stock Information

Our 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 our common stock. The following table sets forth the
range of high and low closing sale prices for our common stock
as reported on the Nasdaq National Market during fiscal 2001 and
the third and fourth quarters of fiscal 2000.

|                             |                                           |              |   |       |  |  |   |      | 
|---------------------------- | ----------------------------------------- | ------------ | - | ----- |  |  | - | ---- | 
|                             |                                           |             
|                             |                                           | Common Stock
|                             |                                           |             
|                             |                                           | High         |   | Low  
|                             |                                           |              |   |      
|Year ended December 31, 2000 |                                           |              |   |       |  |  |   |     
|                             | Third quarter (commencing August 9, 2000) |              | $ | 10.75 |  |  | $ | 8.00 | 
|                             | Fourth quarter                            |              |   | 8.94  |  |  |   | 4.63 | 
|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 1, 2002, there were
approximately 3,600 holders of our common stock. This number
includes beneficial owners of our common stock whose shares are
held in the names of various dealers, clearing agencies, banks,
brokers and other fiduciaries.

Dividend Policy

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

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, 2001, the
proceeds have been applied toward:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | purchases of fixed assets and leasehold
	improvements, $1.6 million;                        
|
| |  | operating activities, $12.8 million; and                                                    
|
| |  | investments in highly liquid, interest bearing,
	investment grade securities, $35.0 million.

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Item 6.     Selected
Financial Data

The selected financial data set forth below
should be read in conjunction with our financial statements and
the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
included in this Form 10-K. The historical results are not
necessarily indicative of the operating results to be expected
in the future.

|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |           |           | 
|-------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ----------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | ---- | ----------- | --------- | ---------- | - | ----------- | --------- | ---------- | - | ---------- | --------- | --------- | 
|                                                                                 |                                             |                         
|                                                                                 |                                             | Year Ended December 31, 
|                                                                                 |                                             |                         
|                                                                                 |                                             | 2001                     |             | 2000       |            | 1999 |             | 1998       |            | 1997
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |     
|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*                   |                          |             | 16,884,027 |            |      |             | 12,815,788 |            |      |             | 9,041,345 |            |   |             | 8,954,904 |            |   |            | 4,656,478 |          
|                                                                                 | General and administrative*                 |                          |             | 3,979,813  |            |      |             | 3,035,559  |            |      |             | 2,593,017 |            |   |             | 1,573,807 |            |   |            | 988,230   |          
|                                                                                 | Amortization of deferred stock compensation |                          |             | 2,652,031  |            |      |             | 7,972,728  |            |      |             | 85,480    |            |   |             |          |            |   |            |          |          
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|                                                                                 |                                             | Total operating expenses |             |            | 23,515,871 |      |             |            | 23,824,075 |      |             |           | 11,719,842 |   |             |           | 10,528,711 |   |            |           | 5,644,708 | 
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|Operating loss                                                                   |                                             |                          | (20,006,331 | )          |            |      | (15,664,372 | )          |            |      | (10,372,633 | )         |            |   | (10,528,711 | )         |            |   | (5,644,708 | )        
|Net interest income (expense)                                                    |                                             |                          | 2,366,748   |            |            |      | 1,714,850   |            |            |      | (60,617     | )         |            |   | (205,130    | )         |            |   | 485,392    |          
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|Net loss                                                                         |                                             | $                        | (17,639,583 | )          |            | $    | (13,949,522 | )          |            | $    | (10,433,250 | )         |            | $ | (10,733,841 | )         |            | $ | (5,159,316 | )        
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|Basic and diluted net loss per share                                             |                                             | $                        | (0.68       | )          |            | $    | (1.30       | )          |            | $    | (4.27       | )         |            | $ | (4.45       | )         |            | $ | (2.25      | )        
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|Shares used in computing basic and diluted net
	loss per share                   |                                             |                          | 26,010,347  |            |            |      | 10,747,773  |            |            |      | 2,443,237   |           |            |   | 2,409,948   |           |            |   | 2,292,966  |          
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|                                                                                 |                                             |                          |             |            |            |      |             |            |            |      |             |           |            |   |             |           |            |   |            |          
|* Exclusive of amounts recorded as
	amortization of deferred stock compensation: |                                             |                          |             |           
|                                                                                 | Research and development                    |                          | $           | 940,053    |            |      | $           | 1,856,932  |            |      | $           | 23,649    |            |   | $           |          |            |   | $          |          |          
|                                                                                 | General and administrative                  |                          | $           | 1,711,978  |            |      | $           | 6,115,796  |            |      | $           | 61,831    |            |   | $           |          |            |   | $          |          |          

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##### Table of Contents



The following table contains a summary of our
balance sheet data for the five years ending December 31,
2001.

|                                            |  |              |             |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |            |  
|------------------------------------------- |  | ------------ | ----------- | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                            |  |             
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2001         |             | 2000 |  | 1999 |             | 1998 |  | 1997
|                                            |  |              |             |      |  |      |             |      |  |     
|Balance Sheet Data:                         |  |              |             |      |  |      |             |      |  |      |             |   |  |   |             |   |  |   |            |  
|Cash and cash equivalents                   |  | $            | 28,682,050  |      |  | $    | 26,463,070  |      |  | $    | 13,409,450  |   |  | $ | 3,686,423   |   |  | $ | 6,925,364  |  
|Short-term investments                      |  |              | 29,757,945  |      |  |      | 27,518,169  |      |  |      |            |   |  |   |            |   |  |   |           |  
|Working capital (deficiency)                |  |              | 55,056,263  |      |  |      | 52,422,951  |      |  |      | 9,651,239   |   |  |   | (4,259,366  | ) |  |   | 6,108,938  |  
|Total assets                                |  |              | 62,255,278  |      |  |      | 57,598,951  |      |  |      | 15,717,214  |   |  |   | 5,341,816   |   |  |   | 7,612,796  |  
|Long-term obligations, less current portion |  |              |            |      |  |      | 84,907      |      |  |      | 61,854      |   |  |   | 163,262     |   |  |   | 281,636    |  
|Deferred stock compensation                 |  |              | (2,975,314  | )    |  |      | (5,930,880  | )    |  |      | (1,809,680  | ) |  |   |            |   |  |   |           |  
|Accumulated deficit                         |  |              | (61,277,987 | )    |  |      | (43,638,404 | )    |  |      | (29,688,882 | ) |  |   | (19,255,632 | ) |  |   | (8,521,791 | )
|Total shareholders equity (deficit)        |  |              | 58,294,812  |      |  |      | 54,271,686  |      |  |      | (29,288,600 | ) |  |   | (18,973,881 | ) |  |   | (8,240,444 | )




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.

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 preclinical programs.

To date, we have devoted substantially all of our
resources to research and development. We have not derived any
commercial revenues from product sales and, excluding the effect
of certain license fees of a non-recurring nature received in
connection with entering into an exclusive license agreement,
expect to incur significant losses in most years prior to
deriving any such product revenue.

We have incurred significant losses since we
began operations in 1994 and, as of December 31, 2001, had
an accumulated deficit of $61.3 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 such 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 compounds and terminated the license
agreement. As a result, Schering-Plough returned all licensed
technology and all materials related to that technology.

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. Other licensed
technology focuses on the application of several naturally
occurring substances in the development of a potential treatment
for asthma. 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.

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##### Table of Contents



Critical Accounting Policies

We have identified the following policies below
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 is
discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations.



| |                    
| | -------------------
| | 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 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. These
revenues were billed quarterly and the related payments were not
refundable. Revenues that had not been invoiced were reflected
as unbilled receivables in the accompanying balance sheets.



| |                         
| | ------------------------
| | 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.

Results of Operations

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 preclinical and clinical studies including the
Phase I studies for AGIX-4207 and AGIX-4207 I.V., compounds
being developed for the treatment of rheumatoid arthritis, and
AGI-1096, a compound being developed for the treatment of solid
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.

