Edgar Filing: ATHEROGENICS INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO ____________

COMMISSION FILE NUMBER 0-31261

ATHEROGENICS, INC.
(Exact name of Registrant as specified in its charter)

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

8995 WESTSIDE PARKWAY, (678) 336-2500
ALPHARETTA, GEORGIA 30004 (Registrant's telephone number, including area code)
(Address of principal executive offices,
including zip code)

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

NONE

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

COMMON STOCK, NO PAR VALUE

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

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. [ ]

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 19, 2001: $113,573,352.

The number of shares outstanding of each of the registrant's classes of
common stock, as of March 19, 2001: 23,971,305 (one class).

DOCUMENTS INCORPORATED BY REFERENCE:

PORTIONS OF THE PROXY STATEMENT TO BE FILED PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 WITH RESPECT TO THE 2001 ANNUAL
MEETING OF SHAREHOLDERS ARE INCORPORATED HEREIN BY REFERENCE IN PART III.
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ATHEROGENICS, INC

FORM 10-K

INDEX

PAGE
----

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21

PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 43

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44
Signatures............................................................ 47

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PART I

ITEM 1. BUSINESS

OVERVIEW

AtheroGenics is an emerging pharmaceutical company focused on the
discovery, development and commercialization of novel drugs for the treatment of
chronic inflammatory diseases, such as atherosclerosis, rheumatoid arthritis and
asthma. We designed our lead product candidate, AGI-1067, 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. In October 1999 we
entered into a worldwide exclusive license agreement with Schering-Plough
Corporation ("Schering-Plough") to develop and commercialize AGI-1067. We are
currently testing AGI-1067 in a Phase II clinical trial for the prevention and
treatment of restenosis, the reoccurrence of narrowing of the coronary arteries
following angioplasty in patients with coronary artery disease. Schering-Plough
has extensive experience in developing, manufacturing and commercializing
pharmaceutical products.

We have developed a proprietary vascular-protectant, or v-protectant,
technology platform to discover drugs for the treatment of chronic inflammation.
Our first v-protectants are drugs 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. We are currently managing a Phase II clinical trial, called CART-1,
to assess in approximately 300 patients the safety and effectiveness of AGI-1067
for the treatment of post-angioplasty restenosis. We completed patient
enrollment for CART I in September 2000 and expect to report the results of this
clinical trial in the first half of 2001. Our Phase II clinical trial program
follows our successful completion of seven Phase I clinical trials comprising
more than 150 men and women.

In February 2001, we filed an Investigational New Drug application with the
U.S. Food and Drug Administration ("FDA") for AGIX-4207, a novel product
candidate for the treatment of rheumatoid arthritis. This filing is the first
step in initiating Phase I clinical trials to assess the safety and tolerability
of AGIX-4207 in healthy volunteers.

We have identified other potential v-protectant product candidates to treat
asthma, exacerbation of rheumatologic diseases and solid organ transplant
rejection. We are evaluating these v-protectant product candidates to choose
lead product candidates for clinical development. We plan to develop these
v-protectants rapidly and may seek regulatory fast track status 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.

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

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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;

- asthma; and

- solid organ transplant rejection.

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.

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 of
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 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, but both drugs must be injected and both increase
the risk of severe infection.

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 or effectively treated by these medicines.

There is a wide variety of other chronic inflammatory diseases and
conditions, such as solid organ transplant rejection. Physicians regularly use
anti-inflammatory agents, such as aspirin, other non-steroidal anti-inflammatory
drugs and corticosteroids, alone or in combination with immuno-suppressants, to
treat these diseases. However, these diseases may suddenly flare due to either
the tissue inflammation that underlies them or bacteria that take advantage of
the suppressed immune response induced by present therapies. Treatments for the
underlying disease have major side effects and are not completely effective for
these inflammatory exacerbations. For example, systemic corticosteroids cause
major side effects including high blood pressure, adult-onset diabetes,
cataracts, brittle bones and increased risk of infection.

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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 two 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 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 anti-oxidants 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.

V-PROTECTANTS BLOCK ACTIVATION OF VCAM-1
IN CELLS THAT LINE BLOOD VESSELS

ACTIVATION OF VCAM-1

[PHOTO]

INHIBITION OF VCAM-1

[PHOTO]

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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 therapeutics for the treatment
of chronic inflammatory diseases. The key elements of our strategy include the
following:

- Develop AGI-1067 in Collaboration with Schering-Plough. We have entered
into an exclusive license agreement with Schering-Plough to develop and
commercialize our lead product candidate, AGI-1067, for the treatment of
atherosclerosis. The collaboration will seek initially to develop
AGI-1067 for the treatment and prevention of restenosis and the
progression of atherosclerosis in patients with coronary artery disease
who undergo angioplasty.

- 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
inflammatory diseases and clinical conditions. These indications include
rheumatoid arthritis, asthma, solid organ transplant rejection and other
diseases.

- Create Value Rapidly Through Innovative Drug Discovery Coupled with
Innovative Drug Development. We intend to use our capabilities to
identify scientific breakthroughs in inflammation and move these rapidly
through pre-clinical testing to clinical trials. We intend to use our
development expertise to minimize the time required to commercialize our
discoveries in functional genomics, which links genetics to drug
research, and medicinal and combinatorial chemistry, which are techniques
to identify novel drug candidates with pre-defined activities.

- Expand Our Clinical Product Candidate Portfolio. In addition to our
existing discovery programs, we intend to acquire rights to other product
candidates and technologies that complement our existing product
candidate lines or that enable us to capitalize on our scientific and
clinical development expertise. We plan to expand our product candidate
portfolio by in-licensing or acquiring product candidates, technologies
or companies.

- Commercialize Our Products. We plan to collaborate with large
pharmaceutical companies to commercialize products that we develop to
target patient or physician populations in broad markets. In contrast, we
plan to develop a sales force to commercialize those of our products that
we develop to target patient or physician populations in narrow markets.

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PRODUCTS

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

THERAPEUTIC PROGRAM DISEASE/INDICATION DEVELOPMENT STATUS (1) COMMERCIAL STRATEGY
------------------- -------------------------- ----------------------- --------------------

LEAD V-PROTECTANTS
AGI-1067 Restenosis Phase II clinical trial Exclusive license to
Schering-Plough
AGIX-4207 Rheumatoid arthritis IND filed Collaboration
OTHER V-PROTECTANTS
AGI-series, intravenous Exacerbations of Compound selection Collaboration
rheumatological diseases
AGI-series, oral Solid organ transplant Compound selection Internal
rejection
Oral product candidate Chronic asthma Research Collaboration
OTHER PROGRAMS
Functional genomics Inflammatory diseases Research
DIAGNOSTICS
OXYKINE(TM) assay Atherosclerosis Clinical testing Collaboration

---------------

(1) References to compound selection mean the process by which we are selecting
a lead product candidate for clinical development.

We have established therapeutic programs for product development using
product 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 are developing our lead compound, AGI-1067, and related compounds in
collaboration with Schering-Plough. We are also progressing with our internally
discovered compound into development as an agent to treat the signs and symptoms
of rheumatoid arthritis.

We continue to test compounds from among our compound libraries to identify
back-up and follow-up 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 molecule that
patients take orally once per day. In pre-clinical testing, AGI-1067 has shown
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 Anti-Oxidant. 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 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.

Our initial development target is post-angioplasty restenosis. More
significantly, 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 pre-clinical testing in multiple species to establish the
therapeutic properties of AGI-1067. Our pre-clinical 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 recent testing, AGI-1067 lowered "bad"
cholesterol, increased "good" cholesterol and blocked atherosclerosis in a
year-long pre-clinical model of progression of atherosclerosis.

Based upon our successful completion of pre-clinical testing, we studied
AGI-1067 in seven Phase I clinical trials in more than 150 men and women,
including healthy volunteers and patients up to the age of 85 to assess
tolerability and potential for interaction with other drugs. In the course of
these seven studies we have given 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, 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 progress
to Phase II clinical trials.

We are presently conducting a Phase II clinical trial in Canada to assess
the tolerability and efficacy of AGI-1067 as an agent to prevent
post-angioplasty restenosis. We opened our Canadian Investigational New Drug
Application in April 1999 for AGI-1067 as an agent to prevent post-angioplasty
restenosis. The Canadian Antioxidant Restenosis Trial, called CART-1, is a
multi-center, randomized, double-blind, safety and efficacy dose-ranging study,
comparing AGI-1067 with placebo and an active control in patients with
established coronary artery disease who undergo elective angioplasty. We have
completed dosing of approximately 300 patients for six weeks and are completing
follow-up at six months. During angiography performed six months after
angioplasty, we will assess the efficacy of AGI-1067 by measuring directly the
diameter of the opening of the treated coronary artery. We enrolled the first
patient in CART-1 in September 1999 and completed dosings in November 2000. The
trial is ongoing at five Canadian centers of excellence in interventional
cardiology. An independent data and safety monitoring board reviews patient data
periodically to ensure the continued safety of enrolled patients.

We have formed a joint management committee with Schering-Plough to oversee
all aspects of development and commercialization of AGI-1067. The committee
consists of equal numbers of AtheroGenics and Schering-Plough representatives.
Under direction of the joint management committee, we expect to manage aspects
of clinical and pre-clinical development work for AGI-1067.

