U.S. SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

~~FORM~~Washington, ~~10-Q~~D.C. 20549

~~(Mark One)~~FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
		FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
~~FOR THE TRANSITION PERIOD FROM TO .~~		FOR THE TRANSITION PERIOD FROM TO .

Commission File Number 000-30493

Restoragen, Inc. ~~(Exact name of small business issuer as specified in its charter)~~

Delaware		47-0727668
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
3820 N.W. 46th Street, Lincoln, Nebraska		68524-1637
(Address of principal executive offices)		Zip Code
(402) 470-2100
(Issuer's Telephone Number)

(Exact name of small business issuer as specified in its charter)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Delaware		47-0727668
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3820 N.W. 46^th Street, Lincoln, Nebraska		68524-1637
(Address of principal executive offices)		Zip Code

(402) 470-2100
(Issuer’s Telephone Number)

AsCheck whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of ~~July~~the Exchange ~~22,~~Act ~~2002,~~during the past 12 months (or for such shorter period that the ~~Company~~registrant ~~had~~was ~~7,379,408~~required ~~shares~~to offile ~~Common~~such ~~Stock~~report), ~~$.01~~and ~~par~~(2) ~~value~~has ~~per~~been ~~share,~~subject to such ~~outstanding~~filing requirements for the past 90 days. YES ý NO o

~~RESTORAGEN~~As of November 12, ~~INC~~2002, the Company had 7,379,415 shares of Common Stock, $.01 par value per share, outstanding.

~~INDEX~~RESTORAGEN, INC.

PART I.		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001
		Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2002 and 2001
		Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and 2001
		Notes to Condensed Consolidated Financial Statements
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Cautionary Statement About Forward-Looking Statements
		Overview
		Results of Operations
		Liquidity and Capital Resources
		New Accounting Pronouncements
		Critical Accounting Policies
		Contractual Obligations and Commitments
		Market Risk
ITEM 3.		QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
PART II.		OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS
ITEM 2.		CHANGES IN SECURITIES
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.		OTHER INFORMATION
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

INDEX

				Page
PART I.		FINANCIAL INFORMATION

	ITEM 1.		FINANCIAL STATEMENTS
			Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	3
			Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2002 and 2001	4
			Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001	5
			Notes to Condensed Consolidated Financial Statements	6

	ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10
			Cautionary Statement About Forward-Looking Statements	10
			Overview	11
			Results of Operations	12
			Liquidity and Capital Resources	13
			New Accounting Pronouncements	14
			Critical Accounting Policies	14
			Contractual Obligations and Commitments	15
			Market Risk	15

	ITEM 3.		QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK	15

	ITEM 4.		CONTROLS AND PROCEDURES	16

PART II.		OTHER INFORMATION		16

	ITEM 1.		LEGAL PROCEEDINGS	16

	ITEM 2.		CHANGES IN SECURITIES	16

	ITEM 3.		DEFAULTS UPON SENIOR SECURITIES	17

	ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
				17
	ITEM 5.		OTHER INFORMATION	17

	ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K	17

SIGNATURES				18
CERTIFICATIONS				19

~~RESTORAGEN, INC. (a development stage company) Condensed Consolidated Balance Sheets (unaudited)~~2

	June 30, 2002			December 31, 2001
ASSETS
Current assets
Cash and cash equivalents	$	4,429,856		$	13,010,711
Short-term investments	—			1,999,314
Prepaid expenses	26,609			146,655
Property and equipment held for sale	1,200,000			—
Other current assets	20,360			41,100
Total current assets	5,676,825			15,197,780
Property and equipment, net of accumulated depreciation $6,762 and $3,798,251	21,169			5,845,068
Patents and patents licensed, net of accumulated amortization of $222,007	—			663,637
Deferred financing costs, net of accumulated amortization of $637,689 and $384,516	375,000			628,173
Other assets	73,055			76,118
Total assets	$	6,146,049		$	22,410,776
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,065,240		$	2,803,131
Accrued expenses	2,870,191			427,817
Capital lease obligations—current portion	524,957			564,362
Notes payable—current portion	722,573			696,127
Total current liabilities	5,182,961			4,491,437
Long-term liabilities:
Capital lease obligations—less current portion	386,260			649,984
Notes payable—less current portion	496,561			859,338
Convertible notes payable	18,000,000			18,000,000
Total long-term liabilities	18,882,821			19,509,322
Total liabilities	24,065,782			24,000,759
Redeemable preferred stock
Series A and A,F ($0.01 par value, 11,750 and 211,750 shares authorized, 11,750 and 20,092 issued and outstanding, at redemption value)	1,975,469			3,050,277
Shareholders’ deficit
Common stock, ($0.01 par value, 40,000,000 shares authorized, 7,379,408 shares issued and outstanding)	73,794			73,794
Convertible preferred stock, Series B,C,D,E,F,G,H ($0.01 par value; 706,500 shares authorized, 354,442 and 346,100 shares issued and outstanding, respectively)	3,544			3,461
Additional paid-in capital	81,373,481			80,281,920
Deficit accumulated during development stage	(101,346,021		)	(84,999,435		)
Total shareholders’ deficit	(19,895,202		)	(4,640,260		)
Total liabilities and shareholders’ deficit	$	6,146,049		$	22,410,776

RESTORAGEN, INC.

~~See~~(a development ~~accompanying~~stage ~~notes to condensed consolidated financial statements~~company)

3Condensed Consolidated Balance Sheets

~~RESTORAGEN, INC.~~ (~~a development stage company) Condensed Consolidated Statements of Operations (~~unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Cumulative period From April 15, 1988 (date of incorporation) to June 30, 2002
	September 30, 2002			December 31, 2001
	2002			2001			2002			2001
ASSETS
Revenues	$	200,000		$	1,175		$	200,000		$	2,493		$	3,869,163
Current assets
Operating costs and expenses:
Cash and cash equivalents	$	1,808,157		$	13,010,711
General and administrative	665,422			753,202			1,516,683			1,555,397			24,041,158
Short-term investments	—			1,999,314
Research and development	2,254,515			3,651,304			6,001,020			6,658,462			71,697,033
Prepaid expenses	295,972			146,655
Corporate restructuring costs	6,905,556			—			8,086,660			—			8,086,660
Property and equipment held for sale	1,200,000			—
Total operating costs and expenses	9,825,493			4,404,506			15,604,363			8,213,859			103,824,851
Other current assets	20,840			41,100
Operating loss	(9,625,493		)	(4,403,331		)	(15,404,363		)	(8,211,366		)	(99,955,688		)
Total current assets	3,324,969			15,197,780
Other income (expense)
Property and equipment, net of accumulated depreciation $9,408 and $3,798,251	18,522			5,845,068
Interest income	38,150			93,489			74,410			203,642			1,939,350
Patents and patents licensed, net of accumulated amortization of $222,007	—			663,637
Interest expense	(501,761		)	(198,182		)	(1,016,632		)	(403,630		)	(3,329,682		)
Deferred financing costs, net of accumulated amortization of $700,189 and $384,516	312,501			628,173
	(463,611		)	(104,693		)	(942,222		)	(199,988		)	(1,390,332		)
Other assets	73,055			76,118
NET LOSS	$	(10,089,104	)	$	(4,508,024	)	$	(16,346,586	)	$	(8,411,354	)	$	(101,346,021	)
Total assets	$	3,729,047		$	22,410,776
Preferred stock dividends accreted and accumulating but not declared	$	(810,984	)	$	(810,984	)	$	(1,621,967	)	$	(1,501,968	)	$	(14,401,088	)
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Net loss applicable to common stock	$	(10,900,088	)	$	(5,319,008	)	$	(17,968,553	)	$	(9,913,322	)	$	(115,747,109	)
Current liabilities:
Basic and diluted loss per common share	$	(1.48	)	$	(0.72	)	$	(2.43	)	$	(1.35	)	$	(27.53	)
Accounts payable	$	630,520		$	2,803,131
Average number of common shares outstanding—basic and diluted	7,379,408			7,354,929			7,379,408			7,355,974			4,205,107
Accrued expenses	127,612			427,817
Accrued restructuring charges	817,997			—
Capital lease obligations - current portion	524,428			564,362
Notes payable - current portion	685,128			696,127
Total current liabilities	2,785,685			4,491,437
Long-term liabilities:
Accrued interest - convertible notes payable	1,135,530			—
Accrued restructuring charges - less current portion	412,320			—
Capital lease obligations - less current portion	460,697			649,984
Notes payable - less current portion	498,396			859,338
Convertible notes payable	18,000,000			18,000,000
Total long-term liabilities	20,506,943			19,509,322
Total liabilities	23,292,628			24,000,759
Redeemable preferred stock
Series A and A,F ($0.01 par value, 11,750 and 211,750 shares authorized, 11,750 and 20,092 issued and outstanding, at redemption value)	1,997,500			3,050,277
Shareholders’ deficit
Common stock, ($0.01 par value, 40,000,000 shares authorized, 7,379,415 and 7,379,408 shares issued and outstanding)	73,794			73,794
Convertible preferred stock, Series B,C,D,E,F,G,H ($0.01 par value; 706,500 shares authorized, 354,442 and 346,100 shares issued and outstanding, respectively)	3,544			3,461
Additional paid-in capital	81,359,914			80,281,920
Deficit accumulated during development stage	(102,998,333		)	(84,999,435		)
Total shareholders’ deficit	(21,561,081		)	(4,640,260		)
Total liabilities and shareholders’ deficit	$	3,729,047		$	22,410,776