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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 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.



| |                    
| | -------------------
| | 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. The net operating loss carryforwards and the
research and development credit carryforwards will expire
between 2010 and 2021. 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
yet completed full 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, 2000 and 1999



| |         
| | --------
| | Revenues

Total revenues were $8.2 million for the
twelve months ended December 31, 2000, compared to
$1.3 million in 1999. Revenues of $3.3 million and
$555,556 in 2000 and 1999, respectively, were attributable to
licensing fees from the exclusive license agreement signed in
October 1999 with Schering-Plough. This amount represents the
earned portion of the $5.0 million initial licensing fee
that was amortized over 18 months. Research and development
revenues from our development activities on AGI-1067 were
$4.8 million and $791,653 in 2000 and 1999, respectively.



| |         
| | --------
| | Expenses

Research and
Development.Research and development
expenses, excluding amortization of deferred stock compensation,
were $12.8 million for the twelve months ended
December 31, 2000, compared to $9.0 million for the
twelve months ended December 31, 1999. The increase of
$3.8 million, or 42%, reflects the continued expansion of
our internal research and development capabilities, preclinical
costs related to AGIX-4207, a novel compound being developed for
the treatment of rheumatoid arthritis, and other product
development programs.

General and
Administrative.General and
administrative expenses, excluding amortization of deferred
stock compensation, were $3.0 million for the twelve months
ended December 31, 2000, compared to

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$2.6 million for the twelve months ended
December 31, 1999. The increase of $442,542, or 17%, was
primarily due to increases in facility costs, personnel costs in
administration departments and professional fees.


Amortization of Deferred Stock
Compensation.For the twelve months
ended December 31, 2000, we recorded non-cash deferred
stock compensation of approximately $12.1 million for
options granted with exercise prices below the deemed fair value
for financial reporting purposes of our common stock on their
respective grant dates. This deferred stock compensation is
being amortized using the graded vesting method. Amortization of
deferred stock compensation was $8.0 million for the twelve
months ended December 31, 2000, of which $1.9 million was
attributable to research and development expenses and
$6.1 million was attributable to general and administrative
expenses. There was $85,480 of amortization of deferred stock
compensation for the twelve months ended December 31, 1999.



| |                    
| | -------------------
| | Net Interest Income

Net interest income was $1.7 million for the
twelve months ended December 31, 2000 as compared to net
interest expense of $60,617 for the twelve months ended
December 31, 1999. The increase in net interest income was
due to an increased level of invested funds from the initial
public offering proceeds, as well as the elimination of interest
expense related to a bridge loan, which was converted to
preferred stock in April 1999.



| |             
| | ------------
| | Income Taxes

As of December 31, 2000, we had net
operating loss carryforwards and research and development credit
carryforwards of $35.6 million and $1.2 million,
respectively, available to offset future regular and alternative
taxable income.

Liquidity and Capital Resources

Since inception, we have financed our operations
primarily through private placements of preferred stock and our
initial public offering of 6.9 million shares of our common
stock that raised net proceeds of $49.4 million. In June
2001, we completed a private placement of 3.6 million
shares of our common stock that raised net proceeds of
$18.8 million. At December 31, 2001, we had cash, cash
equivalents and short-term investments of $58.4 million,
compared with $54.0 million at December 31, 2000.
Working capital at December 31, 2001 was
$55.1 million, compared to $52.4 million at
December 31, 2000. The increase in cash, cash equivalents,
short-term investments and working capital is primarily due to
the funds received from the private placement of our common
stock in June 2001.

Net cash used in operating activities was
$12.8 million in 2001, compared to $8.8 million in
2000. The increase in the use of cash in operating activities is
principally due to the funding of net losses, excluding non-cash
charges. We expect an increase in net cash used in operating
activities as a result of the termination of our license
agreement with Schering-Plough.

Net cash used in investing activities was
$3.8 million in 2001, compared to $28.2 million used
in investing activities in 2000. 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 used in investing activities
during 2000 consisted primarily of the purchases of short-term
investments and purchases of equipment and leasehold
improvements.

Net cash provided by financing activities was
$18.8 million in 2001, compared to $50.1 million
provided by financing activities in 2000. 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. Net cash provided by financing
activities in 2000 consisted primarily of proceeds from our
initial public offering in August 2000, and the exercise of
preferred stock warrants and common stock options. We have
entered into a non-formula revolving line of credit with Silicon
Valley Bank in the amount $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.
In addition, we have entered into an equipment financing
facility with Silicon Valley Bank in the amount of
$2.5 million to be used to finance existing and new

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##### Table of Contents



equipment purchases. Borrowings under the
financing facility bear interest to be fixed at the time of each
advance and each advance will mature in 33 months from the
date of the advance.


Based upon the current status of our product
development and commercialization plans, we believe that our
existing cash and cash equivalents, along with our line of
credit and equipment financing 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;    
|
| |  | filing, prosecuting and enforcing patent and
	other intellectual property claims;                
|
| |  | competing technological and market developments;
	and                                            
|
| |  | our ability to market and distribute our future
	products and establish new licensing agreements.

Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS Nos. 141, Business
Combinationsand 142, Accounting for Goodwill and Other
Intangibles(SFAS 141 and
SFAS 142). SFAS 141 requires that the purchase
method of accounting be used for all business combinations
initiated after June 30, 2001, and provides new criteria
for determining whether an acquired intangible asset should be
recognized separately from goodwill. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually. Intangible assets that have finite lives will continue
to be amortized over their useful lives. We do not expect the
adoption of SFAS 141 and SFAS 142 to have an impact on
our financial statements.

In October 2001, FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived
Assets, (SFAS 144) which is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. SFAS 144 establishes a new method
of accounting and reporting for the impairment of long-lived
assets other than goodwill and intangible assets. The statement
provides a single accounting model for long-lived assets to be
disposed of and changes the criteria required to classify an
asset as held-for-sale. We do not expect the adoption of SFAS
144 to have a material impact on our financial statements.




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, 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.

29



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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

ATHEROGENICS, INC.

INDEX TO FINANCIAL STATEMENTS

Contents

|                                             |  |  |    | 
|-------------------------------------------- |  |  | -- | 
|Report of Independent Auditors               |  |  | 31 | 
|Balance Sheets                               |  |  | 32 | 
|Statements of Operations                     |  |  | 33 | 
|Statements of Shareholders Equity (Deficit) |  |  | 34 | 
|Statements of Cash Flows                     |  |  | 35 | 
|Notes to Financial Statements                |  |  | 36 | 

30



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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, 2001 and 2000, and
the related statements of operations, shareholders equity
(deficit) and cash flows for each of the three years in the
period ended December 31, 2001. 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, 2001 and
2000, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally
accepted in the United States.



| |                      
| | ---------------------
| | /S/ ERNST & YOUNG LLP

Atlanta, Georgia

February 8, 2002


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##### Table of Contents



ATHEROGENICS, INC.