AGI-Series for Rheumatoid Arthritis

Rheumatoid arthritis is a common auto-immune disease which 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

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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 potentially toxic drugs, termed
disease modifying anti-rheumatic drugs ("DMARDs"). The newer DMARDs target the
modulation of tumor necrosis factor, 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, but must be injected
according to a schedule and may cause serious side effects. AGIX-4207 is a
selective modulator of tumor necrosis factor and is being tested as an oral
medication, taken once a day. This selective nature of AGIX-4207 may decrease
chronic inflammation in rheumatoid arthritis with fewer side effects. Enrollment
for a Phase I clinical trial for AGIX-4207 is expected to begin in early 2001.

Treatment of patients with rheumatoid arthritis, progresses from pain
reliever to increasingly toxic immuno-suppressants, called disease modifiers. If
we achieve positive clinical trial results, 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 are developing an orally-dosed, v-protectant drug to treat moderate to
severe rheumatoid arthritis in patients who have shown an incomplete or
inadequate response to other DMARD therapy. We are also developing an
intravenously-dosed, v-protectant drug to treat exacerbations of rheumatologic
diseases. An exacerbation is a sudden worsening of the patient's arthritis or
condition that usually requires hospitalization and intensive therapy.

AGI-Series for Post-Transplant Chronic Solid Organ Rejection

We are developing an orally-dosed, v-protectant drug to treat chronic solid
organ transplant rejection. Patients' immune systems recognize transplanted
organs as foreign and therefore reject them. This may occur soon after
transplantation ("acute rejection") or may take years ("chronic rejection").
Physicians treat these patients with powerful immuno-suppressants to block all
immune and inflammatory reactions that could cause solid organ rejection. These
therapies may place patients at increased risk for infection. The vascular
protection provided by our product candidates may protect solid organs from
rejection beyond the first year without increasing the risk of infection.

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.

We have identified v-protectant product candidates for oral administration
to patients who have received transplants. We are evaluating these small
molecules based on development criteria such as potency, stability and ease of
formulation. We will use these criteria and results from comprehensive
pre-clinical studies that are under way to choose a lead product candidate for
clinical development that targets chronic solid organ transplant rejection. We
plan to apply to the FDA for fast track status for this product candidate as an
adjunct to current transplant therapy, which includes immuno-suppressant and
anti-inflammatory drugs.

AGI-Series for Respiratory Diseases

According to the American Lung Association, asthma afflicts more than 17
million adults and children in the United States. 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. According to the
American Lung Association, in 1998 the combined direct and indirect costs of
asthma in the United States is approximately $11.3 billion annually. 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 exacerbation of asthma, which remains

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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.

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(TM), is an accurate and useful
diagnostic tool. We believe OXYKINE(TM) will allow physicians to determine
whether a patient has active and progressive atherosclerosis and whether the
disease is responding to medical therapy. There are currently no 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,
medicine, biochemistry, and analytical and synthetic chemistry and
bioengineering.

Our research program has three 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 target
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 process. We plan to progress these genes and proteins into
targets for novel classes of drugs.

- To Develop New Classes of V-Protectant Drugs Based on the 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. 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.

PATENTS AND INTELLECTUAL PROPERTY

We have established a patent portfolio of owned and in-licensed patents
that cover our lead v-protectant compounds and their use, as well as methods for
regulating the fundamental biological pathway involved in the production of the
inflammatory protein, VCAM-1. 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.

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The patent approval process in the United States progresses through several
steps from filing an application, through review of the application by the U.S.
Patent and Trademark Office, and, if the application is allowed, to an issued
patent. There is a similar regulatory process in most non-U.S. countries. As of
March 1, 2001, we own three U.S. patents, nine pending U.S. applications, and 51
associated non-U.S. patent filings, which, if issued, will expire from 2012 to
2020. We co-own with Emory University one pending U.S. patent application and 18
associated non-U.S. patent filings which, if issued, will expire on or before
2018. In addition, we hold exclusive licenses from Emory University to 11 U.S.
patents, one U.S. patent application, and 59 associated non-U.S. patent filings,
expiring on or before 2012. We purchased the U.S. patent that we own in an
agreement with Dr. Sampath Parthasarathy, a member of our Scientific Advisory
Board. We believe the cost of this agreement to us is immaterial.

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

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

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

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

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,

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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 covers 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 closely related 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 20 non-U.S. 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.

Other V-Protectant Compounds

We have filed patent applications in the United States and non-U.S.
countries that 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.

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. We may not develop or obtain rights to products
or processes that are patentable. Even if we do obtain patents, they may not
adequately protect the technology we own or in-license. In addition, others may
challenge, seek to invalidate, infringe or circumvent any patents we own or
in-license, and rights we receive under those patents may not provide
competitive advantages to us.

Our commercial success will depend in part on our ability to manufacture,
use, sell and offer to sell our product candidates and proposed product
candidates without infringing patents or other proprietary rights of others. We
may not be aware of all patents or patent applications that may impact our
ability to make, use or sell any of our product candidates or proposed product
candidates. For example, U.S. patent applications are confidential while pending
in the Patent and Trademark Office, and patent applications filed in non-U.S.
countries are often first published six months or more after filing. 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 Form 10-K. 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 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.

Trademarks

In August 2000, the U.S. Patent and Trademark Office (USPTO) notified us
that the trademark OXYKINE has been allowed for registration, and we expect the
Certificate of Registration to be issued during the year 2001. The USPTO issued
a Certificate of Registration for the trademark AATHEROGENICS & DESIGN on
November 7, 2000 and issued one for the trademark AGI on September 19, 2000.

EXCLUSIVE LICENSE AGREEMENT WITH SCHERING-PLOUGH

In October 1999, we entered into a worldwide exclusive license agreement
with Schering-Plough. This agreement consists of contracts with two
Schering-Plough affiliates. Under the agreement we granted to
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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. During the term of the agreement
with Schering-Plough, we will not develop or commercialize outside the agreement
any compound for the treatment or prevention of restenosis, coronary artery
disease or atherosclerosis.

Schering-Plough paid us an initial nonrefundable licensing fee of
$5,000,000 upon signing the agreement and has assumed responsibility for all
costs going forward associated with the development, manufacturing and
commercialization of products containing AGI-1067 and any other licensed
compound. Further, Schering-Plough will make certain payments to us upon
achievement of clinical and regulatory milestones. Schering-Plough will also pay
us a royalty on all net sales of licensed products and will pay us fees
associated with the achievement of certain annual sales levels.
Schering-Plough's total direct payments to us for the initial indication of
restenosis, excluding royalties and development costs, could reach $189 million
during the term of the agreement. The amount and timing of any milestone and
royalty payments, however, are subject to events, many of which are beyond our
control and the achievement of which we cannot assure.

The agreement will terminate when the last patent right, which is the
subject of the agreement, expires. Schering-Plough may terminate the agreement
at any time upon 60 days prior written notice to us. We may terminate the
agreement upon the failure of Schering-Plough to meet certain development
milestones. Either party may terminate the agreement upon proper notice of
certain uncured material violations of the agreement. In addition, either party
may terminate the agreement on a product-by-product basis if Schering-Plough
ceases commercialization of a licensed product. Finally, either party may
terminate the agreement if the other party incurs specified financial problems.
Upon certain material breaches of the agreement by AtheroGenics, Schering-Plough
may either terminate the agreement, continue the agreement with future milestone
payments materially reduced by a specified percentage, or continue the agreement
with future royalty payments reduced by a specified percentage. Should either
party terminate the agreement, AtheroGenics will have the right to purchase
Schering-Plough's remaining inventory of licensed products at a specified
amount.

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. Our exclusive license agreement with
Schering-Plough grants them the right to manufacture AGI-1067 for late-stage
clinical trials and commercialization. Schering-Plough has assumed
responsibility for manufacturing and formulating AGI-1067. Schering-Plough has
extensive experience in manufacturing pharmaceutical products.

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.

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SALES AND MARKETING

Under our exclusive license agreement for AGI-1067, Schering-Plough will
handle exclusively, or sublicense, on a worldwide basis, sales, marketing and
distribution of AGI-1067 for any therapeutic indication. Schering-Plough has
extensive experience in marketing pharmaceutical products.

We plan to collaborate with large pharmaceutical companies to commercialize
product candidates other than AGI-1067 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 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

We believe pharmaceutical companies and research institutions will increase
their efforts to define and exploit emerging concepts about vascular cell
biology and oxidant signals for drug discovery programs relating to chronic
inflammation. Many of these companies and institutions 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 four 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 current Phase II clinical trials demonstrate that we
are maintaining this important first-to-clinic competitive advantage.

- Third, we expect that our exclusive license agreement with
Schering-Plough will allow us to sustain and extend our competitive
advantage.

- Fourth, we believe our scientific, development and licensing expertise
strongly positions us to acquire promising technologies and products
discovered outside AtheroGenics.