See accompanying notes to condensed consolidated financial statements

RESTORAGEN, INC. ~~(a development stage company) Condensed Consolidated Statements of Cash Flows (unaudited)~~

	Six Months Ended June 30,						Cumulative period from April 15, 1988 (date of incorporation)
	2002			2001			to June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,346,586	)	$	(8,411,354	)	$	(101,346,021	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization	389,313			379,608			4,649,393
Restructuring charges	4,995,777			—			4,995,777
Amortization of deferred financing costs	253,173			128,172			1,137,689
Acquired in process research and development	—			—			1,200,000
Stock-based compensation expense	16,836			174,174			6,254,588
Changes in operating assets and liabilities:
Accounts receivable and other current assets	122,215			(30,621		)	(565,538		)
Accounts payable and accrued expenses	704,483			(49,491		)	4,891,808
Net cash flows from operating activities	(9,864,789		)	(7,809,512		)	(78,782,304		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(78,983		)	(721,233		)	(9,723,150		)
(Increase) / decrease in deposits and other assets	3,063			(5,000		)	(304,734		)
Increase in patents	—			(51,678		)	(892,938		)
Acquisition of R&C, Inc. and GRFCo	—			—			(1,200,000		)
Net cash flows from investing activities	(75,920		)	(777,911		)	(12,120,822		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock	—			214,263			39,710,261
Net proceeds from issuance of preferred stock	—			7,360,000			34,591,371
Proceeds from long-term obligations	—			71,841			23,125,426
Payments on notes payable and capital leases	(639,460		)	(611,971		)	(3,495,076		)
Proceeds from bridge notes payable	—			—			3,765,500
Payments on bridge notes payable	—			—			(2,364,500		)
Net cash flows from financing activities	(639,460		)	7,034,133			95,332,982
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(10,580,169		)	(1,553,290		)	4,429,856
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	15,010,025			9,492,135			—
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,429,856		$	7,938,845		$	4,429,856
Supplemental Disclosures of Investing Financing Activities:
Interest paid	$	190,959		$	275,458		$	1,840,921

(a development stage company)

~~See~~Condensed ~~accompanying~~Consolidated Statements ~~notes~~of ~~to condensed consolidated financial statements~~Operations

5(unaudited)

Restoragen, Inc. Notes to Condensed Consolidated Financial Statements June 30, 2002 and 2001 (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Cumulative period From April 15, 1988 (date of incorporation) to September 30, 2002
	2002			2001			2002			2001

Revenues	$	670,480		$	4,503		$	870,480		$	6,996		$	4,539,643

Operating costs and expenses:
General and administrative	441,778			928,254			1,958,461			2,483,651			24,482,936
Research and development	1,239,695			4,625,789			7,240,715			11,284,251			72,936,728
Corporate restructuring costs	248,721			—			8,335,381			—			8,335,381

Total operating costs and expenses	1,930,194			5,554,043			17,534,557			13,767,902			105,755,045

Operating loss	(1,259,714		)	(5,549,540		)	(16,664,077		)	(13,760,906		)	(101,215,402		)

Other income (expense)
Interest income	10,525			50,593			84,934			254,235			1,949,874
Interest expense	(403,124		)	(211,165		)	(1,419,756		)	(614,794		)	(3,732,806		)
	(392,599)			(160,572		)	(1,334,822		)	(360,559		)	(1,782,932		)

NET LOSS	$	(1,652,313	)	$	(5,710,112	)	$	(17,998,899	)	$	(14,121,465	)	$	(102,998,334	)

Preferred stock dividends accreted and accumulating but not declared	$	(810,984	)	$	(810,984	)	$	(2,432,951	)	$	(2,312,952	)	$	(15,212,072	)

Net loss applicable to common stock	$	(2,463,297	)	$	(6,521,096	)	$	(20,431,850	)	$	(16,434,417	)	$	(118,210,406	)

Basic and diluted loss per common share	$	(0.33	)	$	(0.88	)	$	(2.77	)	$	(2.23	)	$	(27.75	)

Average number of common shares outstanding - basic and diluted	7,379,413			7,373,357			7,379,410			7,361,768			4,259,836

~~(1) Summary~~See ofaccompanying notes ~~Significant~~to ~~Accounting~~condensed ~~Policies~~consolidated financial statements

Basis of Presentation — The condensed consolidated balance sheet as of June 30, 2002, the condensed consolidated statements of operations for the three and six month periods ended June 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2002 and 2001 have been prepared by the Company without audit in accordance with accounting principles generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary to present fairly the financial position at June 30, 2002, and results of operations and cash flows for the periods presented have been included. Results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal year, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements for the year ended December 31, 2001, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.4

~~In July 2001~~RESTORAGEN, ~~the FASB~~ ~~issued Statement of Financial Accounting Standards No~~INC. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. There was no impact to the Company’s financial statements as a result of adopting this standard.

In(a ~~June~~development ~~2001, the~~stage Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect its adoption of this standard to have a significant impact on the consolidated financial statements.company)

InCondensed ~~August 2001,~~Consolidated ~~the~~Statements ~~Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal~~ of ~~Long-Lived~~Cash Assets” which was effective January 1, 2002. This standard addresses financial accounting and reporting for the impairment or disposal of certain long-lived assets. There was no impact to the Company’s financial statements as a result of adopting this standard. Flows

6(unaudited)

Property and equipment held for sale — Property and equipment held for sale is carried at the lower of carrying amount or estimated net realizable value.

	Nine Months Ended September 30,						Cumulative period From April 15, 1988 (date of incorporation) to September 30, 2002
	2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(17,998,899	)	$	(14,121,465	)	$	(102,998,334	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization	391,959			581,143			4,652,039
Restructuring charges	5,225,929			—			5,225,929
Amortization of deferred financing costs	315,673			192,259			700,189
Acquired in process research and development	—			—			1,200,000
Stock-based compensation expense	25,255			261,261			6,263,006
Changes in operating assets and liabilities:
Accounts receivable and other current assets	(129,059		)	(43,745		)	(316,812		)
Accounts payable and accrued expenses	(106,969		)	253,120			3,123,979

Net cash flows from operating activities	(12,276,111		)	(12,877,427		)	(82,150,004		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(78,983		)	(830,860		)	(9,954,828		)
Purchase of Short term investments	—			—			(1,999,314		)
Maturity of short term investments	1,999,314			—			1,999,314
(Increase) / decrease in deposits and other assets	3,063			(45,118		)	(73,056		)
Increase in patents	—			(51,678		)	(892,938		)
Acquisition of R&C, Inc. and GRFCo	—			—			(1,200,000		)

Net cash flows from investing activities	1,923,394			(927,656		)	(12,120,822		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock	46			346,941			40,666,684
Net proceeds from issuance of preferred stock	—			7,360,000			34,591,371
Proceeds from long-term obligations	—			185,994			23,125,426
Payments on notes payable and capital leases	(849,882		)	(910,291		)	(3,705,498		)
Proceeds from bridge notes payable	—			—			3,765,500
Payments on bridge notes payable	—			—			(2,364,500		)

Net cash flows from financing activities	(849,837		)	6,982,644			96,078,983

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(11,202,554		)	(6,822,439		)	1,808,157

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	13,010,711			9,492,135			—

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,808,157		$	2,669,696		$	1,808,157

Supplemental Disclosures of Investing Financing Activities:

Interest paid	$	245,334		$	422,536

~~Shareholders~~See ~~Equity — In connection with the issuance of the convertible~~accompanying notes ~~in December 2001, the Company issued 999,997 warrants~~ to ~~purchase~~condensed ~~common stock~~consolidated offinancial the Company at a per share warrant exercise price equal to the lower of $9.00 or the lowest per common equivalent share price at which the Company sells equity after the date of the warrants. Each lender initially received warrants to purchase a number of shares of common stock equal to 50% of the amount of notes held divided by the warrant exercise price. Commencing with the 90th day after the initial date of issuance of the warrants, the number of shares of common stock into which the warrants are exercisable increases by an additional 10% of the notes held divided by the warrant exercise price for each 30-day period in which the notes continue to remain outstanding and not converted, up to 100% of the outstanding notes divided by the warrant exercise price. Pursuant to this provision, the number of shares of the Company’s common stock issuable under the warrants increased by 200,000 shares in each month of March, April, May and June 2002. As of June 30, 2002, the warrants issued in connection with the convertible notes in December 2001 entitle the holders to purchase 1799,997 shares of common stock.statements

Holder redemption rights on Series F Preferred Stock expired on March 31, 2002. In connection with the expiration of these rights, the Series F Preferred Stock has been reclassified to shareholders’ equity as of March 31, 2002.5

~~Going Concern Considerations — The Company~~Restoragen, ~~from inception, has experienced losses from its activities in research and development and has had minimal revenues~~Inc. This and the fact that the Company is a development stage business create a substantial doubt as to its ability to continue as a going concern. The Independent Auditors’ Report accompanying the Company’s audited financial statements for the year ended December 31, 2001 contained a going concern opinion.