BALANCE SHEETS

|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |             |             |            | 
|-------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ----------- | ---------- | --------- | ----------- | ----------- | ---------- | 
|                                                   |                                                             |                                                                                                                                         
|                                                   |                                                             | December 31,                                                                                                                            
|                                                   |                                                             |                                                                                                                                         
|                                                   |                                                             | 2001                                                                                                                                     |                                            | 2000       
|                                                   |                                                             |                                                                                                                                          |                                            |            
|ASSETS                                            
|Current assets:                                    |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   | Cash and cash equivalents                                   |                                                                                                                                          | $                                          | 28,682,050  |             |            | $         | 26,463,070  |            
|                                                   | Short-term investments                                      |                                                                                                                                          |                                            | 29,757,945  |             |            |           | 27,518,169  |            
|                                                   | Accounts receivable                                         |                                                                                                                                          |                                            |            |             |            |           | 1,138,244   |            
|                                                   | Prepaid expenses, note receivable and other
	current assets |                                                                                                                                          |                                            | 576,734     |             |            |           | 545,826     |            
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | Total current assets                       |             |             | 59,016,729 |           |             |             | 55,665,309 | 
|Equipment and leasehold improvements:              |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   | Laboratory equipment                                        |                                                                                                                                          |                                            | 1,861,221   |             |            |           | 1,352,692   |            
|                                                   | Leasehold improvements                                      |                                                                                                                                          |                                            | 1,420,579   |             |            |           | 966,869     |            
|                                                   | Computer and office equipment                               |                                                                                                                                          |                                            | 968,329     |             |            |           | 476,276     |            
|                                                   | Construction in progress                                    |                                                                                                                                          |                                            | 309,384     |             |            |           | 131,185     |            
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | 4,559,513                                  |             |             |            | 2,927,022 |            
|                                                   | Less accumulated depreciation and amortization              |                                                                                                                                          |                                            | (1,644,001  | )           |            |           | (1,152,028  | )          
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | 2,915,512                                  |             |             |            | 1,774,994 |            
|Long-term notes receivable                         |                                                             |                                                                                                                                          | 323,037                                    |             |             |            | 158,648   |            
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | Total assets                               |             | $           | 62,255,278 |           |             | $           | 57,598,951 | 
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|LIABILITIES AND SHAREHOLDERS
	EQUITY             
|Current liabilities:                               |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   | Accounts payable                                            |                                                                                                                                          | $                                          | 1,121,550   |             |            | $         | 504,991     |            
|                                                   | Accrued research and development costs                      |                                                                                                                                          |                                            | 1,307,435   |             |            |           | 342,210     |            
|                                                   | Accrued compensation                                        |                                                                                                                                          |                                            | 902,571     |             |            |           | 640,975     |            
|                                                   | Accrued liabilities                                         |                                                                                                                                          |                                            | 541,809     |             |            |           | 517,312     |            
|                                                   | Current portion of capitalized lease obligation             |                                                                                                                                          |                                            | 87,101      |             |            |           | 125,759     |            
|                                                   | Deferred revenues                                           |                                                                                                                                          |                                            |            |             |            |           | 1,111,111   |            
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | Total current liabilities                  |             |             | 3,960,466  |           |             |             | 3,242,358  | 
|                                                  
|Long-term portion of capitalized lease obligations |                                                             |                                                                                                                                          |                                           |             |             |            | 84,907    |            
|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  27,834,773 and 23,909,295 shares at
	December 31, 2001 and 2000, respectively |                                            |             | 121,723,102 |            |           |             | 103,608,655 |           
|                                                   |                                                             | Warrants                                                                                                                                 |                                            |             | 771,713     |            |           |             | 225,713     |           
|                                                   |                                                             | Deferred stock compensation                                                                                                              |                                            |             | (2,975,314  | )          |           |             | (5,930,880  | )         
|                                                   | Accumulated deficit                                         |                                                                                                                                          |                                            | (61,277,987 | )           |            |           | (43,638,404 | )          
|                                                   | Accumulated other comprehensive income                      |                                                                                                                                          |                                            | 53,298      |             |            |           | 6,602       |            
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | Total shareholders equity                 |             |             | 58,294,812 |           |             |             | 54,271,686 | 
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            
|                                                   |                                                             |                                                                                                                                          | Total liabilities and shareholders equity |             | $           | 62,255,278 |           |             | $           | 57,598,951 | 
|                                                   |                                                             |                                                                                                                                          |                                            |             |             |            |           |            

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

32



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##### Table of Contents



ATHEROGENICS, INC.

STATEMENTS OF OPERATIONS

|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |           |            | 
|------------------------------------------------------ | ------------------------------------------- | ------------------------ | ----------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | --------- | ---------- | 
|                                                       |                                             |                         
|                                                       |                                             | Year Ended December 31, 
|                                                       |                                             |                         
|                                                       |                                             | 2001                     |             | 2000       |            | 1999
|                                                       |                                             |                          |             |            |            |     
|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*                   |                          |             | 16,884,027 |            |      |             | 12,815,788 |            |   |             | 9,041,345 |           
|                                                       | General and administrative*                 |                          |             | 3,979,813  |            |      |             | 3,035,559  |            |   |             | 2,593,017 |           
|                                                       | Amortization of deferred stock compensation |                          |             | 2,652,031  |            |      |             | 7,972,728  |            |   |             | 85,480    |           
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          
|                                                       |                                             | Total operating expenses |             |            | 23,515,871 |      |             |            | 23,824,075 |   |             |           | 11,719,842 | 
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          
|Operating loss                                         |                                             |                          | (20,006,331 | )          |            |      | (15,664,372 | )          |            |   | (10,372,633 | )        
|Net interest income (expense)                          |                                             |                          | 2,366,748   |            |            |      | 1,714,850   |            |            |   | (60,617     | )        
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          
|Net loss                                               |                                             | $                        | (17,639,583 | )          |            | $    | (13,949,522 | )          |            | $ | (10,433,250 | )        
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          
|Net loss per sharebasic and diluted                   |                                             | $                        | (0.68       | )          |            | $    | (1.30       | )          |            | $ | (4.27       | )        
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          
|Weighted average shares outstandingbasic
	and diluted |                                             |                          | 26,010,347  |            |            |      | 10,747,773  |            |            |   | 2,443,237   |          
|                                                       |                                             |                          |             |            |            |      |             |            |            |   |             |          



---



|  |                                                                               
|- | ------------------------------------------------------------------------------
|* | Exclusive of amounts recorded as amortization of
	deferred stock compensation:

|                           |  |   |           |  |  |   |           |  |  |   |        | 
|-------------------------- |  | - | --------- |  |  | - | --------- |  |  | - | ------ | 
|Research and development   |  | $ | 940,053   |  |  | $ | 1,856,932 |  |  | $ | 23,649 | 
|General and administrative |  | $ | 1,711,978 |  |  | $ | 6,115,796 |  |  | $ | 61,831 | 

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

33



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##### Table of Contents



ATHEROGENICS, INC.

STATEMENTS OF SHAREHOLDERS EQUITY
(DEFICIT)