Our initial target for drug development is restenosis. We are aware of two
orally-dosed drugs that have shown efficacy in prevention of restenosis in
clinical trials. One of these drugs, Tranilast, is currently in a worldwide
Phase III clinical trial sponsored by SmithKline Beecham PLC. The rationale for
this clinical trial is based on efficacy in a limited Phase II clinical trial in
Japan. However, another major pharmaceutical company previously discontinued
Tranilast development during Phase II in the United States as a treatment of
asthma due to significant human liver toxicity. The second drug, Lorelco,
decreased the rate of restenosis in a North American clinical trial undertaken
by an independent investigator. This trial confirmed and extended results from
Japan, where Lorelco is still marketed. However, Aventis SA previously withdrew
Lorelco from North American markets as a lipid-lowering drug due to lack of
efficacy. We believe that a rare but potentially fatal side effect makes
Lorelco's return to the marketplace highly unlikely. In addition, we are aware
that Amylin Pharmaceuticals Inc. has recently begun Phase I clinical trials to
evaluate a compound as a treatment to prevent restenosis after vascular repair
procedures. Amylin has reported that in animal studies this compound reduced low
density lipids in blood serum, but not high density lipids, to inhibit
lipoprotein oxidation, and to inhibit cell adhesion molecules in vascular cells.
In addition to these drugs and product candidate, some physicians advocate the
use of anti-oxidant vitamins, short courses of radiation delivered

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directly to coronary arteries, or the use of specially designed catheters or
improved angioplasty techniques to decrease the incidence or severity of
restenosis.

In addition to the drugs and devices that may compete with AGI-1067 in the
treatment of restenosis, there are a number of other drugs and compounds in
development for other indications that we target. A number of companies are
pursuing drugs that control aspects of the immune system across the range of
diseases that we target. For example, Genentech, Inc. in collaboration with
Tanox, Inc. and Novartis AG is developing a novel injectable asthma therapy
based on delivery of an anti-IgE monoclonal antibody, which targets the allergic
component of chronic asthma. Drugs that target tumor necrosis factor, including
Enbrel(R) (etanercept) and Remicade(R) (infliximab) are approved to treat
rheumatoid arthritis.

GOVERNMENTAL REGULATION

We plan to develop prescription-only drugs for the foreseeable future. The
FDA is the regulatory agency that is charged to protect 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 pre-clinical 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 pre-clinically.

- Phase III clinical trials usually include two adequate and well
controlled studies in the target population. For most chronic diseases,
drug companies study a few thousand patients to assure a broadly
applicable assessment of safety and efficacy.

At the successful conclusion of Phase III, drug companies may submit a
product license application, called a New Drug Application in the United
States. Upon accepting the submission, the FDA or non-U.S. regulatory
authorities review the file for completeness, accuracy and adherence to
regulations. These authorities may use internal and external consultants
and may convene an expert committee to advise on the safety,
effectiveness and usefulness of the proposed new product candidate prior
to final regulatory judgment. The final step to registration is approval
of the package insert or label that defines what the drug company may
promote to physicians who use the new drug.

- Phase IV clinical trials support marketing of the drug for its approved
indication. Phase IV clinical trials generate data to allow promotion of
the new drug in comparison with other approved drugs and to support
healthcare economics claims. In addition, every pharmaceutical company is
responsible for post-marketing surveillance for safety in the
marketplace.

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

EMPLOYEES

We currently have 70 full-time employees, including 54 in research and
development. The employee group includes 21 Ph.D.s, seven M.D.s and 15 employees
with Masters degrees. We believe that our employee relations are good.

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.......................... Chairman, Department of Medicine, Harvard
Medical School
David Harrison, M.D.......................... Professor of Medicine, Division of
Cardiology, Emory University School of
Medicine
Dennis Liotta, Ph.D.......................... Professor of Chemistry and Vice President of
Research, Emory University School of Medicine
Robert M. Nerem, Ph.D........................ Parker H. Petit Professor and Director,
Bioengineering and Bioscience, Georgia
Institute of Technology

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Sampath Parthasarathy, Ph.D.................. Professor, Department of Gynecology and
Obstetrics, Emory University School of
Medicine
Robert D. Rosenberg, M.D., Ph.D.............. Professor of Biology, Massachusetts Institute
of Technology and Professor of Medicine,
Harvard Medical School

CLINICAL ADVISORY BOARD:
William Virgil Brown, M.D.................... Professor of Medicine, Director of Division
of Atherosclerosis & Lipid Metabolism, 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, 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 (the "Reform Act")
provides a safe harbor for forward-looking statements made by or on behalf of
AtheroGenics. AtheroGenics and its representatives may from time to time make
written or 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, anticipated product commercialization strategies, and
anticipated trends in our business, are forward-looking statements within the
meaning of the Reform Act. The forward-looking statements are and will be based
on our then current views and assumptions regarding future events and operating
performance, and speak only as of their dates. AtheroGenics undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

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

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 and the subject of an exclusive licensing
agreement with Schering-Plough. This compound would fail in clinical trials if
we show it is ineffective or causes unacceptable side effects in the patients we
treated.

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 pre-clinical 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, 2000, we had an
accumulated deficit of approximately $43.6 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, pre-clinical,
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.

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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 we face
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 2004. In addition, other than AGIX-4207, a
product candidate for which we recently filed an Investigational New Drug
application with the FDA, 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, pre-clinical testing and clinical
trials before we can file product approval applications with the FDA and similar
regulatory authorities in other countries. Pre-clinical testing and clinical
trials are long, expensive and uncertain processes. It may take us several years
to complete our testing, 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 which we use
in our clinical trials under the FDA's Good Manufacturing Practices.

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

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 product 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.

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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 assure you that for any product candidate we or our collaborators
develop, including AGI-1067 or AGIX-4207, the regulatory agencies will complete
their review processes in a timely manner or that we will obtain regulatory
approval. Pharmaceutical companies cannot market a drug in the United States or
most other countries until they have completed a rigorous and extensive
regulatory approval process for the drug. 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.

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 may seek fast track status for some of our product candidates. If we
obtain this status for any of our product candidates, the time required for the
FDA to review the Investigational New Drug application that we submit for that
product candidate would be shorter than would otherwise be the case. We cannot
assure you that the FDA will grant fast track status to any Investigational New
Drug applications that we may submit or that, if granted, such status will
result in faster New Drug Application approval or any approval at all.

If Schering-Plough decides to terminate our exclusive license agreement, we
would lose access to their substantial development, commercial and financial
resources, which could materially adversely affect our ability to develop and
commercialize AGI-1067 and our ability to generate revenue.

Schering-Plough may terminate our exclusive license agreement for any
reason upon 60 days notice. Under our agreement, Schering-Plough will pay all
costs related to the worldwide development and commercialization of AGI-1067.
Schering-Plough also will pay us significant milestone fees upon attaining
development, regulatory and sales objectives. In addition, the agreement
provides us with access to their substantial product development, manufacturing
and commercialization expertise. If, however, Schering-Plough terminates the
agreement, we may not receive a substantial portion of our potential aggregate
licensing and milestone payments from Schering-Plough or have access to their
resources and expertise.

The receipt and timing of milestone payments from Schering-Plough is
uncertain, which could materially adversely affect our revenue and
profitability.

We have to date received a $5.0 million nonrefundable license fee from
Schering-Plough for entering into our license agreement with them. The receipt
and timing of the balance of the development and sales milestone payments to us
under this agreement is subject to factors relating to the clinical and
regulatory development and commercialization of AGI-1067. These factors
generally are the responsibility of Schering-Plough. As a result, many of these
factors are beyond our control and we cannot assure their achievement.

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
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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 are confidential while pending
in the Patent and Trademark Office, and patent offices in non-U.S. countries
often publish patent applications for the first time six months or more after
filing. 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 prospectus. 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.

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, and The Regents of the University of California,
covering aspects of our diagnostic technology. Our exclusive license with Emory
University requires us to take steps to commercialize the licensed technology in
a timely manner. If we fail to meet these obligations, Emory University can
convert our exclusive license to a non-exclusive license, can grant others
non-exclusive rights in the licensed technology or can require us to sublicense
aspects of the licensed technology. Our license agreement with The Regents of
the University of California also includes a requirement that we develop the
licensed technology within certain time limits. If we fail to meet these time
limits, they can terminate our license. Further, The Regents of the University
of California are primarily responsible for patent prosecution of the technology
we license from them, and we are required to reimburse them for the costs they
incur in performing these activities. As a result, we do not have the ability to
control these activities.

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

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

Our competitors include large pharmaceutical 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.

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

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

- A finding that a third party did not comply with applicable governmental
regulations. Manufacturers of pharmaceutical products are subject to
continual review and periodic inspections by regulatory agencies. Failure
of one of our third party manufacturers to comply with applicable
regulatory requirements, whether or not related to our product
candidates, could result in sanctions against our potential products,
including recall or seizure, total or partial suspension of production or
injunction.

- A failure to synthesize and manufacture our product candidates in
accordance with our product specifications. For example, a starting
material used in the manufacturing process of AGI-1067 is probucol, which
physicians previously prescribed as a cholesterol-lowering agent but
which its manufacturer withdrew from the market for efficacy reasons. The
occurrence of a rare side effect with chronic dosing of probucol requires
that we maintain a very low maximal amount of probucol in the manufacture
of AGI-1067.