~~The~~Notes ~~Company’s ability~~ to ~~achieve~~ ~~profitability~~Condensed onConsolidated ~~substantial~~Financial portions of its operations will also depend in large part on: obtaining additional financing through equity or debt issues or development collaborations, as necessary; obtaining regulatory approvals of its products and entering into satisfactory agreements for product commercialization.Statements

~~The~~September ~~financial~~30, ~~statements~~2002 ~~do not include any adjustments relating to the recoverability~~ and ~~classification~~ ~~of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.~~ 2001

7(unaudited)

(21) ~~Corporate~~Summary ~~Restructuring~~of Significant Accounting Policies

OnBasis ~~February~~of 21Presentation - The condensed consolidated balance sheet as of September 30, 2002, the condensed ~~Company~~consolidated ~~announced~~statements aof ~~consolidation~~operations offor ~~facilities~~the three and ~~reduction~~nine inmonth ~~workforce from~~periods ~~121~~ended ~~employees~~September to30, 602002 ~~employees. On~~and ~~May~~2001 and the condensed consolidated statements of 22cash flows for the nine month periods ended September 30, 2002, ~~the~~and ~~Company~~2001 ~~announced~~have been aprepared ~~revised~~by ~~corporate~~the ~~strategy~~Company ~~that~~without ~~will~~audit ~~result~~in accordance with accounting principles generally accepted in the ~~Company~~United ~~ceasing~~States ~~its~~of ~~non-strategic~~America. Accordingly, ~~recombinant~~they ~~peptide~~do ~~production~~not include all of the ~~operations~~information and ~~closing~~footnotes ~~its~~required ~~peptide~~by ~~production~~accounting ~~facilities~~principles generally accepted in the United States of America. In Itthe opinion isof ~~anticipated~~management, all adjustments (all of which are normal and recurring ~~that~~in ~~third~~nature) ~~party~~considered ~~contract~~necessary ~~manufacturers~~to ~~will~~present ~~source~~fairly ~~all~~the ~~future~~financial ~~production~~position at ~~requirements. The~~September ~~May~~30, 2002, and results of operations and cash flows for the periods ~~announcement~~presented ~~has~~have ~~resulted~~been inincluded. Results of operations for the ~~reduction~~interim periods are not necessarily indicative of the results ~~workforce~~that bymay anbe ~~additional~~expected 55for the full fiscal year, or any other ~~employees~~period. These Afinancial ~~small~~statements ~~number~~and notes ofshould ~~these~~be ~~employees~~read ~~have~~in ~~been~~conjunction ~~retained~~with tothe ~~complete~~audited financial statements for ~~transition~~the ~~activities. Going~~year ~~forward~~ended December 31, 2001, included in the Company’s isForm ~~being~~10-K ~~operated~~filed with bythe ~~four~~Securities ~~full-time~~and ~~employees~~Exchange Commission.

~~The~~In ~~following~~July is2001, athe ~~summary~~FASB issued Statement of ~~restructuring~~Financial ~~charges~~Accounting ~~related~~Standards toNo. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which was effective January 1, 2002. SFAS 142 requires, among other things, the ~~staff~~discontinuance ~~reduction~~of goodwill amortization. In addition, ~~consolidation~~the standard includes provisions for the reclassification of ~~facilities~~certain ~~and~~existing ~~discontinuance~~recognized intangibles as goodwill, reassessment of ~~peptide~~the ~~production~~useful ~~resulting~~lives ~~from~~of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential ~~revised~~future ~~corporate~~impairments ~~strategy~~of goodwill. There was no impact to the Company’s financial statements as a result of adopting this standard.

	Quarter ended March 31, 2002		Quarter ended June 30, 2002		Six months June 30, 2002
Employee compensation & benefits:
Severance pay & benefits	$	923,249	$	1,222,879	$	2,146,128
Occupancy & equipment costs:
Non-cancelable lease costs, net of Estimated sublease income	$	115,350	$	626,217	$	741,567
Loss on impairment and abandonment of property and Equipment	$	142,505	$	4,192,771	$	4,335,276
Write down of patents	—		$	641,932	$	641,932
Other	—		$	221,757	$	221,757
Total corporate restructuring Charges	$	1,181,104	$	6,905,556	$	8,086,660

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect its adoption of this standard to have an impact on the consolidated financial statements.

~~The~~In ~~Company~~August ~~expects~~2001, the ~~majority~~Financial ofAccounting ~~employee compensation~~Standards ~~costs~~Board ~~associated~~issued ~~with the restructuring to be paid during 2002.~~SFAS ~~The~~No. ~~Company~~144, ~~expects~~“Accounting tofor ~~pay~~the ~~liabilities~~Impairment ~~established~~or ~~relating~~Disposal toof ~~non~~Long-~~cancelable~~Lived Assets” which ~~leases~~was ~~over~~effective ~~the~~January ~~respective lease periods~~1, ~~through fiscal 2005~~2002. ~~Absent the~~ This ~~ability~~standard toaddresses ~~sell~~financial ~~the~~accounting ~~production~~and ~~facilities~~reporting asfor ~~a going concern,~~ the ~~Company~~impairment ~~will~~or ~~seek~~disposal toof ~~sell~~certain ~~the~~long-lived ~~peptide production~~ assets. ~~The~~There ~~Company~~was ~~has~~no ~~written~~impact ~~down~~to the ~~value~~ ofCompany’s ~~the production equipment to reflect anticipated net proceeds from sale~~financial ~~and~~statements ~~has~~as ~~written~~a ~~down~~result toof ~~zero~~adopting ~~the~~this ~~building and~~standard.

8In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. This standard requires the Company to recognize a liability for a cost associated with an exit or disposal activity when the liability is

leasehold improvements. The majority of the patents issued to the Company have historically been in respect of production processes or for medical applications which are no longer being pursued by the Company in its revised strategy. The Company has written down to zero all previously capitalized patent expenses. 6

~~The~~incurred ~~following~~rather isthan arecognition ~~summary~~of the liability at the date of ~~activity~~a ~~relating~~commitment to ~~the~~an ~~restructuring~~exit ~~charges~~plan ~~during~~and ~~2002:~~is effective for exit or disposal activities that are initiated after December 31, 2002.

	Restructuring Charges		Cash Payments		Non-cash Charges(1)		June 30, 2002 Balance
Employee compensation & benefits	$	2,146,128	$	1,139,352	—		$	1,006,776
Occupancy & equipment costs	$	5,076,843	$	40,853	$	4,335,276	$	700,714
Patents	$	641,932	—		$	641,932	—
Other	$	221,757	43,734		$	18,569	$	159,454
Total	$	8,086,660	$	1,223,939	$	4,995,777	$	1,866,944

Property and equipment held for sale – Property and equipment held for sale is carried at the lower of carrying amount or estimated net realizable value.

~~(1)~~Shareholders Equity ~~Non~~-~~cash~~ ~~charges~~In ~~consist~~connection with the issuance of ~~impairment~~the convertible notes in December 2001, the Company issued 999,997 warrants to purchase common stock of the Company at a per share warrant exercise price equal to the lower of $9.00 or the lowest per common equivalent share price at which the Company sells equity after the date of the warrants. Each lender initially received warrants to purchase a number of shares of common stock equal to 50% of the amount of notes held divided by the warrant exercise price. Commencing with the 90th day after the initial date of issuance of the warrants, the number of shares of common stock into which the warrants are exercisable increases by an additional 10% of the notes held divided by the warrant exercise price for each 30-day period in which the notes continue to remain outstanding and ~~abandonment~~not ~~charges~~converted, up to 100% of the outstanding notes divided by the warrant exercise price. Pursuant to this provision, the number of shares of the Company’s common stock issuable under the warrants increased by 200,000 shares in each month of March, April, May, June and July 2002. As of September 30, 2002, the warrants issued in connection with the convertible notes in December 2001 entitle the holders to purchase 1,999,998 shares of common stock.