|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   |             |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------ |  | -------- | ----------- | ------------ |  | ------------- | ------- | ------------- |  | --------- | ----------- | - |  | - | ----------- | - |  | - | ------ |  |  | - | ----------- | -
|                                                                                                                  |  |              |            |        |  |          |             |              |  | Accumulated   |         | Total        
|                                                                                                                  |  | Common Stock |            |        |  | Deferred |             |              |  | Other         |         | Shareholders
|                                                                                                                  |  |              |            |        |  | Stock    |             | Accumulated  |  | Comprehensive |         | Equity       
|                                                                                                                  |  | Shares       |            | Amount |  | Warrants |             | Compensation |  | Deficit       |         | Income        |  | (Deficit)
|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |          
|Balance at January 1, 1999                                                                                        |  |              | 2,410,375  |        |  | $        | 281,751     |              |  | $             |        |               |  | $         |            |   |  | $ | (19,255,632 | ) |  | $ |       |  |  | $ | (18,973,881 | )
|Issuance of stock for exercise of stock options
	at $.10 to $.30 per share                                        |  |              | 126,168    |        |  |          | 33,051      |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 33,051      |  
|Deferred stock compensation related to stock
	option grants                                                       |  |              |           |        |  |          | 1,895,160   |              |  |               |        |               |  |           | (1,895,160  | ) |  |   |            |   |  |   |       |  |  |   |            |  
|Amortization of deferred stock compensation                                                                       |  |              |           |        |  |          |            |              |  |               |        |               |  |           | 85,480      |   |  |   |            |   |  |   |       |  |  |   | 85,480      |  
|Net loss                                                                                                          |  |              |           |        |  |          |            |              |  |               |        |               |  |           |            |   |  |   | (10,433,250 | ) |  |   |       |  |  |   | (10,433,250 | )
|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   |             |  
|Balance at December 31, 1999                                                                                      |  |              | 2,536,543  |        |  |          | 2,209,962   |              |  |               |        |               |  |           | (1,809,680  | ) |  |   | (29,688,882 | ) |  |   |       |  |  |   | (29,288,600 | )
|Issuance of stock for exercise of stock options
	at $.30 to $.38 per share                                        |  |              | 602,650    |        |  |          | 185,788     |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 185,788     |  
|Issuance of stock for services                                                                                    |  |              | 11,000     |        |  |          | 85,438      |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 85,438      |  
|Issuance of common stock, net of issuance cost of
	$5,770,749                                                     |  |              | 6,900,000  |        |  |          | 49,429,251  |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 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   |   |  |   |            |   |  |   |       |  |  |   | 7,972,728   |  
|Preferred stock conversion                                                                                        |  |              | 13,859,102 |        |  |          | 39,604,288  |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 39,604,288  |  
|Preferred stock warrant conversion                                                                                |  |              |           |        |  |          |            |              |  |               | 225,713 |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 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                                                                                      |  |              | 23,909,295 |        |  |          | 103,608,655 |              |  |               | 225,713 |               |  |           | (5,930,880  | ) |  |   | (43,638,404 | ) |  |   | 6,602  |  |  |   | 54,271,686  |  
|Issuance of stock for exercise of stock options
	at $.30 to $.38 per share                                        |  |              | 335,478    |        |  |          | 108,764     |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 108,764     |  
|Issuance of stock for services                                                                                    |  |              | 5,000      |        |  |          | 29,778      |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 29,778      |  
|Issuance of common stock, net of issuance cost of
	$1,788,310                                                     |  |              | 3,585,000  |        |  |          | 18,825,440  |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   |       |  |  |   | 18,825,440  |  
|Deferred stock compensation for issuance of stock
	options and warrants related to a technology license agreement |  |              |           |        |  |          | 546,200     |              |  |               | 546,000 |               |  |           | (1,092,200  | ) |  |   |            |   |  |   |       |  |  |   |            |  
|Amortization of deferred stock compensation                                                                       |  |              |           |        |  |          |            |              |  |               |        |               |  |           | 2,652,031   |   |  |   |            |   |  |   |       |  |  |   | 2,652,031   |  
|Adjustment to deferred stock compensation for
	forfeited stock options                                            |  |              |           |        |  |          | (1,395,735  | )            |  |               |        |               |  |           | 1,395,735   |   |  |   |            |   |  |   |       |  |  |   |            |  
|Net loss                                                                                                          |  |              |           |        |  |          |            |              |  |               |        |               |  |           |            |   |  |   | (17,639,583 | ) |  |   |       |  |  |   | (17,639,583 | )
|Unrealized gain on available-for-sale securities                                                                  |  |              |           |        |  |          |            |              |  |               |        |               |  |           |            |   |  |   |            |   |  |   | 46,696 |  |  |   | 46,696      |  
|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   |             |  
|Comprehensive loss                                                                                                |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   | (17,592,887 | )
|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   |             |  
|Balance at December 31, 2001                                                                                      |  |              | 27,834,773 |        |  | $        | 121,723,102 |              |  | $             | 771,713 |               |  | $         | (2,975,314  | ) |  | $ | (61,277,987 | ) |  | $ | 53,298 |  |  | $ | 58,294,812  |  
|                                                                                                                  |  |              |            |        |  |          |             |              |  |               |         |               |  |           |             |   |  |   |             |   |  |   |        |  |  |   |             |  

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

34



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##### Table of Contents



ATHEROGENICS, INC.

STATEMENTS OF CASH FLOWS

|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |         |            |            |  
|---------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | --------- | ---------- | ----------- | ----------- | --------- | ---------- | ----------- | ----------- | ------- | ---------- | ---------- | -
|                                                                             |                                              |                                                   
|                                                                             |                                              | Year Ended December 31,                           
|                                                                             |                                              |                                                   
|                                                                             |                                              | 2001                                               |                                           | 2000      |            | 1999       
|                                                                             |                                              |                                                    |                                           |           |            |            
|Operating activities                                                         |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Net loss                                                                     |                                              | $                                                  | (17,639,583                               | )         |            | $           | (13,949,522 | )         |            | $           | (10,433,250 | )      
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|                                                                             | Depreciation and amortization                |                                                    |                                           | 491,973   |            |             |             | 420,192   |            |             |             | 279,823 |           
|                                                                             | Amortization of deferred stock compensation  |                                                    |                                           | 2,652,031 |            |             |             | 7,972,728 |            |             |             | 85,480  |           
|                                                                             | Amortization of debt discount                |                                                    |                                           |          |            |             |             |          |            |             |             | 235,750 |           
|                                                                             | Stock issued for services                    |                                                    |                                           | 29,778    |            |             |             | 85,438    |            |             |             | 49,998  |           
|                                                                             | Preferred stock issued for interest          |                                                    |                                           |          |            |             |             |          |            |             |             | 271,071 |           
|                                                                             | Changes in operating assets and liabilities: |                                                    |                                           |           |            |             |             |           |            |             |             |         |           
|                                                                             |                                              | Accounts receivable                                |                                           |           | 1,138,244  |             |             |           | (346,591   | )           |             |         | (791,653   | )         
|                                                                             |                                              | Prepaid expenses, note receivable and other assets |                                           |           | (195,297   | )           |             |           | (422,996   | )           |             |         | 977,544    |           
|                                                                             |                                              | Accounts payable                                   |                                           |           | 616,559    |             |             |           | (174,151   | )           |             |         | (770,411   | )         
|                                                                             |                                              | Accrued liabilities                                |                                           |           | 1,251,318  |             |             |           | 974,897    |             |             |         | (1,028,422 | )         
|                                                                             |                                              | Deferred revenues                                  |                                           |           | (1,111,111 | )           |             |           | (3,333,333 | )           |             |         | 4,444,444  |           
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|                                                                             |                                              |                                                    | Net cash used in operating activities     |           |            | (12,766,088 | )           |           |            | (8,773,338  | )           |         |            | (6,679,626 | )
|Investing activities                                                         |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Purchases of equipment and leasehold improvements                            |                                              |                                                    | (1,632,491                                | )         |            |             | (738,053    | )         |            |             | (1,115,085  | )      
|Purchases of short-term investments                                          |                                              |                                                    | (2,193,080                                | )         |            |             | (27,511,567 | )         |            |             |            |        
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|                                                                             |                                              |                                                    | Net cash used in investing activities     |           |            | (3,825,571  | )           |           |            | (28,249,620 | )           |         |            | (1,115,085 | )
|Financing activities                                                         |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Payments on capital lease                                                    |                                              |                                                    | (123,565                                  | )         |            |             | (175,096    | )         |            |             | (198,236    | )      
|Proceeds from the issuance of preferred stock,
	Series C                     |                                              |                                                    |                                          |           |            |             |            |           |            |             | 17,535,923  |        
|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                           |                                              |                                                    | 108,764                                   |           |            |             | 185,788     |           |            |             | 33,051      |        
|Proceeds from bridge loan financing, net of
	warrants                        |                                              |                                                    |                                          |           |            |             |            |           |            |             | 150,000     |        
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|                                                                             |                                              |                                                    | Net cash provided by financing activities |           |            | 18,810,639  |             |           |            | 50,076,578  |             |         |            | 17,520,738 |  
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Increase in cash and cash equivalents                                        |                                              |                                                    | 2,218,980                                 |           |            |             | 13,053,620  |           |            |             | 9,726,027   |        
|Cash and cash equivalents at beginning of period                             |                                              |                                                    | 26,463,070                                |           |            |             | 13,409,450  |           |            |             | 3,683,423   |        
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Cash and cash equivalents at end of period                                   |                                              | $                                                  | 28,682,050                                |           |            | $           | 26,463,070  |           |            | $           | 13,409,450  |        
|                                                                             |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Supplemental disclosures of cash flow
	information                           |                                              |                                                    |                                           |           |            |             |             |           |            |             |             |        
|Interest paid                                                                |                                              | $                                                  | 21,536                                    |           |            | $           | 30,524      |           |            | $           | 28,317      |        
|Equipment purchases under capitalized lease
	obligation                      |                                              |                                                    |                                          |           |            |             | 222,500     |           |            |             |            |        
|Conversion of bridge loan and accrued interest to
	preferred stock           |                                              |                                                    |                                          |           |            |             |            |           |            |             | 6,421,071   |        
|Warrants issued for extension of bridge loan                                 |                                              |                                                    |                                          |           |            |             |            |           |            |             | 235,750     |        
|Option and warrants issued for technology license
	agreement                 |                                              |                                                    | 1,092,200                                 |           |            |             |            |           |            |             |            |        

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

35



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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.



| |                    
| | -------------------
| | Accounts Receivable

Accounts receivable consisted of accounts
receivable and unbilled receivables from Schering-Plough. As of
December 31, 2001, there were no accounts receivable or
unbilled receivables as a result of the termination of the
license agreement with Schering-Plough (see Note 2
License Agreement).



| |                                      
| | -------------------------------------
| | 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.