- A failure to deliver product candidates in sufficient quantities or in a
timely manner. Any failure by our third party manufacturers to supply
our requirements for clinical trial materials or supply these materials
in a timely manner could jeopardize the scheduled initiation or
completion of these clinical trials and could have a material adverse
effect on our ability to generate revenue.

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

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

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

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

- we may not be able to find collaborators, enter into alliances on
favorable terms or enter into alliances that will be commercially
successful;

- any collaborator might, at its discretion, limit the amount of resources
and time it devotes to marketing our products; and

- any collaborator may terminate its agreement with us and abandon our
products at any time for any reason, regardless of the terms of the
agreement.

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

We are a small company with 70 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

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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.

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 and can be expected to continue to be subject to
quarterly fluctuations. 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;

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- 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 fluctuations 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 $9 million. This
lease may be extended at our option to 2019.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

COMMON STOCK INFORMATION

Our common stock has been traded on the Nasdaq National Market under the
symbol "AGIX" since August 9, 2000. Prior to that time, there was no public
market for the common stock. The following table sets forth the range of high
and low closing sale prices for the common stock as reported on the Nasdaq
National Market during the third and fourth quarters of fiscal 2000.

COMMON STOCK
--------------
HIGH LOW
------ -----

QUARTERLY PERIOD ENDED
Quarter ended September 30, 2000 (commencing August 9,
2000)..................................................... $11.50 $7.88
Quarter ended December 31, 2000............................. 9.00 4.38

As of March 1, 2001, there were approximately 2,700 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.

USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES

The Securities and Exchange Commission declared our Registration Statement
on Form S-1 (File No. 333-31140) effective on August 8, 2000. The net proceeds
from the sale of the 6,900,000 shares of common stock registered pursuant to the
Registration Statement (including the exercise of the underwriters'
over-allotment option) was $49.4 million after deducting underwriting discounts
of $3.9 million and offering expenses of $1.9 million. We intend to use the net
proceeds for research and development activities, including clinical trials,
process development and manufacturing support and for general corporate
purposes, including
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working capital. A portion of the proceeds may be used to acquire or invest in
complementary businesses, products or technologies. As of December 31, 2000, we
have not used any of the net proceeds from the offering, and pending such uses,
have invested the proceeds in highly liquid, interest bearing, investment grade
securities (see Note 7 "Investments" of the Notes to Financial Statements
included in this Form 10-K).

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.

Pro forma basic and diluted net loss per share have been calculated
assuming the conversion of all outstanding preferred stock into common stock, as
if the shares had converted immediately upon their issuance.

YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ----------- -----------

STATEMENT OF OPERATIONS DATA:
Revenues:
License fees......................... $ 3,333,333 $ 555,556 $ -- $ -- $ --
Research and development............. 4,826,370 791,653 -- -- --
------------ ------------ ------------ ----------- -----------
Total revenues................ 8,159,703 1,347,209 -- -- --
Operating expenses:
Research and development exclusive of
$1,856,932 and $23,649 for the
years ended December 31, 2000 and
1999, respectively, reported below
as amortization of deferred stock
compensation....................... 12,815,788 9,041,345 8,954,904 4,656,478 1,776,891
General and administrative exclusive
of $6,115,796 and $61,831 for the
years ended December 31, 2000 and
1999, respectively, reported below
as amortization of deferred stock
compensation....................... 3,035,559 2,593,017 1,573,807 988,230 548,766
Amortization of deferred stock
compensation....................... 7,972,728 85,480 -- -- --
Total operating expenses...... 23,824,075 11,719,842 10,528,711 5,644,708 2,325,657
------------ ------------ ------------ ----------- -----------
Operating loss......................... (15,664,372) (10,372,633) (10,528,711) (5,644,708) (2,325,657)
Net interest income (expense).......... 1,714,850 (60,617) (205,130) 485,392 277,563
------------ ------------ ------------ ----------- -----------
Net loss............................... $(13,949,522) $(10,433,250) $(10,733,841) $(5,159,316) $(2,048,094)
============ ============ ============ =========== ===========
Basic and diluted net loss per share... $ (1.30) $ (4.27) $ (4.45) $ (2.25) $ (1.10)
============ ============ ============ =========== ===========
Shares used in computing basic and
diluted net loss per share........... 10,747,773 2,443,237 2,409,948 2,292,966 1,869,246
============ ============ ============ =========== ===========
Pro forma basic and diluted net loss
per share............................ $ (0.72) $ (0.82)
============ ============
Shares used in computing pro forma
basic and diluted net loss per
share................................ 19,343,445 12,712,029
============ ============

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The following table contains a summary of our balance sheet for the five
years ending December 31, 2000.

DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ----------- ------------

BALANCE SHEET DATA:
Cash and cash equivalents... $ 26,463,070 $ 13,409,450 $ 3,686,423 $ 6,925,364 $ 11,404,142
Short-term investments...... 27,518,169 -- -- -- --
Working capital
(deficiency).............. 52,422,951 9,651,239 (4,259,366) 6,108,938 11,330,250
Total assets................ 57,598,951 15,717,214 5,341,816 7,612,796 11,965,284
Long-term obligations, less
current portion........... 84,907 61,854 163,262 281,636 270,950
Redeemable convertible
preferred stock and
warrants.................. -- 39,193,366 14,950,624 14,654,626 14,654,604
Deferred compensation....... (5,930,880) (1,809,680) -- -- --
Accumulated deficit......... (43,638,404) (29,688,882) (19,255,632) (8,521,791) (3,362,475)
Total
shareholders'
equity
(deficit)....... 54,271,686 (29,288,600) (18,973,881) (8,240,444) (3,177,653)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our financial
statements and related notes included in this annual report on Form 10-K.

OVERVIEW

Since our operations began in 1994, we have been focused on the discovery
and development of novel therapeutics for the treatment of chronic inflammatory
diseases. Based on our proprietary vascular protectant technology platform, we
have advanced two drug candidates into development, and are progressing on a
number of other pre-clinical programs. Our lead product candidate, AGI-1067, is
currently in Phase II clinical trials for the treatment and prevention of
post-angioplasty restenosis. We recently filed an Investigational New Drug
application with the FDA for our second product candidate, AGIX-4207, for the
treatment of rheumatoid arthritis. The filing is the first step in initiating
Phase I clinical trials to assess the safety and tolerability of AGIX-4207.

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, 2000, had an accumulated deficit of $43.6 million. There can be no
assurance if 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 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 is responsible for all costs of development
and commercialization. Schering-Plough paid us an initial licensing fee and will
pay milestone fees upon achievement of development, regulatory and commercial
milestones.

On August 9, 2000, we completed an Initial Public Offering of 6,000,000
shares of common stock at a price of $8.00 per share. All of the 6,000,000
shares were issued and sold. We granted the underwriters a

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30-day option to purchase up to an additional 900,000 shares of common stock to
cover over-allotments. The over-allotment option was exercised on September 13,
2000.

RESULTS OF OPERATIONS

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 is being 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,
pre-clinical 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 $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 (Expense)

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.
The net operating loss carryforwards and the research and the 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 IRC Section 382
limitations on the cumulative net

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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 preferred 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, 1999 AND 1998

Revenues

Total revenues were $1.3 million in 1999, compared to none in 1998.
Revenues of $555,556 in 1999 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 license fee
that is being amortized over 18 months. Research and development revenues
related to the exclusive license agreement signed with Schering-Plough were
$791,653 in 1999.

Expenses

Research and Development. Research and development expenses were $9.0
million for the years ended December 31, 1999 and 1998. Research and development
expenses in 1999 were higher than 1998 by $86,441, or 1%, reflecting slightly
higher costs associated with the AGI-1067 clinical trials. These increased costs
principally involved payments to third party contractors.

General and Administrative. General and administrative expenses for the
years ended December 31, 1999 and 1998 were $2.6 million and $1.6 million,
respectively. The $1.0 million, or 63%, increase in 1999 compared to 1998 was
due primarily to an increase in administrative personnel to support our expanded
research and development and licensing programs, and to the costs of relocating
to a larger scientific and administration facility.

Amortization of Deferred Stock Compensation. In 1999 we recorded non-cash
deferred stock compensation of approximately $1.9 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. Amortization of
deferred stock compensation was $85,480 in 1999. Of such amount, $23,649 was
attributable to research and development expenses and $61,831 was attributable
to general and administrative expenses. There was no amortization of deferred
stock compensation in 1998.

Net Interest (Expense) Income

Net interest expense was $60,617 and $205,130 for the years ended December
31, 1999 and 1998, respectively. The $144,513, or 70%, decrease in expense in
1999 as compared to 1998 was attributable to an increase in the amount of cash
available for investing from the sale of Series C convertible preferred stock
and conversion of a bridge loan to preferred stock in April 1999.

Income Taxes

As of December 31, 1999, we had net operating loss carryforwards and
research and development credit carryforwards of $24.9 million and $1.1 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 most recently, we have completed an Initial
Public Offering, including the exercise of the underwriters' over-allotment
option, that raised net proceeds of $49.4 million through December 31, 2000. We
had cash and cash equivalents and short-term investments of $54.0 million at
December 31, 2000, compared with $13.4 million at December 31, 1999. Working
capital at December 31, 2000 was $52.4 million, compared to $9.7 million at
December 31, 1999. Long-term debt was $84,907 at December 31, 2000 compared to
$61,854 for the year ended December 31, 1999. Long-term debt consists primarily
of capital equipment lease obligations.