~~The~~Holder ~~June~~redemption 30rights on Series F Preferred Stock expired on March 31, 2002. In ~~restructuring~~connection ~~liability~~with the ~~balance~~expiration isof ~~included~~these inrights, ~~accrued~~the ~~expenses~~Series inF ~~the~~Preferred ~~consolidated~~Stock ~~condensed~~has ~~balance~~been reclassified ~~sheet~~to shareholders’ equity as of March 31, 2002.

~~Item~~Going 2Concern Considerations - The Company, from inception, has experienced losses from its activities in research and development and has had minimal revenues. ~~MANAGEMENT~~ This and the fact that the Company is a development stage business create a substantial doubt as to its ability to continue as a going concern. The Independent Auditors’S Report accompanying the ~~DISCUSSION~~Company’s ~~AND~~audited ~~ANALYSIS~~financial OFstatements ~~FINANCIAL~~for ~~CONDITION~~the ~~AND~~year ~~RESULTS~~ended OFDecember ~~OPERATIONS~~31, 2001 contained a going concern opinion.

~~Following~~The ~~is a discussion and analysis of the~~ Company’s ~~consolidated condensed financial~~ ~~condition~~ability ~~and~~to ~~results~~continue ofas ~~operations~~a ~~for~~going ~~the~~concern ~~three~~in ~~and~~the ~~six~~short ~~months~~term ~~ended~~will ~~June~~depend ~~30,~~on ~~2002~~obtaining ~~and~~additional ~~2001. The~~working ~~section~~capital ~~should~~to ~~be read~~finance inoperations ~~conjunction~~beyond ~~with~~2002. ~~the~~ The Company’s ~~audited~~ability ~~financial~~to ~~statements~~achieve ~~for~~profitability in the ~~year~~ ~~ended~~long ~~December~~term ~~31,~~will depend ~~2001,~~in ~~and~~large ~~Management’s~~part ~~Discussion~~on: ~~and Analysis of~~obtaining ~~Financial~~additional ~~Condition~~financing ~~and~~through ~~Results~~equity ofor ~~Operations~~debt ~~contained~~issues inor ~~the~~development ~~Company’s Form~~collaborations, ~~10-K~~as ~~for~~necessary; ~~the~~obtaining ~~year~~regulatory ~~ended~~approvals ~~December~~of ~~31,~~its ~~2001,~~products asand ~~filed~~entering ~~with~~into satisfactory ~~the~~agreements ~~Securities~~for ~~and Exchange~~product ~~Commission~~commercialization.

~~Cautionary~~The ~~Statement~~financial statements ~~About~~do ~~Forward-Looking~~not include any adjustments relating to the recoverability and ~~Statements~~classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

~~This~~(2) Corporate Form 10-Q contains, in addition to historical information, forward-looking statements that are based on the Company’s current expectations, beliefs, intentions or future strategies. Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “plan,” “seek” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statement was made. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including the dependence of the Company on obtaining future financing and its ability to continue operations, uncertainties involved in the additional development of the Company’s new pharmaceutical products, including securing strategic partners to fund further development, the outcomes of clinical trials, obtaining regulatory approvals or clearances, the ability of the Company’s products to be manufactured in commercial quantities, availability of commercial production capacity, the development of partnerships for distribution and marketing, protection of the Company’s patent and proprietary rights, avoiding infringement of competitor’s proprietary rights, potential competition and the extent to which reimbursement for the costs of the products and treatments will be available from government health administration authorities, private health insurers and other organizations. These risks are further described in the Company’s Form 10-K for the year ended December 31, 2001 under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Additional Factors That May Affect Future Performance”. The Company does not undertake responsibility to update such forward-looking statements to reflect events that arise after the date of this report.Restructuring

~~Overview~~On February 21, 2002, the Company announced a consolidation of facilities and reduction in workforce from 121 employees to 60 employees. On May 22, 2002, the Company announced a revised corporate strategy that resulted in the Company ceasing its non-strategic recombinant peptide production operations and closing its peptide production facilities. It is anticipated that third party contract manufacturers will source all future production requirements. The May 2002 announcement has resulted in the reduction of the workforce by an additional 55 employees. A small number of these employees have been retained to complete transition activities. The Company is currently being operated by four full-time employees.

~~Restoragen,~~The ~~Inc.~~following is a ~~development~~summary ~~stage biotechnology company focused on the development~~ of ~~peptide~~restructuring ~~therapeutics.~~charges ~~The~~related ~~Company’s principal pharmaceutical product currently under development is recombinant human GLP-1 (rGLP-1). GLP-1 is believed~~ to ~~be an important insulinotropic peptide that~~the ~~regulates~~staff ~~metabolism and has been shown to reduce high blood glucose levels and to improve insulin secretion and action in type II diabetics. Since 1997~~reduction, ~~the Company~~consolidation ~~has focused its drug development efforts on rGLP-1 for the treatment~~ of ~~type~~ IIfacilities ~~diabetes~~ and isdiscontinuance ~~currently~~of ~~completing phase 2 (b) clinical trials for~~peptide ~~type~~production IIresulting ~~diabetes~~from ~~patients~~the ~~who~~revised ~~are~~corporate ~~failing oral therapy~~strategy.

As a result of its research in type II diabetes, the Company believes that GLP-1 has the potential to decrease insulin resistance. While virtually all type II diabetic patients have insulin resistance, most people who have insulin resistance do not develop diabetes. They do, however, frequently present with other serious disorders. In particular, it appears that insulin resistance is a major risk factor for most serious and common cardiovascular diseases. Restoragen has filed patent applications for uses of rGLP-1 and its analogs in various cardiovascular diseases. In May 2002

	Quarter ended March 31, 2002		Quarter ended June 30, 2002		Quarter ended Sept 30, 2002		Nine months Sept 30, 2002
Employee compensation & benefits:
Severance pay & benefits	$	923,249	$	1,222,879	—		$	2,146,128
Occupancy & equipment costs:
Non-cancelable lease costs, net of Estimated sublease income	$	115,350	$	626,217	—		$	741,567
Loss on impairment and abandonment of property and equipment	$	142,505	$	4,192,771	—		$	4,335,276
Write down of patents	—		$	641,932	—		$	641,932
Other	—		$	221,757	$	248,721	$	470,478
Total corporate restructuring Charges	$	1,181,104	$	6,905,556	$	248,721	$	8,335,381

108

~~the~~In ~~Company~~September ~~announced~~2002, ~~its~~the ~~revised~~Company ~~corporate~~ceased ~~strategy~~paying remaining employee severance obligations to ~~focus~~employees onno longer providing services to the Company, ~~clinical~~until ~~development~~further ofnotice. ~~rGLP-1~~As indicated below, severance obligations in ~~cardiovascular~~the amount ~~disease~~of $442,692 remain to be paid. The liability established relating to ~~indications~~non-cancelable facility leases covers the period through May 2005. The Company’s has ~~strategy~~negotiated isan arrangement with the property owner for the period September through December 2002, to ~~establish~~pay ~~partnerships~~only 25% of the facility lease obligations owed and defer remaining obligations. Further discussions with the landlord will be ~~market~~required ~~leading~~before ~~pharmaceutical~~year-end ~~companies~~regarding lease arrangements and ~~medical~~payments ~~device~~after December ~~companies~~2002. The Company has actively sought to ~~develop~~license or sell the production technology and ~~commercialize~~facilities ~~rGLP-1~~associated ~~for~~with ~~certain~~its ~~niche~~peptide ~~cardiovascular~~production. ~~diseases~~To date inno ~~which~~targeted party has been willing to pursue this opportunity. The Company has begun the process of closing ~~insulin~~down ~~resistance~~the production facilities and is anseeking ~~underlying~~to ~~factor.~~sell all production equipment. The Company ~~anticipates~~has ~~that~~written down the value of the production equipment to reflect ~~development~~anticipated ofnet ~~rGLP-1~~proceeds ~~for~~from sale and has written down to zero the ~~management~~building and leasehold improvements. The majority of ~~severe~~the ~~heart~~patents ~~failure~~issued to the Company have historically been in ~~patients~~respect of production processes or for medical ~~who~~applications which are ~~transplant~~no ~~ineligible~~longer ~~will~~being ~~begin~~pursued ~~with~~by athe ~~phase~~Company 2in ~~(a)~~its ~~proof~~revised strategy. ofTherefore, ~~concept~~the Company has written down to zero all previously ~~study~~capitalized inpatent ~~the~~expenses. In September 2002, an additional restructuring charge of $248,721 was recorded to recognize additional obligations to certain third ~~quarter~~party equipment lessors based on agreements to suspend lease payments for a limited period and proceed with the sale of ~~2002~~leased assets.