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NOTES TO FINANCIAL STATEMENTS 
(Continued)




| |                    
| | -------------------
| | 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 the license agreement with
Schering-Plough; 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.
Revenues that had not been invoiced were reflected as unbilled
receivables as described in the accounts receivable note above.



| |                                           
| | ------------------------------------------
| | 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.



| |             
| | ------------
| | 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
$17,592,887 and $13,942,920 for the years ended
December 31, 2001 and 2000, respectively, as AtheroGenics
reported an accumulated unrealized gain from available-for-sale
securities of $53,298. Comprehensive loss was equal to net loss
for the year ended December 31, 1999.



| |                                      
| | -------------------------------------
| | Recently Issued Accounting
	Standards

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS Nos. 141, Business
Combinationsand 142, Accounting for Goodwill and Other
Intangibles(SFAS 141 and
SFAS 142). SFAS 141 requires that the purchase
method of accounting be used for all business combinations
initiated after June 30, 2001, and provides new criteria
for determining whether an acquired intangible asset should be
recognized separately from goodwill. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually. Intangible assets that

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NOTES TO FINANCIAL STATEMENTS 
(Continued)


have finite lives will continue to be amortized
over their useful lives. AtheroGenics does not expect the
adoption of SFAS 141 and SFAS 142 to have an impact on
its financial statements.

In October 2001, FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived
Assets, (SFAS 144) which is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. SFAS 144 establishes a new method of
accounting and reporting for the impairment of long-lived assets
other than goodwill and intangible assets. The statement
provides a single accounting model for long-lived assets to be
disposed of and changes the criteria required to classify an
asset as held-for-sale. AtheroGenics does not expect the
adoption of SFAS 144 to have a material impact on its
financial statements.



| |                  
| | -----------------
| | Reclassifications

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

2.     License
Agreement

On October 22, 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 non-refundable
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, $4,826,370 and $791,653 during 2001,
2000 and 1999, 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.
AtheroGenics potentially dilutive 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 has
been issued or granted for nominal consideration prior to the
anticipated effective date of the 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 and 1999 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

38



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NOTES TO FINANCIAL STATEMENTS 
(Continued)


public offering, retroactive to the date of
issuance. This information is included in the following table
for comparative purposes.

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

|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |             |  
|---------------------------- | ------------------------------------------------------------------------------------------------- | ----------------------- | - | ----------- | - | ---- | - | ----------- | - |  | - | ----------- | -
|                             |                                                                                                   |                        
|                             |                                                                                                   | Year Ended December 31,
|                             |                                                                                                   |                        
|                             |                                                                                                   | 2001                    |   | 2000        |   | 1999
|                             |                                                                                                   |                         |   |             |   |     
|Basic and diluted:           |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Net loss                                                                                          |                         | $ | (17,639,583 | ) |      | $ | (13,949,522 | ) |  | $ | (10,433,250 | )
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Weighted average shares used in computing basic
	and diluted net loss per share                   |                         |   | 26,010,347  |   |      |   | 10,747,773  |   |  |   | 2,443,237   |  
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Basic and diluted net loss per share                                                              |                         | $ | (0.68       | ) |      | $ | (1.30       | ) |  | $ | (4.27       | )
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|Pro forma basic and diluted: |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Shares used above                                                                                 |                         |   |             |   |      |   | 10,747,773  |   |  |   | 2,443,237   |  
|                             | Pro forma adjustment to reflect weighted average
	effect of assumed conversion of preferred stock |                         |   |             |   |      |   | 8,595,672   |   |  |   | 10,268,792  |  
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Pro forma weighted average shares of common stock
	outstanding                                    |                         |   |             |   |      |   | 19,343,445  |   |  |   | 12,712,029  |  
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            
|                             | Basic and diluted pro forma loss per share                                                        |                         |   |             |   |      | $ | (0.72       | ) |  | $ | (0.82       | )
|                             |                                                                                                   |                         |   |             |   |      |   |             |   |  |   |            

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,
|                                                          |  |                        
|                                                          |  | 2001                    |           | 2000 |  | 1999
|                                                          |  |                         |           |      |  |     
|Convertible (at one share for one share)
	preferred stock |  |                         |          |      |  |      |          |  |  |   | 13,643,837 | 
|Options                                                   |  |                         | 3,360,660 |      |  |      | 2,858,175 |  |  |   | 1,785,325  | 
|Warrants                                                  |  |                         | 350,290   |      |  |      | 250,290   |  |  |   | 467,503    | 
|                                                          |  |                         |           |      |  |      |           |  |  |   |            | 
|Total                                                     |  |                         | 3,710,950 |      |  |      | 3,108,465 |  |  |   | 15,896,665 | 
|                                                          |  |                         |           |      |  |      |           |  |  |   |            | 
|Weighted average exercise price of options                |  | $                       | 2.99      |      |  | $    | 1.49      |  |  | $ | 0.28       | 
|                                                          |  |                         |           |      |  |      |           |  |  |   |            | 
|Weighted average exercise price of warrants               |  | $                       | 4.14      |      |  | $    | 3.40      |  |  | $ | 3.21       | 
|                                                          |  |                         |           |      |  |      |           |  |  |   |            | 

4.     Redeemable
Convertible Preferred Stock

AtheroGenics sold shares of Series A,
Series B, Series B-1 and Series C Redeemable
Convertible Preferred Stock at 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

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NOTES TO FINANCIAL STATEMENTS 
(Continued)


converted into 13,859,102 shares of common stock.
Immediately following the automatic conversion of preferred
stock, an amended and restated certificate of incorporation was
filed. Under the amended and restated certificate of
incorporation, AtheroGenics is authorized to issue 100,000,000
shares of common stock and 5,000,000 shares of preferred stock.

The following table summarizes AtheroGenics
outstanding shares and value of Series A, Series B,
Series B-1 and Series C Redeemable Convertible
Preferred Stock at December 31, 2000 and 1999:

|           |  |                   |   |                   |  |             |   |          |  |  |            |  |  |   |            | 
|---------- |  | ----------------- | - | ----------------- |  | ----------- | - | -------- |  |  | ---------- |  |  | - | ---------- | 
|           |  |                   |   |                  
|           |  | December 31, 2000 |   | December 31, 1999
|           |  |                   |   |                  
|           |  | Shares            |   | Carrying          |  | Shares      |   | Carrying
|           |  | Outstanding       |   | Value             |  | Outstanding |   | Value   
|           |  |                   |   |                   |  |             |   |         
|Series A   |  |                   |  |                   |  | $           |  |          |  |  | 1,000,000  |  |  | $ | 1,000,000  | 
|Series B   |  |                   |  |                   |  |             |  |          |  |  | 4,586,815  |  |  |   | 13,704,499 | 
|Series B-1 |  |                   |  |                   |  |             |  |          |  |  |           |  |  |   |           | 
|Series C   |  |                   |  |                   |  |             |  |          |  |  | 8,057,022  |  |  |   | 24,006,992 | 
|           |  |                   |   |                   |  |             |   |          |  |  |            |  |  |   |            | 
|           |  |                   |  |                   |  | $           |  |          |  |  | 13,643,837 |  |  | $ | 38,711,491 | 
|           |  |                   |   |                   |  |             |   |          |  |  |            |  |  |   |            | 

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 underwriters over-allotment
option) that raised gross proceeds of approximately $55,200,000
and 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 gross proceeds of approximately $20,600,000 and net
proceeds of approximately $18,800,000. Both new and existing
investors participated in the transaction.