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Net cash used in operating activities was $8.8 million and $6.7 million for
the twelve months ended December 31, 2000 and 1999, respectively. Uses of cash
in operating activities were primarily to fund net losses, excluding non-cash
charges.

Net cash used in investing activities was $28.2 million for the twelve
months ended December 31, 2000 compared to $1.1 million for the twelve months
ended December 31, 1999. Net cash used in investing activities consisted
primarily of the purchase of short-term investments, equipment purchases and
leasehold improvements. Our cash and investments policy emphasizes liquidity and
preservation of principal over other portfolio considerations. We select
investments that maximize interest income to the extent possible given these two
constraints. We satisfy our cash requirements by investing excess cash in
securities with different maturities to match projected cash needs and limit
concentration of credit risk by diversifying our investments among a variety of
high quality credit issuers.

Net cash provided by financing activities was $50.1 million for the twelve
months ended December 31, 2000, and $17.5 million for the twelve months ended
December 31, 1999. Net cash provided by financing activities in 2000 consisted
primarily of the proceeds from the Initial Public Offering as well as proceeds
from the exercise of preferred stock warrants and common stock options. Net cash
provided by financing activities in the preceding twelve-month period consisted
primarily of proceeds from the sale of preferred stock.

Based upon the current status of our product development and
commercialization plans, we believe that the net proceeds of the Initial Public
Offering, together with our existing cash and cash equivalents, will be adequate
to satisfy our capital needs for at least the next 12 months. However, our
actual capital requirements will depend on many factors, including:

- the status of product development;

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

- filing, prosecuting and enforcing patent 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 June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Investments and Hedging Activities ("SFAS 133"). SFAS
133 established a new model for accounting for derivatives and hedging
activities and supercedes several existing standards. SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect the adoption of SFAS 133 to have
an impact on our financial statements.

In December 1999, the SEC staff issued Staff Accounting Bulletin SAB 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 explains how
the SEC staff applies by analogy the existing rules on revenue recognition to
other transactions not covered by such rules. In March 2000, the SEC issued SAB
101A that delayed the original effective date of SAB 101 until the second
quarter of 2000 for calendar year companies. In June 2000, the SEC issued SAB
101B that further delayed the effective date of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 has not had 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

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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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ATHEROGENICS, INC.

INDEX TO FINANCIAL STATEMENTS

CONTENTS

PAGE
----

Report of Independent Auditors.............................. 28
Balance Sheets.............................................. 29
Statements of Operations.................................... 30
Statements of Redeemable Convertible Preferred Stock and
Shareholders' Equity (Deficit)............................ 31
Statements of Cash Flows.................................... 32
Notes to Financial Statements............................... 33

27
30

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, 2000 and 1999, and the related statements of operations, redeemable
convertible preferred stock and shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.

Ernst & Young LLP

Atlanta, Georgia
February 13, 2001

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31

ATHEROGENICS, INC.

BALANCE SHEETS

DECEMBER 31,
---------------------------
2000 1999
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,463,070 $ 13,409,450
Short-term investments.................................... 27,518,169 --
Accounts receivable....................................... 1,138,244 791,653
Prepaid expenses, note receivable and other current
assets.................................................. 545,826 89,619
------------ ------------
Total current assets............................... 55,665,309 14,290,722
Equipment and leasehold improvements:
Laboratory equipment...................................... 1,352,692 904,599
Leasehold improvements.................................... 966,869 1,137,868
Computer and office equipment............................. 476,276 168,899
Construction in progress.................................. 131,185 124,730
------------ ------------
2,927,022 2,336,096
Less accumulated depreciation and amortization............ 1,152,028 1,101,463
------------ ------------
1,774,994 1,234,633
Long-term note receivable................................... 158,648 191,859
------------ ------------
Total assets....................................... $ 57,598,951 $ 15,717,214
============ ============

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 504,991 $ 679,142
Accrued liabilities....................................... 517,312 246,286
Accrued compensation...................................... 640,975 39,314
Accrued development costs................................. 342,210 240,000
Current portion of capitalized lease obligation........... 125,759 101,408
Current portion of deferred revenues...................... 1,111,111 3,333,333
------------ ------------
Total current liabilities.......................... 3,242,358 4,639,483
Long-term portion of capitalized lease obligation........... 84,907 61,854
Long-term portion of deferred revenues...................... -- 1,111,111
Redeemable convertible preferred stock:
Series A, $1 par and liquidation value:
Authorized -- 1,000,000 shares; issued and
outstanding -- 1,000,000 shares at December 31, 1999... -- 1,000,000
Series B, $3 par and liquidation value:
Authorized -- 4,804,382 shares; issued and
outstanding -- 4,586,815 shares at December 31, 1999... -- 13,704,499
Series C, $3 par and liquidation value:
Authorized -- 8,500,000 shares; issued and
outstanding -- 8,057,022 shares at December 31, 1999... -- 24,006,992
Preferred stock, no par value: Authorized -- 5,000,000
shares at December 31, 2000............................... -- --
Preferred stock warrants.................................... -- 481,875
Shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 100,000,000 and 21,100,000 shares at
December 31, 2000 and 1999, respectively; issued and
outstanding -- 23,909,295 and 2,536,543 shares at
December 31, 2000 and 1999, respectively............... 103,608,655 2,209,962
Warrants................................................ 225,713 --
Deferred stock compensation............................. (5,930,880) (1,809,680)
Accumulated deficit....................................... (43,638,404) (29,688,882)
Accumulated other comprehensive income.................... 6,602 --
------------ ------------
Total shareholders' equity (deficit)............... 54,271,686 (29,288,600)
------------ ------------
Total liabilities, redeemable convertible preferred
stock and shareholders' equity (deficit)......... $ 57,598,951 $ 15,717,214
============ ============

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

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32

ATHEROGENICS, INC.

STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Revenues:
License fees....................................... $ 3,333,333 $ 555,556 $ --
Research and development........................... 4,826,370 791,653 --
------------ ------------ ------------
Total revenues............................. 8,159,703 1,347,209 --
Operating expenses:
Research and development, exclusive of $1,856,932
and $23,649 for the years ended December 31,
2000 and 1999, respectively, reported below as
amortization of deferred stock compensation..... 12,815,788 9,041,345 8,954,904
General and administrative, exclusive of $6,115,796
and $61,831 for the years ended December 31,
2000 and 1999, respectively, reported below as
amortization of deferred stock compensation..... 3,035,559 2,593,017 1,573,807
Amortization of deferred stock compensation........ 7,972,728 85,480 --
------------ ------------ ------------
Total operating expenses................... 23,824,075 11,719,842 10,528,711
------------ ------------ ------------
Operating loss....................................... (15,664,372) (10,372,633) (10,528,711)
Net interest income (expense)........................ 1,714,850 (60,617) (205,130)
------------ ------------ ------------
Net loss............................................. $(13,949,522) $(10,433,250) $(10,733,841)
============ ============ ============
Net loss per share -- basic and diluted.............. $ (1.30) $ (4.27) $ (4.45)
============ ============ ============
Weighted average shares outstanding -- basic and
diluted............................................ 10,747,773 2,443,237 2,409,948
============ ============ ============
Pro forma net loss per share -- basic and diluted.... $ (0.72) $ (0.82)
============ ============
Pro forma weighted average shares outstanding --
basic and diluted.................................. 19,343,445 12,712,029
============ ============

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

30
33

ATHEROGENICS, INC.

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(DEFICIT)

REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------
SERIES A SERIES B
------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ------------

BALANCE AT DECEMBER 31, 1997........... 1,000,000 $ 1,000,000 4,570,149 $ 13,654,501
Issuance of stock for exercise of stock
options at $.30 per share............. -- -- -- --
Issuance of 50,000 Series B-1
convertible preferred stock warrants
in relation to building agreement..... -- -- -- --
Issuance of 200,001 Series B
convertible preferred stock warrants
in relation to bridge loan
agreement............................. -- -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- 16,666 49,998
Net loss............................... -- -- -- --
---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1998........... 1,000,000 1,000,000 4,586,815 13,704,499
Issuance of stock for exercise of stock
options at $.10 to $.30 per share..... -- -- -- --
Issuance of stock at $3 per share, net
of issuance cost of $164,074.......... -- -- -- --
Issuance of 205,002 Series C
convertible preferred stock warrants
in relation to extension of bridge
loan agreement........................ -- -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share....................... -- -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- -- --
Deferred stock compensation related to
stock option grants................... -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
Net loss............................... -- -- -- --
---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1999........... 1,000,000 1,000,000 4,586,815 13,704,499
Issuance of stock for exercise of stock
options at $.30 to $.38 per share..... -- -- -- --
Issuance of stock for services......... -- -- -- --
Issuance of stock upon exercise of
stock warrants........................ -- -- 109,159 459,558
Issuance of common stock, net of
issuance cost of $5,770,749........... -- -- -- --
Deferred stock compensation related to
stock option grants................... -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
Preferred stock conversion............. (1,000,000) (1,000,000) (4,695,974) (14,164,057)
Preferred stock warrant conversion..... -- -- -- --
Net loss............................... -- -- -- --
Unrealized gain on available-for-sale
securities............................ -- -- -- --
---------- ----------- ---------- ------------
Comprehensive loss..................... -- -- -- --
BALANCE AT DECEMBER 31, 2000........... -- $ -- -- $ --
========== =========== ========== ============

REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------
SERIES C PREFERRED
------------------------- STOCK
SHARES AMOUNT WARRANTS
---------- ------------ ---------

BALANCE AT DECEMBER 31, 1997........... -- $ -- $ 125
Issuance of stock for exercise of stock
options at $.30 per share............. -- -- --
Issuance of 50,000 Series B-1
convertible preferred stock warrants
in relation to building agreement..... -- -- 4,000
Issuance of 200,001 Series B
convertible preferred stock warrants
in relation to bridge loan
agreement............................. -- -- 242,000
Issuance of stock for legal services at
$3 per share.......................... -- -- --
Net loss............................... -- -- --
---------- ------------ ---------
BALANCE AT DECEMBER 31, 1998........... -- -- 246,125
Issuance of stock for exercise of stock
options at $.10 to $.30 per share..... -- -- --
Issuance of stock at $3 per share, net
of issuance cost of $164,074.......... 5,899,999 17,535,923 --
Issuance of 205,002 Series C
convertible preferred stock warrants
in relation to extension of bridge
loan agreement........................ -- -- 235,750
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share....................... 2,140,357 6,421,071 --
Issuance of stock for legal services at
$3 per share.......................... 16,666 49,998 --
Deferred stock compensation related to
stock option grants................... -- -- --
Amortization of deferred stock
compensation.......................... -- -- --
Net loss............................... -- -- --
---------- ------------ ---------
BALANCE AT DECEMBER 31, 1999........... 8,057,022 24,006,992 481,875
Issuance of stock for exercise of stock
options at $.30 to $.38 per share..... -- -- --
Issuance of stock for services......... -- -- --
Issuance of stock upon exercise of
stock warrants........................ 106,106 433,239 (256,162)
Issuance of common stock, net of
issuance cost of $5,770,749........... -- -- --
Deferred stock compensation related to
stock option grants................... -- -- --
Amortization of deferred stock
compensation.......................... -- -- --
Preferred stock conversion............. (8,163,128) (24,440,231) --
Preferred stock warrant conversion..... -- -- (225,713)
Net loss............................... -- -- --
Unrealized gain on available-for-sale
securities............................ -- -- --
---------- ------------ ---------
Comprehensive loss..................... -- -- --
BALANCE AT DECEMBER 31, 2000........... -- $ -- $ --
========== ============ =========

SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------

COMMON STOCK
-------------------------
SHARES AMOUNT WARRANTS
---------- ------------ --------

BALANCE AT DECEMBER 31, 1997........... 2,409,030 $ 281,347 $ --
Issuance of stock for exercise of stock
options at $.30 per share............. 1,345 404 --
Issuance of 50,000 Series B-1
convertible preferred stock warrants
in relation to building agreement..... -- -- --
Issuance of 200,001 Series B
convertible preferred stock warrants
in relation to bridge loan
agreement............................. -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- --
Net loss............................... -- -- --
---------- ------------ --------
BALANCE AT DECEMBER 31, 1998........... 2,410,375 281,751 --
Issuance of stock for exercise of stock
options at $.10 to $.30 per share..... 126,168 33,051 --
Issuance of stock at $3 per share, net
of issuance cost of $164,074.......... -- -- --
Issuance of 205,002 Series C
convertible preferred stock warrants
in relation to extension of bridge
loan agreement........................ -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share....................... -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- --
Deferred stock compensation related to
stock option grants................... -- 1,895,160 --
Amortization of deferred stock
compensation.......................... -- -- --
Net loss............................... -- -- --
---------- ------------ --------
BALANCE AT DECEMBER 31, 1999........... 2,536,543 2,209,962 --
Issuance of stock for exercise of stock
options at $.30 to $.38 per share..... 602,650 185,788 --
Issuance of stock for services......... 11,000 85,438 --
Issuance of stock upon exercise of
stock warrants........................ -- -- --
Issuance of common stock, net of
issuance cost of $5,770,749........... 6,900,000 49,429,251 --
Deferred stock compensation related to
stock option grants................... -- 12,093,928 --
Amortization of deferred stock
compensation.......................... -- -- --
Preferred stock conversion............. 13,859,102 39,604,288 --
Preferred stock warrant conversion..... -- -- 225,713
Net loss............................... -- -- --
Unrealized gain on available-for-sale
securities............................ -- -- --
---------- ------------ --------
Comprehensive loss..................... -- -- --
BALANCE AT DECEMBER 31, 2000........... 23,909,295 $103,608,655 $225,713
========== ============ ========

SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------
ACCUMULATED
DEFERRED OTHER TOTAL
STOCK ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
COMPENSATION DEFICIT INCOME EQUITY (DEFICIT)
------------ ------------ ------------- ----------------

BALANCE AT DECEMBER 31, 1997........... $ -- $(8,521,791) $ -- $ (8,240,444)
Issuance of stock for exercise of stock
options at $.30 per share............. -- -- -- 404
Issuance of 50,000 Series B-1
convertible preferred stock warrants
in relation to building agreement..... -- -- -- --
Issuance of 200,001 Series B
convertible preferred stock warrants
in relation to bridge loan
agreement............................. -- -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- -- --
Net loss............................... -- (10,733,841) -- (10,733,841)
------------ ------------ ------ ------------
BALANCE AT DECEMBER 31, 1998........... -- (19,255,632) -- (18,973,881)
Issuance of stock for exercise of stock
options at $.10 to $.30 per share..... -- -- -- 33,051
Issuance of stock at $3 per share, net
of issuance cost of $164,074.......... -- -- -- --
Issuance of 205,002 Series C
convertible preferred stock warrants
in relation to extension of bridge
loan agreement........................ -- -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share....................... -- -- -- --
Issuance of stock for legal services at
$3 per share.......................... -- -- -- --
Deferred stock compensation related to
stock option grants................... (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........... (1,809,680) (29,688,882) -- (29,288,600)
Issuance of stock for exercise of stock
options at $.30 to $.38 per share..... -- -- -- 185,788
Issuance of stock for services......... -- -- -- 85,438
Issuance of stock upon exercise of
stock warrants........................ -- -- -- --
Issuance of common stock, net of
issuance cost of $5,770,749........... -- -- -- 49,429,251
Deferred stock compensation related to
stock option grants................... (12,093,928) -- -- --
Amortization of deferred stock
compensation.......................... 7,972,728 -- -- 7,972,728
Preferred stock conversion............. -- -- -- 39,604,288
Preferred stock warrant conversion..... -- -- -- 225,713
Net loss............................... -- (13,949,522) -- (13,949,522)
Unrealized gain on available-for-sale
securities............................ -- -- 6,602 6,602
------------ ------------ ------ ------------
Comprehensive loss..................... -- -- -- (13,942,920)
------------
BALANCE AT DECEMBER 31, 2000........... $(5,930,880) $(43,638,404) $6,602 $ 54,271,686
============ ============ ====== ============

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

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ATHEROGENICS, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

OPERATING ACTIVITIES:
Net loss............................................. $(13,949,522) $(10,433,250) $(10,733,841)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 420,192 279,823 250,095
Amortization of deferred stock compensation........ 7,972,728 85,480 --
Amortization of debt discount...................... -- 235,750 242,000
Stock issued for services.......................... 85,438 49,998 49,998
Stock issued for interest.......................... -- 271,071 --
Changes in operating assets and liabilities:
Accounts receivable............................. (346,591) (791,653) --
Prepaid expenses, note receivable and other
current assets................................ (422,996) 977,544 (1,158,470)
Accounts payable................................ (174,151) (770,411) 693,404
Accrued liabilities............................. 974,897 (1,028,422) 1,554,022
Deferred revenues............................... (3,333,333) 4,444,444 --
------------ ------------ ------------
Net cash used in operating activities......... (8,773,338) (6,679,626) (9,102,792)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements.... (738,053) (1,115,085) (62,586)
Purchase of short-term investments................... (27,511,567) -- --
------------ ------------ ------------
Net cash used in investing activities...... (28,249,620) (1,115,085) (62,586)
FINANCING ACTIVITIES:
Proceeds of capital lease............................ -- -- 99,984
Payments on capital lease............................ (175,096) (198,236) (180,951)
Proceeds from the issuance of preferred stock, Series
C.................................................. -- 17,535,923 --
Proceeds from the issuance and exercise of preferred
stock warrants..................................... 636,635 -- 246,000
Proceeds from issuance of common stock............... 49,429,251 -- --
Proceeds from the exercise of common stock options... 185,788 33,051 404
Proceeds from bridge loan financing, net of
warrants........................................... -- 150,000 5,758,000
------------ ------------ ------------
Net cash provided by financing
activities............................... 50,076,578 17,520,738 5,923,437
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents..... 13,053,620 9,726,027 (3,241,941)
Cash and cash equivalents at beginning of period..... 13,409,450 3,683,423 6,925,364
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 26,463,070 $ 13,409,450 $ 3,683,423
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ $ 30,524 $ 28,317 $ 32,622
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 --

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

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ATHEROGENICS, INC.