The ~~Company~~following ~~also~~is ~~intends to establish partnerships with market leading~~a ~~pharmaceutical~~summary ~~and~~of ~~drug~~activity ~~delivery~~relating ~~companies~~ to ~~develop~~the ~~and~~restructuring ~~commercialize sustained~~charges ~~release~~during ~~formulations of rGLP-1 for type II diabetes and other metabolic diseases and cardiovascular disorders in which insulin resistance is an underlying factor.~~2002:

As a result of the refocused strategy, the Company ceased its non-strategic recombinant peptide production operations. The Company has actively sought to license or sell the production technology and facilities associated with its peptide production. Despite its best efforts, the Company has been unable to identify a buyer for the production technology or facilities. The Company has begun the process of closing down the production facilities and will seek to sell all production equipment.

	Restructuring Charges		Cash Payments		Non-cash Charges(1)		Sept 30, 2002 Balance
Employee compensation & benefits	$	2,146,128	$	1,703,436	—		$	442,692

Occupancy & equipment costs	$	5,076,843	$	102,834	$	4,335,276	$	638,733

Patents	$	641,932	—		$	641,932	—

Other	$	470,478	$	54,296	$	267,290	$	148,892

Total	$	8,335,381	$	1,860,566	$	5,244,498	$	1,230,317

~~Since~~(1) ~~inception, the Company has financed its~~Non-cash ~~operations~~charges ~~through~~include ~~the~~impairment ~~sale of equity securities~~ and ~~issuance~~abandonment of debt. From May through September 2001, the Company undertook a private placement of preferred stock through a national investment banking firm with the goal of raising approximately $30 million to fund operations. Despite significant efforts, including road shows and individual investor meetings throughout the United States and Europe, the Company was not successful in placing those securities.charges

In December 2001, Restoragen entered into a bridge loan agreement with several current shareholders and their affiliates, including Medtronic, Inc., Rocky Mountain Associates, S.A. and Equity Four Life (Bahamas) Ltd. Restoragen received loans in an aggregate principal amount of $18 million, which bear interest at prime plus three percent per annum. The loans are due and payable in December 2003. The loans are secured by a first priority security interest in the Company’s intellectual property and all proceeds from licensing of the intellectual property.9

~~The~~Item ~~Company is continuing efforts to raise additional working capital to fund operations, and is holding discussions with existing note holders~~2. ~~If the Company is unable to raise additional working~~ MANAGEMENT’S ~~capital,~~DISCUSSION ~~its~~AND ~~ability~~ANALYSIS toOF ~~meet~~FINANCIAL ~~obligations~~CONDITION inAND ~~the~~RESULTS ~~ordinary~~OF ~~course will be impaired.~~OPERATIONS

Following is a discussion and analysis of the Company’s consolidated condensed financial condition and results of operations for the three and nine months ended September 30, 2002 and 2001. The section should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission.

~~The Company recorded revenues of $0.2 million in the second quarter of~~Cautionary ~~2002.~~Statement ~~The~~About ~~revenues~~Forward-Looking ~~related to third party proof of concept production arrangements.~~Statements

~~Research~~This Form 10-Q contains, in addition to historical information, forward-looking statements that are based on the Company’s current expectations, beliefs, intentions or future strategies. These forward looking statements involve known and ~~development~~unknown ~~expenses~~risks, ~~include~~uncertainties ~~those~~and ~~costs~~other ~~associated~~factors that ~~with~~may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “plan,” “seek” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the ~~research~~date the statement was made. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including the dependence of the Company on obtaining future financing and its ability to continue operations, uncertainties involved in the additional development of the Company’s new pharmaceutical products, including securing strategic partners to fund further development, the outcomes of clinical trials, obtaining regulatory approvals or clearances, the ability of the Company’s products to be manufactured in commercial quantities, availability of commercial production capacity, the development of partnerships for distribution and ~~testing~~marketing, protection of ~~our~~the ~~pharmaceutical~~Company’s patent and ~~products~~proprietary rights, ~~including~~avoiding ~~all~~infringement ~~direct~~of competitor’s proprietary rights, potential competition and the extent to which reimbursement for the costs of the products and treatments will be available from government health administration authorities, private health insurers and other organizations. These risks are further described in the Company’s Form 10-K for the year ended December 31, 2001 under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Additional Factors That May Affect Future Performance.” The Company does not undertake responsibility to update such forward-looking statements to reflect events that arise after the date of this report.

1110

incurred in conducting our clinical trials and all costs related to the protection of proprietary rights. These costs have aggregated $71.7 million since our inception. Research and development costs were $2.3 million and $6.0 million for the three and six month periods ended June 30, 2002, as compared to $3.7 million and $6.7 million for the same periods in the prior fiscal year. Research and development activities have been scaled back significantly following the corporate restructuring initiatives announced in February and May of this year. General and administrative expenses were $0.7 million and $1.5 million for the three and six-month periods ended June 30, 2002, as compared to $0.8 million and $1.6 million for the same periods in 2001. Administrative costs have also decreased as a result of the restructuring initiatives.Overview

InThe ~~February~~Company ~~2002,~~is ~~Restoragen~~a development ~~announced~~stage abiotechnology ~~restructuring~~company ~~and~~that ais ~~reduction~~seeking to commercialize ofrecombinant ~~total~~human ~~workforce~~GLP-1 ~~from~~(rGLP-1) ~~121~~for tocertain 60niche ~~employees~~cardiovascular indications. GLP-1 Inis ~~May~~believed ~~2002,~~to ~~the~~be ~~Company announced~~an ainsulinotropic ~~revised~~peptide ~~corporate~~involved ~~strategy~~in ~~that~~the ~~would~~regulation ~~result~~of inmetabolism. Prior to May 2002, the Company ~~ceasing~~had ~~its~~pursued ~~non~~applications for rGLP-~~strategic~~1 ~~recombinant~~in ~~peptide~~the ~~production~~treatment ~~operations~~of ~~and~~type ~~closing~~II ~~its~~diabetes. Because ~~peptide~~of potential patent obstacles, the ~~production~~short ~~facilities.~~duration ~~The~~of ~~May~~action ~~2002~~of ~~announcement~~a ~~has~~first ~~resulted~~generation inproduct ~~the~~(requiring ~~reduction~~continuous ofsubcutaneous ~~the~~infusion), ~~workforce~~and byother anstrategic ~~additional~~issues, 55the ~~employees.~~Company Ain ~~small~~the ~~number of these~~first ~~employees~~half ~~have~~of ~~been~~2002 ~~retained~~terminated toits ~~complete~~efforts ~~transition~~directed ~~activities.~~at ~~Going forward,~~ the ~~Company~~treatment isof ~~being~~diabetes ~~operated~~and commercial byscale ~~four~~manufacture ~~full~~of ~~time employees~~rGLP-1.

InAs ~~connection~~a ~~with~~result ~~the~~of ~~restructuring,~~its ~~the~~research ~~Company~~in ~~recorded~~type II diabetes, the ~~restructuring~~Company ~~costs~~has ofpostulated ~~approximately~~that $rGLP-1.2 ~~million~~may ~~during~~have the ~~first~~potential ~~quarter~~to ofdecrease insulin ~~2002~~resistance. It ~~and~~appears ~~$6.9~~that ~~million~~insulin resistance ~~during~~is ~~the~~a ~~second~~major ~~quarter~~risk offactor ~~2002. The~~for ~~second~~many ~~quarter~~serious ~~charge~~and ~~included~~common acardiovascular ~~non-cash~~diseases. The ~~charge~~Company’s ofintention ~~$4.9~~is ~~million~~to establish ~~related~~a topartnership ~~the~~with ~~write~~a ~~down~~large ofpharmaceutical ~~tangible~~company to develop and to ~~intangible~~attempt ~~assets.~~to ~~The~~commercialize ~~Company~~rGLP-1 ~~has~~for ~~written~~these ~~down~~indications. The ~~production~~Company ~~equipment~~has tofiled ~~reflect~~patent applications ~~anticipated~~for ~~net~~uses ~~proceeds~~of ~~from~~rGLP-1 ~~sale~~ and ~~has~~its ~~written~~analogs ~~down~~for totreatment ~~zero~~of ~~the~~various ~~building~~cardiovascular ~~and~~diseases. In ~~leasehold~~September ~~improvements.~~2002 ~~The~~patient enrollment ~~majority~~began for a phase 2(a) proof of ~~the~~concept ~~patents~~study ~~issued~~as to the ~~Company~~use of ~~have~~rGLP-1 ~~historically~~for ~~been~~the inmanagement ~~respect~~ of ~~production~~severe ~~processes~~heart orfailure ~~for~~in ~~medical applications which~~patents who are ~~no longer being~~ineligible ~~pursued~~for byheart ~~the~~transplant. ~~Company~~The inresults ~~its~~from ~~revised~~this ~~strategy.~~concept Itstudy isare ~~anticipated~~expected ~~that~~by the ~~Company’s~~end ~~ongoing~~of ~~net cash outflow for~~ the ~~second~~first ~~half~~quarter of ~~the~~2003, ~~year~~assuming ~~will~~no ~~be approximately~~unforeseen $1delays.~~1 million per month.~~