On November 9, 2001, AtheroGenics
Board of Directors adopted a Shareholder Rights Plan declaring a
dividend distribution of one common stock purchase right on each
outstanding share of its common stock. Until the rights become
exercisable, the rights will trade automatically with the common
stock of AtheroGenics and separate rights certificates will not
be issued. Under the rights plan, each right consists of an
initial right and subsequent rights. Initial rights will be
exercisable only if a person or group acquires 15% or more of
AtheroGenics common stock, whether through open market or
private purchases or consummation of a tender or exchange offer.
Any shareholders who owned, as of November 9, 2001, in
excess of 15% 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 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.

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NOTES TO FINANCIAL STATEMENTS 
(Continued)


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

|                                          |  |           |          |             |  |          |         |  |  |   |     | 
|----------------------------------------- |  | --------- | -------- | ----------- |  | -------- | ------- |  |  | - | --- | 
|                                          |  |           |          |             |  | Weighted
|                                          |  | Number of |          |             |  | Average 
|                                          |  | Shares    |          | Price Range |  | Price   
|                                          |  |           |          |             |  |         
|Outstanding at January 1, 1999            |  |           | 457,000  |             |  | $        | .10-.30 |  |  | $ | .20 | 
|Exercised                                 |  |           | (24,000  | )           |  |          | .10     |  |  |   | .10 | 
|Canceled                                  |  |           | (17,800  | )           |  |          | .30     |  |  |   | .30 | 
|                                          |  |           |          |             |  |          |         |  |  |   |     | 
|Outstanding at December 31, 1999          |  |           | 415,200  |             |  |          | .10-.30 |  |  |   | .20 | 
|Exercised                                 |  |           | (165,200 | )           |  |          | .10-.30 |  |  |   | .29 | 
|                                          |  |           |          |             |  |          |         |  |  |   |     | 
|Outstanding at December 31, 2000 and 2001 |  |           | 250,000  |             |  |          | .10-.30 |  |  |   | .14 | 
|                                          |  |           |          |             |  |          |         |  |  |   |     | 

The following table summarizes information
concerning outstanding and exercisable options under the 1995
Plan as of December 31, 2001:

|               |  |                     |         |                     |  |                  |      |             |  |                  |     |  |  |  |         |  |  |   |     | 
|-------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | ---- | ----------- |  | ---------------- | --- |  |  |  | ------- |  |  | - | --- | 
|               |  |                     |         |                    
|               |  | Options Outstanding |         | Options Exercisable
|               |  |                     |         |                    
|               |  | Number              |         | Weighted Average    |  | Weighted Average |      | Number      |  | Weighted Average
|Exercise Price |  | Outstanding         |         | Remaining Years     |  | Exercise Price   |      | Exercisable |  | Exercise Price  
|               |  |                     |         |                     |  |                  |      |             |  |                 
|$.10           |  |                     | 200,000 |                     |  |                  | 3.62 |             |  | $                | .10 |  |  |  | 200,000 |  |  | $ | .10 | 
|.30            |  |                     | 50,000  |                     |  |                  | 4.61 |             |  |                  | .30 |  |  |  | 49,000  |  |  |   | .30 | 
|               |  |                     |         |                     |  |                  |      |             |  |                  |     |  |  |  |         |  |  |   |     | 
|               |  |                     | 250,000 |                     |  |                  | 3.82 |             |  |                  | .14 |  |  |  | 249,000 |  |  |   | .14 | 
|               |  |                     |         |                     |  |                  |      |             |  |                  |     |  |  |  |         |  |  |   |     | 

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 values 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, 2001, AtheroGenics
had reserved 2,831,975 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.

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NOTES TO FINANCIAL STATEMENTS 
(Continued)


A summary of stock option activity under the 1997
Plan follows:

|                                 |  |           |           |             |  |          |           |  |  |   |      | 
|-------------------------------- |  | --------- | --------- | ----------- |  | -------- | --------- |  |  | - | ---- | 
|                                 |  |           |           |             |  | Weighted
|                                 |  | Number of |           |             |  | Average 
|                                 |  | Shares    |           | Price Range |  | Price   
|                                 |  |           |           |             |  |         
|Outstanding at January 1, 1999   |  |           | 778,875   |             |  | $        | .30       |  |  | $ | .30  | 
|Granted                          |  |           | 748,000   |             |  |          | .30-.31   |  |  |   | .30  | 
|Exercised                        |  |           | (102,168  | )           |  |          | .30       |  |  |   | .30  | 
|Canceled                         |  |           | (54,582   | )           |  |          | .30       |  |  |   | .30  | 
|                                 |  |           |           |             |  |          |           |  |  |   |      | 
|Outstanding at December 31, 1999 |  |           | 1,370,125 |             |  |          | .30-.31   |  |  |   | .30  | 
|Granted                          |  |           | 1,797,850 |             |  |          | .38-9.88  |  |  |   | 2.28 | 
|Exercised                        |  |           | (448,450  | )           |  |          | .30-9.88  |  |  |   | .50  | 
|Canceled                         |  |           | (111,350  | )           |  |          | .30-8.25  |  |  |   | .67  | 
|                                 |  |           |           |             |  |          |           |  |  |   |      | 
|Outstanding at December 31, 2000 |  |           | 2,608,175 |             |  |          | .30-9.88  |  |  |   | 1.62 | 
|Granted                          |  |           | 791,450   |             |  |          | 4.37-6.85 |  |  |   | 6.01 | 
|Exercised                        |  |           | (340,478  | )           |  |          | .30-6.56  |  |  |   | .41  | 
|Canceled                         |  |           | (228,487  | )           |  |          | .30-8.25  |  |  |   | 2.31 | 
|                                 |  |           |           |             |  |          |           |  |  |   |      | 
|Outstanding at December 31, 2001 |  |           | 2,830,660 |             |  |          | .30-9.88  |  |  |   | 2.93 | 
|                                 |  |           |           |             |  |          |           |  |  |   |      | 

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

|                    |           |                     |  |                  |           |                  |  |             |      |                  |  |   |      |  |  |  |           |  |  |   |      | 
|------------------- | --------- | ------------------- |  | ---------------- | --------- | ---------------- |  | ----------- | ---- | ---------------- |  | - | ---- |  |  |  | --------- |  |  | - | ---- | 
|                    |           |                    
|Options Outstanding |           | Options Exercisable
|                    |           |                    
|                    |           | Number              |  | Weighted Average |           | Weighted Average |  | Number      |      | Weighted Average
|Exercise Price      |           | Outstanding         |  | Remaining Years  |           | Exercise Price   |  | Exercisable |      | Exercise Price  
|                    |           |                     |  |                  |           |                  |  |             |      |                 
|$                   | .30-.31   |                     |  |                  | 644,595   |                  |  |             | 7.16 |                  |  | $ | .30  |  |  |  | 424,385   |  |  | $ | .30  | 
|                    | .38-4.36  |                     |  |                  | 913,915   |                  |  |             | 8.08 |                  |  |   | .38  |  |  |  | 481,413   |  |  |   | .38  | 
|                    | 4.37-6.03 |                     |  |                  | 637,150   |                  |  |             | 9.28 |                  |  |   | 5.38 |  |  |  | 169,503   |  |  |   | 5.50 | 
|                    | 6.04-9.88 |                     |  |                  | 635,000   |                  |  |             | 9.26 |                  |  |   | 6.83 |  |  |  | 107,883   |  |  |   | 7.77 | 
|                    |           |                     |  |                  |           |                  |  |             |      |                  |  |   |      |  |  |  |           |  |  |   |      | 
|                    |           |                     |  |                  | 2,830,660 |                  |  |             | 8.41 |                  |  |   | 2.93 |  |  |  | 1,183,184 |  |  |   | 1.76 | 
|                    |           |                     |  |                  |           |                  |  |             |      |                  |  |   |      |  |  |  |           |  |  |   |      | 

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 values 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, 2001, 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.