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 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.
Such assets are maintained by high quality credit, third party financial
institution custodians. The carrying values reported in the balance sheet for
cash, cash equivalents and short-term investments approximate their fair values.

Accounts Receivable

Accounts receivable consists of accounts receivable and unbilled
receivables from Schering-Plough. As of December 31, 2000, accounts receivable
was $956,649, while unbilled receivables were $181,595. Unbilled receivables
were $791,653 as of December 31, 1999.

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.

33
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ATHEROGENICS, INC.

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 has committed to perform certain research and
development activities as part of the license agreement; accordingly, the
upfront license payment is being amortized over the anticipated time period to
conduct such activities. Revenues under research and development arrangements
are recognized as the research and development activities are performed pursuant
to the terms of the related agreements (see Note 2 "License Agreement"). These
revenues are billed quarterly and the related payments are not refundable.
Revenues that have not been invoiced are 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 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 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 (loss), 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 equal
to net loss for the years ended December 31, 1998 and 1999 and was a net loss of
$13,942,920 for the year ended December 31, 2000 as AtheroGenics reported an
unrealized gain from available-for-sale securities of $6,602.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Investments and Hedging Activities ("SFAS 133"). SFAS
133 establishes a new model for accounting for derivatives and hedging
activities and supersedes several existing standards. SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years
beginning after June 15,

34
37
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2000. AtheroGenics does not expect that the adoption of SFAS 133 will have a
material impact on its financial statements.

Reclassifications

Certain prior year balances have been reclassified to conform with the
current year presentation.

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 provides 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 is
amortizing the fee over 18 months, which is the period AtheroGenics is
conducting 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.

Schering-Plough may choose to complete the development of the licensed
product without additional help from AtheroGenics. To the extent that
AtheroGenics performs additional research and development at Schering-Plough's
request, AtheroGenics is to be paid for performing such research and
development. AtheroGenics recognized research and development revenues of
$4,826,370 and $791,653 during 2000 and 1999, respectively, in relation to such
requests.

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 was computed by dividing the
net loss by the weighted average number of shares of common stock outstanding
plus the conversion of all outstanding convertible preferred stock into common
stock, which occurred upon consummation of AtheroGenics' Initial Public
Offering, retroactive to the date of issuance.

35
38
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Basic and diluted:
Net loss................................... $(13,949,522) $(10,433,250) $(10,733,841)
============ ============ ============
Weighted average shares used in computing
basic and diluted net loss per share.... 10,747,773 2,443,237 2,409,948
============ ============ ============
Basic and diluted net loss per share....... $ (1.30) $ (4.27) $ (4.45)
============ ============ ============
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 net 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,
-------------------------------------
2000 1999 1998
---------- ----------- ----------

Convertible (at one share for one share) preferred
stock........................................... -- 13,643,837 5,586,815
Options........................................... 2,858,175 1,785,325 1,235,875
Warrants.......................................... 250,290 467,503 262,501
---------- ----------- ----------
Total................................... 3,108,465 15,896,665 7,085,191
========== =========== ==========
Weighted average exercise price of options per
share........................................... $ 1.49 $ 0.28 $ 0.26
========== =========== ==========
Weighted average exercise price of warrants per
share........................................... $ 3.40 $ 3.21 $ 3.38
========== =========== ==========

4. BRIDGE LOAN

AtheroGenics entered into a $6,000,000 bridge loan agreement on August 24,
1998 with various lenders, under which AtheroGenics had an obligation in the
form of unsecured promissory notes (some of the lenders are also shareholders of
AtheroGenics). The initial maturity date was December 31, 1998.

AtheroGenics issued the lenders warrants for 205,002 shares of Series B
Redeemable Convertible Preferred Stock. These warrants became exercisable
January 1, 1999 for $3.00 per share and expire on August 19, 2008. The warrants
have been valued at approximately $1.21 per share based on an independent
appraisal, and the principal balance of the bridge loan payable has been
discounted in an amount equal to such value. This discount was amortized as
additional interest expense over the original term of the bridge loan.

On February 24, 1999, the bridge loan was increased to $6,150,000. In
addition, as an inducement to extend the loan maturity date from December 31,
1998 to April 30, 1999, AtheroGenics issued the lenders additional warrants to
purchase 200,001 shares of Series C Redeemable Convertible Preferred Stock.
These warrants became exercisable on April 13, 1999 for $3.00 per share and
expire on December 31, 2008. The

36
39
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

warrants have been valued at approximately $1.15 per share based on an
independent appraisal, and the principal balance of the bridge loan payable was
discounted in an amount equal to such value. This discount was amortized as
additional interest expense over the extended term of the bridge loan.

Accordingly, 205,002 shares of Series B Redeemable Convertible Preferred
Stock and 200,001 shares of Series C Redeemable Convertible Preferred Stock were
reserved for issuance under these warrants at December 31, 1999. During the year
ended December 31, 2000, 217,213 of these warrants were exercised.

On April 13, 1999, the promissory notes were converted to 2,050,000 shares
of Series C Redeemable Convertible Preferred Stock. On the date of conversion,
accrued interest totaling $382,799 was paid by a combination of $111,728 in cash
and the issuance of 90,357 additional shares of Series C Redeemable Convertible
Preferred Stock based on the fair values of such shares as determined by the
most recent arms-length stock purchase transaction.

The weighted average interest rate for the bridge loan for the period from
January 1 through April 13, 1999 was 9.75%.

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Series A, Series B, Series B-1 and Series C Redeemable Convertible
Preferred Stock were convertible into common stock, at a conversion rate of
one-to-one, upon certain qualifying conditions which include the completion of
an underwritten public offering of AtheroGenics' common stock.

On August 8, 2000, AtheroGenics' Registration Statement on Form S-1 was
declared effective by the Securities and Exchange Commission. Immediately prior
to the closing of AtheroGenics' Initial Public Offering on August 14, 2000, all
of the outstanding shares of convertible preferred stock automatically converted
into 13,859,102 shares of common stock. Immediately following the automatic
conversion of preferred stock, 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.

6. STOCK OPTIONS

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, 2000,
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. Under the terms of
an equity ownership agreement, AtheroGenics may, if it chooses to do so,
repurchase a declining percentage of shares issued pursuant the exercise of
options

37
40
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

during the four-year period following the grant date if the optionee's
employment or affiliation with AtheroGenics is terminated. A summary of stock
option activity under the 1995 Plan follows:

WEIGHTED
AVERAGE
SHARES PRICE RANGE PRICE
-------- ----------- --------

Outstanding at January 1 and December 31, 1998.... 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.................. 250,000 10-.30 .14
========

The following table summarizes information concerning outstanding and
exercisable options under the 1995 Plan as of December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------

$.10..................... 200,000 4.62 $.10 200,000 $.10
.30..................... 50,000 5.61 .30 23,000 .30
------- -------
250,000 4.82 .14 223,000 .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, 2000, AtheroGenics had reserved 3,172,453 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 vest immediately for non-employees, but vest
over a four-year period for employees. Under the terms of an equity ownership
agreement, AtheroGenics may, if it chooses to do so, repurchase a declining
percentage of shares issued pursuant the exercise of options during the
four-year period following the grant date if the optionee's employment or
affiliation with AtheroGenics is terminated. Incentive stock options generally
vest over four years. The majority of the stock options granted under the 1997
Plan are incentive stock options.

38
41
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

WEIGHTED AVERAGE
SHARES PRICE RANGE PRICE
--------- ----------- ----------------

Outstanding at January 1, 1998................... 632,750 $ .30 $ .30
Granted........................................ 151,500 .30 .30
Exercised...................................... (1,345) .30 .30
Canceled....................................... (4,030) .30 .30
---------
Outstanding at December 31, 1998................. 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
=========

The following table summarizes information concerning currently outstanding
and exercisable options granted under the 1997 Plan as of December 31, 2000:

$ .30 677,675 7.68 $ .30 368,776 $ .30
.31 285,650 8.94 .31 80,100 .31
.38 1,084,500 9.08 .38 349,874 .38
5.00 - 8.25 536,650 9.77 6.13 10,000 7.70
8.63 - 9.88 23,700 9.70 9.35 -- --
--------- -------
2,608,175 8.85 1.62 808,750 .43
========= =======

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 2000 and 1999, AtheroGenics recorded amortization of deferred stock
compensation of $7,972,728 and $85,480, respectively. At December 31, 2000,
AtheroGenics had a total of approximately $5,930,880 remaining to be amortized
over the corresponding vesting period of each respective option, generally four
years. Such amortization will approximate $3,330,000 in 2001, $1,841,000 in
2002, $744,000 in 2003, and $16,000 in 2004.