~~Interest~~In ~~income~~order ~~decreased~~ to ~~$0.04~~conserve ~~million~~limited cash and ~~$0.07~~focus ~~million~~on possible cardiovascular indications for rGLP-1, the Company has ceased its ~~three~~research and ~~six~~development ~~month~~efforts ~~periods~~that ~~ended~~were ~~June~~aimed ~~30,~~at ~~2002,~~recombinant aspeptide production ~~compared~~and toat ~~$0.~~scaling up its rGLP-1 ~~million and~~manufacturing $0activities.2 In ~~million~~February ~~for~~2002 the ~~same~~workforce ~~periods~~was inreduced from ~~2001~~121 to 60 employees, ~~reflecting~~and ~~lower~~in ~~interest~~May ~~rates~~2002 there was a further reduction from 55 ~~and~~to ~~lower~~4 ~~interest~~employees. ~~earning~~The ~~assets.~~Company Wehas ~~incurred~~actively ~~interest~~sought ~~expense~~to oflicense ~~$0.5~~or ~~million~~sell the production technology and $1facilities associated with its peptide production.0 ~~million~~To date the Company has contacted over thirty potential acquirers for the production ~~three~~technology ~~and~~or ~~six~~facilities. Despite offering these non-~~month~~strategic assets ~~periods~~for ~~ended~~substantially ~~June~~discounted 30amounts, ~~2002~~to date no targeted party has been ~~compared~~willing to $0pursue the opportunity.2 The Company ~~million~~has ~~and~~therefore ~~$0.4~~begun ~~million~~the ~~for~~process of closing down the ~~same~~production facilities ~~period~~and inwill ~~2001. The~~seek ~~increase~~to ~~reflects~~auction ~~interest~~all ~~charges~~physical assets no longer being used, ~~associated~~including ~~with~~laboratory ~~the~~and ~~bridge~~production ~~loan~~equipment ~~financing~~and ~~secured~~supplies, incomputer ~~December~~equipment and ~~2001~~office and furniture equipment.

~~Liquidity~~The ~~and~~Company ~~Capital~~currently ~~Resources~~ has available very limited working capital to fund ongoing activities. Unless additional funds are obtained, the Company expects to exhaust its cash in December 2002.

~~Working~~From ~~capital~~May ~~was~~through ~~$0.5~~September ~~million~~2001, asthe Company undertook a private placement of ~~June~~preferred 30stock. This offering, ~~2002~~which focused on the Company’s previous diabetes strategy, ~~compared~~was toconducted ~~$10.7~~through a national investment-banking firm with the goal of raising approximately $30 million asto offund ~~December~~operations. 31Despite significant efforts, ~~2001. Cash~~including road shows and individual investor meetings throughout the United States and ~~cash~~Europe, ~~equivalents~~the ~~were~~Company ~~$4.4~~was ~~million~~not assuccessful ofin placing ~~June~~those ~~30,~~securities ~~2002~~or raising the money.

During the six months ended June 30, 2002, the Company used approximately $9.9 million of cash for operating activities and $0.1 million for asset acquisitions. Cash payments for financing activities totaled $0.6 million for the six-month period. Based on its anticipated revised operating plan, the Company believes that existing cash and cash equivalents will be sufficient to fund operations until the beginning of the fourth quarter of 2002.11

Following the unsuccessful private equity offering, in December 2001 the Company entered into a bridge loan agreement with several current shareholders and their affiliates, including Medtronic, Inc., Rocky Mountain Associates, S.A. and Equity Four Life (Bahamas) Ltd. The Company ~~continues~~received toa ~~seek~~loan ~~financing~~in ~~from~~the principal ~~existing~~amount ~~note~~of $18 million. The loan is due on December 18, 2003 and bears ~~holders~~interest at prime plus three percent per annum. ~~Additional~~ The loans are secured by a first priority security interest in the Company’s intellectual property and all proceeds from licensing of the Company’s intellectual property.

12The Company is attempting to raise additional working capital from the sale of non-strategic assets (such as equipment and intellectual property unrelated to cardiovascular indications) and from collaboration payments from potential strategic partners. If the Company is unable to raise additional funds by December 2002, it will be unable to meet obligations in the ordinary course and the Company may be forced to discontinue its remaining operations. In an effort to conserve cash, non-essential payments to creditors have been suspended, including severance payments to former employees and lease payments for equipment no longer being used. The Company may face lawsuits by creditors and may need to seek protection under the US Bankruptcy Code if it is unable to meet its obligations or obtain relief from its creditors.

~~financing may require a restructuring or~~Results ~~re-capitalization. The restructuring or re-capitalization could take one~~ of ~~several~~ forms, including conversion of all or a portion of the notes to equity, refinancing the indebtedness using new funds from third party sources, or voluntary or involuntary bankruptcy or re-capitalization under Chapter 11 of the United States Bankruptcy Code. In any form of restructuring or re-capitalization involving conversion of the indebtedness to equity, the interests of existing shareholders could be substantially diluted. The ultimate success of the financing will depend upon the Company’s ability to successfully negotiate and implement a restructuring plan with the note holders. If the Company is unable to restructure or obtain financing from another source, the Company will be required to discontinue all of its operations.Operations

AsThe ~~of June 30, 2002, the~~ Company ~~had~~recorded arevenues ~~negative shareholders equity~~ of $190.97 million ~~and~~in ~~shareholders’~~the ~~deficit~~third ~~accumulated~~quarter ~~during~~of ~~the development~~2002, ~~stage~~reflecting oflicensing ~~$101.3~~fees ~~million.~~from ~~Historically~~ the ~~auditors’~~license ~~reports~~of onnon-strategic ~~the Company’s~~intellectual ~~financial~~property. ~~statements~~Year ~~have contained an explanatory paragraph concerning the Company’s ability~~ to ~~continue~~date asrevenues atotal ~~going concern and its status as a development stage company~~$0.9 ~~The Company will incur additional losses as it continues to operate~~million.

~~New~~Research ~~Accounting~~and ~~Pronouncements~~development expenses include those costs associated with the research, development, production and testing of our pharmaceutical products, including all direct costs incurred in conducting our clinical trials and all costs related to the protection of proprietary rights. These costs have aggregated $72.9 million since our inception. Research and development costs were $1.2 million and $7.2 million for the three and nine-month periods ended September 30, 2002, as compared to $4.6 million and $11.3 million for the same periods in the prior fiscal year. Research and development activities have been scaled back significantly following the corporate restructuring initiatives announced in February and May of 2002. General and administrative expenses were $0.4 million and $2.0 million for the three and nine-month periods ended September 30, 2002, as compared to $0.9 million and $2.5 million for the same periods in 2001. Administrative costs have also decreased as a result of the restructuring initiatives.

In ~~July~~February ~~2001~~2002, ~~the~~Restoragen ~~FASB~~announced ~~issued~~a ~~Statement of Financial Accounting~~restructuring ~~Standards~~and ~~No.~~a ~~142~~reduction ~~(“SFAS~~of ~~142”),~~total ~~“Goodwill~~workforce ~~and~~from ~~Other~~121 ~~Intangible~~to ~~Assets”,~~60 ~~which was~~employees. ~~effective~~In ~~January~~May 12002, ~~2002. SFAS 142~~the ~~requires,~~Company ~~among~~announced ~~other~~a ~~things,~~revised ~~the~~corporate ~~discontinuance~~strategy ofthat ~~goodwill~~would ~~amortization. In~~result ~~addition,~~in the ~~standard includes~~Company ~~provisions~~ceasing ~~for~~its ~~the~~non-strategic ~~reclassification~~recombinant ofpeptide ~~certain~~production ~~existing~~operations ~~recognized~~and ~~intangibles~~closing asits ~~goodwill,~~peptide ~~reassessment~~production offacilities. ~~the~~The ~~useful~~May ~~lives~~2002 ofannouncement ~~existing~~has ~~recognized~~resulted in ~~intangibles,~~the ~~reclassification~~reduction of ~~certain~~the ~~intangibles~~workforce ~~out~~by ofan ~~previously~~additional ~~reported goodwill~~55 ~~and~~employees. ~~the~~A ~~identification~~small ofnumber ~~reporting units for purposes~~ of ~~assessing~~ ~~potential~~these ~~future~~employees ~~impairments~~have ofbeen ~~goodwill. There~~retained ~~was~~to nocomplete ~~impact~~transition toactivities. ~~the~~ The Company’s ~~financial~~is ~~statements~~currently asbeing aoperated ~~result~~by ~~of adopting~~four ~~this~~full ~~standard~~time employees.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect its adoption of this standard to have a significant impact on the consolidated financial statements.12