A summary of stock option activity under the 2001
Plan follows:

|                                 |  |           |         |             |  |          |      |  |  |   |      | 
|-------------------------------- |  | --------- | ------- | ----------- |  | -------- | ---- |  |  | - | ---- | 
|                                 |  |           |         |             |  | Weighted
|                                 |  | Number of |         |             |  | Average 
|                                 |  | Shares    |         | Price Range |  | Price   
|                                 |  |           |         |             |  |         
|Outstanding at January 1, 2001   |  |           |        |             |  | $        |     |  |  | $ |     | 
|Granted                          |  |           | 280,000 |             |  |          | 6.05 |  |  |   | 6.05 | 
|                                 |  |           |         |             |  |          |      |  |  |   |      | 
|Outstanding at December 31, 2001 |  |           | 280,000 |             |  |          | 6.05 |  |  |   | 6.05 | 
|                                 |  |           |         |             |  |          |      |  |  |   |      | 

42



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
(Continued)


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

|                    |      |                     |  |                  |         |                  |  |             |      |                  |  |   |      |  |  |  |   |  |  |   |   | 
|------------------- | ---- | ------------------- |  | ---------------- | ------- | ---------------- |  | ----------- | ---- | ---------------- |  | - | ---- |  |  |  | - |  |  | - | - | 
|                    |      |                    
|Options Outstanding |      | Options Exercisable
|                    |      |                    
|                    |      | Number              |  | Weighted Average |         | Weighted Average |  | Number      |      | Weighted Average
|Exercise Price      |      | Outstanding         |  | Remaining Years  |         | Exercise Price   |  | Exercisable |      | Exercise Price  
|                    |      |                     |  |                  |         |                  |  |             |      |                 
|$                   | 6.05 |                     |  |                  | 280,000 |                  |  |             | 10.0 |                  |  | $ | 6.05 |  |  |  |  |  |  | $ |  | 
|                    |      |                     |  |                  |         |                  |  |             |      |                  |  |   |      |  |  |  |   |  |  |   |   | 

During 2000 and 1999, in connection with the
grant of certain options to employees, AtheroGenics recorded
non-cash deferred stock compensation of $12,093,928 and
$1,895,160, respectively, 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
2001, 2000 and 1999, AtheroGenics recorded amortization of
deferred stock compensation of $2,316,141, $7,972,728 and
$85,480, 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
2001, AtheroGenics recorded a total of $335,890 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. Accordingly, at December 31, 2001,
100,000 shares of common stock were reserved for issuance upon
the exercise of outstanding warrants.

At December 31, 2001, AtheroGenics had a
total of $2,975,314 remaining to be amortized over the
corresponding vesting period of each respective option. Such
amortization will approximate $1,923,000 in 2002, $837,000 in
2003, $133,000 in 2004, $63,000 in 2005 and $19,000 in 2006.
During 2001, 165,500 shares were forfeited and deferred stock
compensation was decreased by $1,395,735.

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 minimum value method
with the following weighted average assumptions for 2001, 2000
and 1999: risk-free interest rates of 4.51%, 6.36% and 5.75%,
respectively; no dividend yield; and a weighted average expected
life of the options of five years. For the period following
AtheroGenics initial public offering, the Black-Scholes
option valuation model was used to calculate the fair value of
options granted. This method includes the above assumptions as
well as the estimated volatility (99.79% and 20.85% for 2001 and
2000, respectively) of the common stock.

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 2001, 2000 and 1999 equal
$4.60, $1.16 and $2.54, respectively. Pro forma net loss and net
loss per share are as follows:

|                                       |  |                         |             |      |  |      |             |   |  |   |             |  
|-------------------------------------- |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                       |  |                        
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 2001                    |             | 2000 |  | 1999
|                                       |  |                         |             |      |  |     
|Net loss                               |  | $                       | (18,694,195 | )    |  | $    | (14,151,546 | ) |  | $ | (10,503,993 | )
|Net loss per share (basic and diluted) |  |                         | (0.72       | )    |  |      | (1.32       | ) |  |   | (4.30       | )

43



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NOTES TO FINANCIAL STATEMENTS 
(Continued)


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. Accordingly, at December 31, 2001, 250,290
shares of common stock were reserved for issuance upon the
exercise of outstanding warrants.

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 twelve 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, 2001. The
following table summarizes unrealized gains and losses on
AtheroGenics short-term investments:

|                             |  |                               |            |            |  |            |   |            |  |   |        |  |  |   |            | 
|---------------------------- |  | ----------------------------- | ---------- | ---------- |  | ---------- | - | ---------- |  | - | ------ |  |  | - | ---------- | 
|                             |  |                              
|                             |  | Available-for-Sale Securities
|                             |  |                              
|                             |  |                               |            | Gross      |  | Gross      |   |           
|                             |  | Amortized                     |            | Unrealized |  | Unrealized |   | Estimated 
|                             |  | Cost                          |            | Loss       |  | Gain       |   | Fair Value
|                             |  |                               |            |            |  |            |   |           
|Government agency notes      |  | $                             | 16,081,537 |            |  | $          |  |            |  | $ | 15,212 |  |  | $ | 16,096,749 | 
|Corporate notes              |  |                               | 7,084,617  |            |  |            |  |            |  |   | 38,086 |  |  |   | 7,122,703  | 
|Commercial paper             |  |                               | 6,500,000  |            |  |            |  |            |  |   |       |  |  |   | 6,500,000  | 
|Certificate of deposit       |  |                               | 38,493     |            |  |            |  |            |  |   |       |  |  |   | 38,493     | 
|                             |  |                               |            |            |  |            |   |            |  |   |        |  |  |   |            | 
|Balance at December 31, 2001 |  | $                             | 29,704,647 |            |  | $          |  |            |  | $ | 53,298 |  |  | $ | 29,757,945 | 
|                             |  |                               |            |            |  |            |   |            |  |   |        |  |  |   |            | 

All available-for-sale securities held at
December 31, 2001, will mature during 2002.

44



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
(Continued)


8.     Income
Taxes

At December 31, 2001, AtheroGenics had net
operating loss carryforwards and research and development credit
carryforwards of $50,389,176 and $1,544,330, respectively, for
income tax purposes, which both begin to expire in 2010. The
significant components of the deferred tax assets are:

|                                 |                           |              |             |            |  |   |             |            | 
|-------------------------------- | ------------------------- | ------------ | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                 |                           |             
|                                 |                           | December 31,
|                                 |                           |             
|                                 |                           | 2001         |             | 2000      
|                                 |                           |              |             |           
|Net operating loss carryforwards |                           | $            | 19,147,887  |            |  | $ | 12,763,242  |           
|Deferred revenue                 |                           |              |            |            |  |   | 422,222     |           
|Research credits                 |                           |              | 1,544,330   |            |  |   | 1,241,809   |           
|Deferred stock compensation      |                           |              | 3,284,001   |            |  |   | 698,197     |           
|Other                            |                           |              | 259,746     |            |  |   | 392,092     |           
|                                 |                           |              |             |            |  |   |             |           
|                                 | Total deferred tax assets |              |             | 24,235,964 |  |   |             | 15,517,562 | 
|Valuation allowance              |                           |              | (24,235,964 | )          |  |   | (15,517,562 | )         
|                                 |                           |              |             |            |  |   |             |           
|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
$8,718,402 and $3,271,774 in 2001 and 2000, 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 yet completed a
full 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.

9.     Leases

On June 19, 1998, AtheroGenics entered into
a ten-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 twelve-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.

45



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NOTES TO FINANCIAL STATEMENTS 
(Continued)


At December 31, 2001, AtheroGenics
minimum aggregate commitments (net of sublease income) under
long-term, non-cancelable operating leases are as follows:

|           |  |       |           |                 |  |     |         |  |  |   |           | 
|---------- |  | ----- | --------- | --------------- |  | --- | ------- |  |  | - | --------- | 
|           |  | Gross |           | Sublease Income |  | Net
|           |  |       |           |                 |  |    
|2002       |  | $     | 1,247,663 |                 |  | $   | 323,508 |  |  | $ | 924,155   | 
|2003       |  |       | 1,247,663 |                 |  |     | 230,811 |  |  |   | 1,016,852 | 
|2004       |  |       | 1,228,416 |                 |  |     | 184,975 |  |  |   | 1,043,441 | 
|2005       |  |       | 1,126,100 |                 |  |     | 184,975 |  |  |   | 941,125   | 
|2006       |  |       | 1,117,583 |                 |  |     |        |  |  |   | 1,117,583 | 
|Thereafter |  |       | 2,421,432 |                 |  |     |        |  |  |   | 2,421,432 | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 
|           |  | $     | 8,388,857 |                 |  | $   | 924,269 |  |  | $ | 7,464,588 | 
|           |  |       |           |                 |  |     |         |  |  |   |           | 

Rent expense under operating leases amounted to
$835,608, $786,452 and $639,934 in 2001, 2000 and 1999,
respectively.