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 2000,
1999 and 1998: risk-free interest rates of 6.36%, 5.75% and 4.65%, respectively;

39
42
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 included the above assumptions as well as the
estimated volatility 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 2000, 1999 and 1998 equal $1.16,
$2.54 and $.06, respectively. Pro forma net loss and net loss per share are as
follows:

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Net loss..................................... $(14,151,546) $(10,503,993) $(10,744,826)
Net loss per share (basic and diluted)....... (1.32) (4.30) (4.45)

7. 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
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, 2000. The following table
summarizes unrealized gains and losses on AtheroGenics' investments:

AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST LOSS GAIN VALUE
----------- ---------- ---------- -----------

Commercial paper......................... $17,946,593 $-- $ -- $17,946,593
Government agency notes.................. 6,541,175 -- 3,641 6,544,816
Corporate notes.......................... 3,023,799 -- 2,961 3,026,760
----------- --- ------ -----------
December 31, 2000........................ $27,511,567 $-- $6,602 $27,518,169
=========== === ====== ===========

All available-for-sale securities held at December 31, 2000 will mature
during 2001.

8. INCOME TAXES

At December 31, 2000, AtheroGenics had net operating loss carryforwards and
research and development credit carryforwards of $35,587,480 and $1,241,809,
respectively, for income tax purposes, which both begin to expire in 2010. The
significant components of the deferred tax assets are:

DECEMBER 31,
---------------------------
2000 1999
------------ ------------

Net operating loss carryforwards.......................... $ 12,763,242 $ 9,445,008
Deferred revenue.......................................... 422,222 1,688,889
Research credits.......................................... 1,241,809 1,111,891
Other..................................................... 1,090,289 --
------------ ------------
Total deferred tax assets................................. 15,517,562 12,245,788
Valuation allowance....................................... (15,517,562) (12,245,788)
------------ ------------
Net deferred tax assets................................... $ -- $ --
============ ============

40
43
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Because of AtheroGenics' lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased $3,271,774 and $4,623,335 in 2000 and 1999, respectively.

AtheroGenics' net operating loss carryforwards may be subject to certain
IRC Section 382 limitations on annual utilization in the event of changes in
ownership. These limitations could significantly reduce the amount of the net
operating loss carryforwards available in the future.

AtheroGenics has not yet completed a full analysis of IRC 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 the significant increases in value indicated by the
successive issues of preferred 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

Rent expense under operating leases amounted to $786,452, $639,934 and
$86,939 in 2000, 1999 and 1998, respectively.

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 $60,400 began March 2, 1999, the date occupancy commenced, and are
subject to increases during each successive twelve-month period based on changes
in the Consumer Price Index. 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.

As of December 31, 1998, AtheroGenics had incurred directly approximately
$1,153,000 of laboratory and office construction costs which were reimbursed to
AtheroGenics by the lessor during 1999 pursuant to the lease agreement and
included in the lessor costs covered by the operating lease. Additional lease
payments are made to the lessor of approximately $29,000 per month through March
1, 2009 related to additional expenditures made by the lessor for leasehold
improvements and equipment, all of which have estimated useful lives well in
excess of ten years.

In conjunction with the above-described lease, AtheroGenics issued the
lessor a warrant for 50,000 shares of Series B-1 Redeemable Convertible
Preferred Stock. The warrant has been valued at $.08 per share based on an
independent professional appraisal. The warrant became exercisable on January 1,
1999 for $5 per share and expires on January 1, 2009. As a result of the
automatic conversion of the Series B-1 Redeemable Convertible Preferred Stock to
common stock immediately prior to the closing of AtheroGenics' Initial Public
Offering, the warrant is now exercisable for common stock.

On March 25, 1999, AtheroGenics entered into a sublease agreement for a
portion of its new office and laboratory space with Inhibitex, Inc. and monthly
lease payments of $11,923 began March 26, 1999, and have increased to $12,224 as
of March 26, 2000. The lease term ends on December 31, 2005.

On July 31, 1999, AtheroGenics entered into a sublease agreement for a
portion of its new office space with ATV Management Corp. and monthly lease
payments of approximately $6,200 began on September 1, 1999. The lease term ends
on July 31, 2002. The chairman of the board of directors of AtheroGenics is the
president and sole shareholder of ATV Management Corp.

41
44
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2000, AtheroGenics' minimum aggregate commitments (net of
sublease income) under long-term, non-cancelable operating leases are as
follows:

GROSS SUBLEASE INCOME NET
---------- --------------- ----------

2001............................................ $1,130,949 $ 258,279 $ 872,670
2002............................................ 1,117,918 226,337 891,581
2003............................................ 1,104,512 181,617 922,895
2004............................................ 1,099,288 181,617 917,671
Thereafter...................................... 4,580,367 181,617 4,398,750
---------- ---------- ----------
$9,033,034 $1,029,467 $8,003,567
========== ========== ==========

Equipment and leasehold improvements include the following amounts for
leases that have been capitalized at December 31, 2000 and 1999:

DECEMBER 31,
-------------------
2000 1999
-------- --------

Lab equipment............................................... $972,500 $750,000
Less accumulated amortization............................... 742,205 600,000
-------- --------
$230,295 $150,000
======== ========

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, 2000:

2001........................................................ $145,328
2002........................................................ 89,947
--------
Total minimum lease payments...................... 235,275
Less amounts representing interest and warrants............. 24,609
--------
Present value of net minimum lease payments................. 210,666
Less current portion........................................ 125,759
--------
$ 84,907
========

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

10. 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 2000, AtheroGenics matched 50% of employees' contributions,
up to a maximum of 6% of the employees' annual base compensation. AtheroGenics'
contribution to the plan for 2000 and 1999 aggregated $62,093 and $37,703,
respectively.

42
45
ATHEROGENICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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

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)
Pro forma net loss per share basic and
diluted................................ (0.21) (0.18) (0.20) (0.15)

YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------

Net revenues................................ $ -- $ -- $ -- $ 1,347,209
Operating loss.............................. (2,628,092) (2,370,499) (2,957,600) (2,416,442)
Net loss.................................... (2,750,335) (2,569,057) (2,862,099) (2,251,759)
Net loss per share data:
Basic and diluted......................... (1.14) (1.06) (1.17) (0.90)
Pro forma net loss per share basic and
diluted................................ (0.34) (0.21) (0.20) (0.14)

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

43
46

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 "Proposal 1 -- Election of Directors -- Executive
Officers and Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," respectively, in our proxy statement for our 2001 annual meeting of
shareholders to be held on April 18, 2001. We are incorporating this information
by reference in this Form 10-K. The definitive proxy statement will be filed
with the Securities and Exchange Commission within 120 days after our fiscal
year end.

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 27-43)

Report of Independent Auditors

Balance Sheets as of December 31, 2000 and 1999

Statements of Operations for the years ended December 31, 2000, 1999
and 1998

Statements of Redeemable Convertible Preferred Stock and Shareholders'
Equity (Deficit) for the years ended December 31, 2000, 1999 and 1998

Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998

Notes to Financial Statements

(2) Financial Statement Schedules

No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial
statements or the notes thereto.

(3) Listing of Exhibits -- The response to this portion of Item 14 is
submitted as a separate section of this report

(b) Reports on 8-K filed in the fourth quarter of 2000:

None.

44
47

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.
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. (to be incorporated by
reference to Exhibits 3.01 and 3.02).
10.01*+ -- Exclusive License Agreements dated October 22, 1999 by and
between AtheroGenics, Inc. and each of Schering-Plough Ltd.
and Schering Corporation.
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.
10.06* -- Consulting Agreement dated May 11, 2000 between
AtheroGenics, Inc. and William Scott, Ph.D.
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 and Russell M. Medford.
10.15** -- Amendment dated January 1, 2001 to Promissory Note dated
April 1, 1999 between Inhibitex, Inc. and AtheroGenics, Inc.
23.01** -- Consent of Ernst & Young LLP.

45
48

EXHIBIT
NO. DESCRIPTION
-------- -----------

24.01** -- Powers of Attorney.

---------------

* Filed as the exhibit with the same number with AtheroGenics' Registration
Statement on Form S-1, Registration No. 333-31140, declared effective by the
Securities and Exchange Commission on August 8, 2000, and incorporated herein
by reference.
** To be filed with this Annual Report on Form 10-K.
+ 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.

46
49

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 23, 2001.

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. MEDFORD, M.D., PH.D. President and Chief Executive March 23, 2001
----------------------------------------------------- Officer, Director
Russell M. Medford, M.D., Ph.D.

PRINCIPAL FINANCIAL AND PRINCIPAL
ACCOUNTING OFFICER:

/s/ MARK P. COLONNESE Vice President of Finance and March 23, 2001
----------------------------------------------------- Administration and Chief
Mark P. Colonnese Financial Officer

ADDITIONAL DIRECTORS:

* Director March 23, 2001
-----------------------------------------------------
Michael A. Henos

* Director March 23, 2001
-----------------------------------------------------
R. Wayne Alexander

* Director March 23, 2001
-----------------------------------------------------
Vaughn D. Bryson

* Director March 23, 2001
-----------------------------------------------------
T. Forcht Dagi

* Director March 23, 2001
-----------------------------------------------------
Arda Minocherhomjee

* Director March 23, 2001
-----------------------------------------------------
Arthur M. Pappas

* Director March 23, 2001
-----------------------------------------------------
Richard S. Schneider

* Director March 23, 2001
-----------------------------------------------------
William A. Scott

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