In ~~August~~connection ~~2001~~with the restructuring, the ~~Financial~~Company recorded ~~Accounting~~restructuring ~~Standards~~costs ~~Board~~of ~~issued~~approximately ~~SFAS~~$1.2 million during the first ~~No.~~quarter ~~144~~of 2002, ~~“Accounting~~$6.9 ~~for~~million during the ~~Impairment~~second orquarter ~~Disposal~~ of ~~Long~~2002 ~~Lived~~and ~~Assets” which~~$0.2 ~~was~~million ~~effective~~during ~~January~~the 1,third quarter of 2002. ~~This~~ ~~standard~~The ~~addresses~~second ~~financial~~quarter ~~accounting~~charge ~~and~~included ~~reporting~~a ~~for~~non-cash ~~the~~charge ~~impairment~~of or$4.9 million related ~~disposal~~to the write down of ~~certain~~tangible ~~long-lived~~and intangible assets. The Company has written ~~There~~down ~~was~~production noequipment ~~impact~~to reflect anticipated net proceeds from sale and has written down to zero the building and leasehold improvements. The majority of the patents issued to the Company’s ~~financial~~have ~~statements~~historically asbeen ain ~~result~~respect of ~~adopting~~production ~~this~~processes ~~standard~~or for medical applications, which are no longer being pursued by the Company in its revised strategy. The third quarter charge was recorded to recognize additional obligations to certain third party lessors based on agreements to terminate immediate lease payments and proceed with the sale of leased assets.

~~Critical~~Interest ~~Accounting~~income ~~Policies~~decreased to $0.01 million and $0.08 million for the three and nine month periods ended September 30, 2002, as compared to $0.05 million and $0.25 million for the same periods in 2001, reflecting lower interest rates and lower interest earning assets. Interest expense increased to $0.4 million and $1.4 million for the three and nine-month periods ended September 30, 2002 compared to $0.2 million and $0.6 million for the same period in 2001. The increase reflects interest charges associated with the bridge loan financing secured in December 2001.

~~The Company recorded restructuring charges totaling $8.1 million during~~Liquidity ~~the~~and ~~six~~Capital ~~months~~ Resources

13Working capital was $0.5 million as of September 30, 2002, compared to $10.7 million as of December 31, 2001. Cash and cash equivalents were $1.8 million as of September 30, 2002.

During the nine months ended ~~June~~September 30, 2002. , the ~~Estimates~~Company ~~were~~used ~~utilized~~approximately in$12.3 ~~determining~~million ~~these~~of ~~restructuring~~cash ~~charges including~~for ~~estimates~~operating ofactivities ~~fair~~and $0.1 ~~values~~million for ~~property~~asset ~~and~~acquisitions. Cash ~~equipment~~payments ~~held~~ for ~~sale,~~ ~~estimated~~financing ~~costs~~activities tototaled ~~maintain~~$0.8 ~~vacated~~million ~~facilities,~~for ~~and~~the nine-month ~~estimated~~period. Based ~~length~~on ofits ~~time~~anticipated ~~necessary~~revised tooperating ~~sublease~~plan, the Company’s ~~vacated~~believes ~~facilities. The~~that ~~Company~~existing ~~will~~cash ~~adjust~~and cash ~~such~~equivalents ~~estimates~~will ~~as additional~~not ~~information~~be issufficient ~~available~~to orfund asoperations ~~circumstances~~past ~~change~~December 2002.

The Company ~~reviews~~is ~~long~~attempting to raise additional working capital from the sale of non-~~lived~~strategic assets, and ~~certain~~from ~~intangibles~~collaboration ~~for~~payments ~~impairment~~from ~~whenever~~potential ~~events~~strategic orpartners. ~~changes~~Any inadditional ~~circumstances~~financing ~~indicate~~may ~~that~~require ~~the~~a ~~carrying~~financial ~~amount~~restructuring or re-capitalization. The restructuring or re-capitalization could take one of anseveral ~~asset~~forms, ~~may~~including ~~not~~conversion beof ~~recoverable. An~~all or ~~evaluation~~a portion of ~~recoverability~~the isoutstanding ~~performed~~secured bynotes ~~comparing~~to equity, refinancing the ~~undiscounted~~indebtedness ~~cash~~using ~~flows~~new ~~associated~~funds ~~with~~from third party sources, or voluntary or involuntary bankruptcy or re-capitalization under Chapter 11 of the ~~asset~~United States Bankruptcy Code. In any form of restructuring or re-capitalization involving conversion of the indebtedness to equity, the ~~asset’s~~interests ~~carrying~~of existing ~~amount~~shareholders tocould ~~determine~~be ifsubstantially adiluted ~~write~~or ~~down~~eliminated. The success of any financing would likely depend on obtaining the co-operation of the note-holders. If the Company is unable to restructure or obtain financing from another source, the Company will be required to discontinue all of its operations.

As ~~permitted~~of bySeptember ~~SFAS No. 123~~30, ~~“Accounting for Stock-based Compensation”~~2002, the Company ~~accounts~~had ~~for its stock-based awards to employees under~~negative ~~the~~shareholders ~~intrinsic~~equity ~~value~~of ~~method~~$21.6 inmillion ~~accordance~~and ~~with~~shareholders’ ~~Accounting~~deficit ~~Principles Board~~accumulated ~~Opinion~~during ~~No.~~the ~~25,~~development ~~“Accounting~~stage ~~for~~of ~~Stock~~$103.0 ~~Issued~~million. toHistorically ~~Employees”~~the ~~and related~~auditors’ ~~interpretations. All~~reports ~~stock-based~~on ~~awards to independent consultants are accounted for under~~ the ~~fair~~Company’s ~~value~~financial ~~method~~statements ~~as required~~have bycontained ~~SFAS~~an ~~No. 123 and related interpretations.~~

~~Contractual Obligations and Commitments~~13

~~Our~~explanatory ~~contractual~~paragraph ~~obligations~~concerning ~~and~~the ~~commitments,~~Company’s ~~consisting~~ability ofto ~~capital~~continue ~~and~~as a ~~operating~~going ~~lease~~concern ~~obligations,~~and ~~notes~~its ~~payable~~status ~~and~~as ~~convertible~~a ~~notes~~development ~~payable~~stage ~~have~~company. ~~not~~The Company will ~~changed~~incur ~~significantly~~additional ~~during~~losses ~~the~~as ~~six~~it ~~month~~continues ~~period~~to ~~ended June 30, 2002~~operate.

~~Market~~New Accounting ~~Risk~~Pronouncements

WeIn July 2001, the FASB issued Statement of Financial ~~are~~Accounting ~~exposed~~Standards toNo. ~~market~~142 ~~risk~~(“SFAS ~~related~~142”), to“Goodwill ~~changes~~and inOther ~~interest~~Intangible Assets”, ~~rates.~~which ~~The~~was ~~Company~~effective January 1, 2002. ~~does~~SFAS ~~not~~142 ~~use~~requires, ~~derivative~~among ~~financial~~other ~~instruments~~things, ~~for~~the ~~speculative~~discontinuance orof ~~trading~~goodwill ~~purposes~~amortization. ~~Due~~In toaddition, the ~~nature~~standard includes provisions for the reclassification of ~~cash~~certain ~~and~~existing recognized ~~cash~~intangibles ~~equivalents~~as goodwill, wereassessment ~~believe~~of ~~that~~the ~~there~~useful islives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. There was no ~~material~~impact ~~market~~to ~~risk~~the ~~exposure~~Company’s financial statements as a result of adopting this standard.

~~Item~~In 3June 2001, the Financial Accounting Standards Board issued SFAS No. ~~QUALITATIVE~~ 143, “Accounting for Asset Retirement Obligations”. This standard addresses financial accounting ~~AND~~and ~~QUANTITATIVE~~reporting ~~DISCLOSURE~~for ~~ABOUT~~obligations ~~MARKET~~related ~~RISK~~to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect its adoption of this standard to have an impact on the consolidated financial statements.

~~See~~In ~~Item~~August 22001, ~~“Management’s~~the ~~Discussion~~Financial ~~and~~Accounting Standards ~~Analysis~~Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of ~~Financial~~Long Lived ~~Condition~~Assets” which was effective January 1, 2002. This standard addresses financial accounting and ~~Results~~reporting offor the ~~Operations~~impairment —or ~~Market~~disposal ~~Risk”~~of certain long-lived assets. There was no impact to the Company’s financial statements as a result of adopting this standard.

14In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. This standard requires the Company to recognize a liability for a cost associated with an exit or disposal activity when the liability is incurred rather than recognition of the liability at the date of a commitment to an exit plan and is effective for exit or disposal activities that are initiated after December 31, 2002.