Equipment and leasehold improvements include the
following amounts for leases that have been capitalized at
December 31, 2001 and 2000:

|                              |  |      |          |      |  |   |          |  
|----------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                              |  | 2001 |          | 2000
|                              |  |      |          |     
|Lab equipment                 |  | $    | 972,500  |      |  | $ | 972,500  |  
|Less accumulated amortization |  |      | (837,162 | )    |  |   | (742,205 | )
|                              |  |      |          |      |  |   |          |  
|                              |  | $    | 135,338  |      |  | $ | 230,295  |  
|                              |  |      |          |      |  |   |          |  

Amortization of leased assets is included in
depreciation and amortization expense. The equipment leases
provide for one-year extensions at the end of the lease terms.

Future minimum lease payments under capital
leases consist of the following at December 31, 2001:

|                                                |                              |   |        |        | 
|----------------------------------------------- | ---------------------------- | - | ------ | ------ | 
|2002                                            |                              | $ | 92,125 |       
|2003                                            |                              |   |       |       
|                                                |                              |   |        |       
|                                                | Total minimum lease payments |   |        | 92,125 | 
|Less amounts representing interest and warrants |                              |   | (5,024 | )     
|                                                |                              |   |        |       
|Present value of net minimum lease payments     |                              |   | 87,101 |       
|Less current portion                            |                              |   | 87,101 |       
|                                                |                              |   |        |       
|                                                |                              | $ |       |       
|                                                |                              |   |        |       

The amounts recorded as capital lease obligations
approximate the estimated fair market values.

10.     Related Party
Transactions

During the year ended December 31, 2001,
AtheroGenics made a secured loan in the amount of $200,000 to
one of its executive officers, who is also a shareholder. The
loan bears interest at a rate of 2.48% per annum, the applicable
Federal rate at the time of the loan, and is due on
December 26, 2004. The loan is secured by 41,000 shares of
AtheroGenics common stock.

AtheroGenics has a sublease agreement for a
portion of its office and laboratory space with Inhibitex, Inc.
The monthly lease payments are approximately $20,000. The lease
term ends on December 31, 2005. Dr. Medford, the
President and Chief Executive Officer of AtheroGenics, and
Mr. Henos, the Chairman of AtheroGenics Board of
Directors, are both on the Inhibitex Board of Directors.

46



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
(Continued)


AtheroGenics has a sublease agreement for a
portion of its office space with ATV Management Corp. Monthly
lease payments are approximately $3,400. The lease term ends on
July 31, 2003. The Chairman of the Board of Directors of
AtheroGenics is the President and sole shareholder of ATV
Management Corp.

11.     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 2001, AtheroGenics matched 50% of
employees contributions, up to a maximum of 6% of the
employees annual base compensation. AtheroGenics
contribution to the plan for 2001, 2000 and 1999 aggregated
$91,852, $62,093 and $37,703, respectively. AtheroGenics
stock is not an eligible investment under this plan.

12.     Quarterly
Results of Operations (Unaudited)

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

|                         |                   |                              |            |             |   |             |            |             |   |   |            |       |   |   |            |       |  
|------------------------ | ----------------- | ---------------------------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | - | - | ---------- | ----- | - | - | ---------- | ----- | -
|                         |                   |                             
|                         |                   | 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 | )

|                         |                   |                              |            |             |   |             |            |             |   |   |            |       |   |   |            |       |  
|------------------------ | ----------------- | ---------------------------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | - | - | ---------- | ----- | - | - | ---------- | ----- | -
|                         |                   |                             
|                         |                   | Year Ended December 31, 2000
|                         |                   |                             
|                         |                   | 1st Quarter                  |            | 2nd Quarter |   | 3rd Quarter |            | 4th Quarter
|                         |                   |                              |            |             |   |             |            |            
|Net revenues             |                   | $                            | 2,091,280  |             |   | $           | 2,064,050  |             |   | $ | 1,905,155  |       |   | $ | 2,099,218  |      
|Operating loss           |                   |                              | (3,552,560 | )           |   |             | (3,219,745 | )           |   |   | (4,475,752 | )     |   |   | (4,416,315 | )    
|Net loss                 |                   |                              | (3,394,793 | )           |   |             | (3,083,213 | )           |   |   | (3,963,531 | )     |   |   | (3,507,985 | )    
|Net loss per share data: |                   |                              |            |             |   |             |            |             |   |   |            |       |   |   |            |      
|                         | Basic and diluted |                              |            | (1.29       | ) |             |            | (1.05       | ) |   |            | (0.30 | ) |   |            | (0.15 | )

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.

47



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##### Table of Contents








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

None.




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 and
Section 16(a) Beneficial Ownership Reporting
Compliance, respectively, in our proxy statement for our
2002 annual meeting of shareholders to be held on April 24,
2002. We are incorporating this information by reference in this
Form 10-K. Our definitive proxy statement was filed with
the Securities and Exchange Commission on March 11, 2002.




Item 11.     Executive
Compensation

We have set forth information relating to
executive compensation under the caption Executive
Compensation 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

We have 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.




PART IV




Item 14.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K



| |        |                                                   
| | ------ | --------------------------------------------------
| | (a)(1) | Financial Statements, filed as part of this report

Financial Statements (indexed as pages 30-47)

Report of Independent Auditors

Balance Sheets as of December 31, 2001 and
2000

Statements of Operations for the years ended
December 31, 2001, 2000 and 1999

Statements Shareholders Equity (Deficit)
for the years ended December 31, 2001, 2000 and 1999

Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999

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.

48



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##### Table of Contents





| |     |                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------
| | (3) | Listing of Exhibits  The response to
	this portion of Item 14 is submitted below as
	Item 14(c) of this report.



| |     |                                                          
| | --- | ---------------------------------------------------------
| | (b) | Reports on Form 8-K filed in the fourth
	quarter of 2001:

AtheroGenics filed a report on Form 8-K on
October 9, 2001 under Item 5 to report the
reacquisition of full rights to AGI-1067 from Schering-Plough.

AtheroGenics filed a report on Form 8-K on
November 19, 2001 under Item 5 to report the adoption
of a shareholders right plan.



| |     |         
| | --- | --------
| | (c) | Exhibits

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

49



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##### Table of Contents



|            |        |  |  |             |  |                                                                                                                                                                                                                                                                                                                                               
|----------- | ------ |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  |  | Description
|            |        |  |  |            
|            | 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.                                                                                                                                                                                                                     
|            | 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.

50



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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 29, 2002.



| |                   
| | ------------------
| | 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 29, 2002
|                                                                                                                               
|Principal Financial and Principal Accounting
        Officer:                                                                   |  |                                                                                         |  |               
|/s/ MARK P. COLONNESEMark P. Colonnese                                                                                          |  | Senior Vice President of Finance and
        Administration and Chief Financial Officer |  | March 29, 2002
|                                                                                                                               
|Additional Directors:                                                                                                           |  |                                                                                         |  |               
|*Michael A. Henos                                                                                                               |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*R. Wayne Alexander                                                                                                             |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*Vaughn D. Bryson                                                                                                               |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*T. Forcht Dagi                                                                                                                 |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*Arthur M. Pappas                                                                                                               |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*William A. Scott                                                                                                               |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*Stephen G. Sudovar                                                                                                             |  | Director                                                                                |  | March 29, 2002
|                                                                                                                               
|*By: /s/ MARK P. COLONNESE
        -----------------------------------------
        Mark P. Colonnese
        Attorney-in-fact |  |                                                                                         |  |               

51