~~PART~~Critical Accounting IIPolicies

~~OTHER~~The ~~INFORMATION~~Company recorded restructuring charges totaling $8.3 million during the nine months ended September 30, 2002. Estimates were utilized in determining these restructuring charges including estimates of fair values for property and equipment held for sale, estimated costs to maintain vacated facilities, and estimated length of time necessary to sublease the Company’s vacated facilities. The Company will adjust such estimates as additional information is available or as circumstances change.

~~Item~~The ~~1. LEGAL~~Company ~~PROCEEDINGS~~reviews long-lived assets and certain intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An evaluation of recoverability is performed by comparing the undiscounted cash

~~None~~14

~~Item~~flows ~~2. CHANGES~~associated INwith ~~SECURITIES~~the asset to the asset’s carrying amount to determine if a write down is required.

InAs ~~connection~~permitted ~~with~~by ~~the~~SFAS ~~issuance~~No. of123, ~~the~~“Accounting ~~convertible notes in December~~for ~~2001~~Stock-based Compensation”, the Company ~~issued~~accounts ~~999,997~~for ~~warrants~~its ~~to purchase common~~ stock-based ofawards ~~the~~to ~~Company~~employees atunder ~~a per share warrant exercise price equal to~~ the ~~lower~~intrinsic ofvalue ~~$9.00~~method ~~or the~~in ~~lowest~~accordance ~~per~~with ~~common equivalent share price at which the Company sells equity~~Accounting ~~after~~Principles ~~the~~Board ~~date~~Opinion ~~of the warrants~~No. ~~Each~~ ~~lender initially~~25, ~~received~~“Accounting ~~warrants~~for toStock ~~purchase~~Issued ~~a number of shares of common stock equal~~ to ~~50%~~Employees” ~~of the amount of notes held divided by the warrant exercise~~and ~~price~~related interpretations. ~~Commencing with the 90th day~~All ~~after the initial date of issuance of the warrants, the number of shares of common~~ stock-based ~~into~~awards ~~which~~to ~~the~~independent ~~warrants~~consultants are ~~exercisable~~accounted ~~increases by an additional 10% of the notes held divided by the warrant exercise price~~ for ~~each~~under ~~30-day period in which~~ the ~~notes continue to remain outstanding and not converted, up~~fair tovalue ~~100%~~method ofas ~~the~~required ~~outstanding notes divided~~ by ~~the~~SFAS ~~warrant exercise price~~No. ~~Pursuant~~ to123 ~~this provision, the number of shares of the Company’s common stock issuable under the warrants increased by 200,000 shares in each month of March, April, May~~ and ~~June~~related ~~2002~~interpretations. ~~As of June 30, 2002, the warrants issued in connection with the convertible notes in December 2001 entitle the holders to purchase 1,799,997 shares of common stock~~

~~Item~~Contractual ~~3. DEFAULTS UPON~~Obligations ~~SENIOR~~and ~~SECURITIES.~~Commitments

~~None~~The Company’s contractual obligations and commitments, consisting of capital and operating lease obligations, notes payable and convertible notes payable have not changed significantly during the nine month period ended September 30, 2002. However, the Company has discontinued payments to third party equipment lessors for equipment not being used. An agreement has been reached with the two major equipment lessors to suspend immediate payments for a limited period and proceed with the sale of leased assets. In addition, for the period September through December 2002, the Company has negotiated to pay only 25% of the facility lease obligations owed and defer remaining obligations.

~~Item~~In 4September 2002, the Board of Directors determined that it was important to retain the services of the four remaining employees of the Company in order to manage and operate the Company at this critical time. ~~SUBMISSION~~ OFThe ~~MATTERS~~Board TOestablished Aan ~~VOTE~~independent OFcommittee ~~SECURITY~~to ~~HOLDERS~~develop a Retention and Incentive Plan for Senior Managers. The Plan, which was unanimously approved by the Board of Directors, is included as Exhibit 10.1 to this Form 10Q.

~~None~~Market Risk

~~Item~~The 5Company is exposed to market risk related to changes in interest rates. ~~OTHER~~ The Company does not use derivative financial ~~INFORMATION~~instruments for speculative or trading purposes. Due to the nature of cash and cash equivalents, the Company believes that there is no material market risk exposure.

~~On July 15, 2002 Peter Tattle resigned from the Board of Directors for~~Item ~~personal reasons~~3. ~~On July 22, 2002 Richard de Souza resigned from the Board of~~ QUALITATIVE ~~Directors~~AND ~~for~~QUANTITATIVE ~~personal~~DISCLOSURE ~~reasons~~ABOUT MARKET RISK.

See Item ~~6. EXHIBITS~~2, “Management’s Discussion and Analysis of ~~AND~~Financial ~~REPORTS~~Condition ONand ~~FORM~~Results 8of Operations -K Market Risk”.

~~(a) Exhibits~~15

~~None~~Item 4. CONTROLS AND PROCEDURES.

(ba) ~~Reports on~~ ~~Form~~Evaluation ~~8-K. The Company filed a Form 8-K on May 30, 2002, attaching a press~~of ~~release~~Disclosure ~~that~~Controls ~~announced the Company’s revised corporate strategy~~ and ~~workforce reduction~~Procedures. ~~No financial statements were required to be filed with the report.~~

15The Company’s Chief Executive Officer, Mr. Ashleigh Palmer, and Chief Financial Officer, Mr. David Walker, have reviewed the Company’s disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, these officers believe that the Company’s disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

~~SIGNATURES~~(b) Changes in Internal Controls.

~~Pursuant~~During to the ~~requirements~~quarter ofended September 30, 2002, the Company ~~Securities~~modified ~~Exchange~~its ~~Act~~system of ~~1934~~processing, recording and reporting financial information. Previously, the ~~Registrant~~Company ~~has~~performed ~~duly~~the ~~caused~~majority ~~this~~of ~~report~~accounting functions tointernally, beexcept ~~signed~~for onpayroll ~~its~~processing. ~~behalf~~In byconnection with the ~~undersigned~~corporate ~~thereunto~~restructuring ~~duly~~and ~~authorized~~related personnel reductions, the Company is utilizing an unrelated firm to process and record financial information under the direction and review of the Company’s Chief Financial Officer.

		RESTORAGEN, INC.
Dated: July 25, 2002		/s/ Ashleigh W. Palmer
		Ashleigh W. Palmer
		Chief Executive Officer
		(Duly Authorized Officer)
		/s/ David S. Walker
		David S. Walker
		Chief Financial Officer
		(Principal Financial Officer)

PART II

16OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

None

Item 2. CHANGES IN SECURITIES.

In connection with the issuance of the convertible notes in December 2001, the Company issued 999,997 warrants to purchase common stock of the Company at a per share warrant exercise price equal to the lower of $9.00 or the lowest per common equivalent share price at which the Company sells equity after the date of the warrants. Each lender initially received warrants to purchase a number of shares of common stock equal to 50% of the amount of notes held divided by the warrant exercise price. Commencing with the 90th day after the initial date of issuance of the warrants, the number of shares of common stock into which the warrants are exercisable increased by an additional 10% of the notes held divided by the warrant exercise price for each 30-day period in which the notes continued to remain outstanding and not converted, up to 100% of the outstanding notes divided by the warrant exercise price. Pursuant to this provision, the number of shares of the Company’s common stock issuable under the warrants increased by 200,000 shares in each month of March, April, May, June and July 2002. As of September 30, 2002, the warrants issued in connection with the convertible notes in December

2001 entitle the holders to purchase 1,999,998 shares of common stock.

The Company issued seven shares of common stock in July 2002 upon the exercise of a stock option by a former employee. The shares were issued in reliance upon the exemption contained in Rule 701 under the Securities Act of 1933 for offers and sales of securities pursuant to a compensatory benefit plan. The options were issued prior to the Company becoming a reporting company

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None

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

None

Item 5. OTHER INFORMATION.

None

Item 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.1 Retention and Incentive Plan for Senior Managers. **

99.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350

(b) Reports on Form 8-K

None

** Denotes compensatory arrangements

SIGNATURES

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

	RESTORAGEN, INC.


Dated: November 12, 2002	/s/ Ashleigh W. Palmer
	Ashleigh W. Palmer
	Chief Executive Officer
	(Duly Authorized Officer)

	/s/ David S. Walker
	David S. Walker
	Chief Financial Officer
	(Principal Financial Officer)

CERTIFICATIONS

I, Ashleigh Palmer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Restoragen, Inc;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002	/s/ Ashleigh W. Palmer

	Ashleigh W. Palmer
	Chief Executive Officer

I, David Walker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Restoragen, Inc;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 12, 2002	/s/ David S. Walker

	David S.Walker
	Chief Financial Officer

Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001

3

10.1 Retention and Incentive Plan for Senior Managers. **

99.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350

Filing Compare · RESTORAGEN INC