|
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|UNITED STATES 
        SECURITIES AND EXCHANGE COMMISSION 
        Washington, D.C. 20549
        FORM 10-Q
        x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the quarterly period ended June 30, 2006
        or
        o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        Commission file number: 000-25571
        AXONYX INC.
 (Exact name of registrant as specified in its charter)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|Nevada                                                               | 86-0883978            
|-------------------------------------------------------------------- | ----------------------
|(State or Other Jurisdiction of
      incorporation or organization) | (IRS Employer Id. No.)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|500 Seventh Avenue, 10th Floor,
        New York, New York 10018(Address of Principal Executive Offices)
        Registrants telephone number, including area code: (212) 645-7704
        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|Large accelerated filero | Accelerated filerx | Non-accelerated filero
|------------------------ | ------------------ | ----------------------

|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox
        As of August 7, 2006, there were 53,680,721 shares of the registrants $.001 par value Common Stock outstanding.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|
|



|AXONYX INC.
|-----------
|           
|INDEX      
|           

|PART I     |    | FINANCIAL INFORMATION                                                                                                   |   
|---------- | -- | ----------------------------------------------------------------------------------------------------------------------- | --
|           |    |                                                                                                                         |   
|Item 1.    |    | Financial Statements                                                                                                    |   
|           |    |                                                                                                                         |   
|           |    | Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005                             | 1 
|           |    |                                                                                                                         |   
|           |    | Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2006 and 2005   | 2 
|           |    |                                                                                                                         |   
|           |    | Condensed Consolidated Statements of Changes in Stockholders Equity (unaudited) for the six months ended June 30, 2006 | 3 
|           |    |                                                                                                                         |   
|           |    | Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2006 and 2005             | 4 
|           |    |                                                                                                                         |   
|           |    | Notes to Condensed Consolidated Financial Statements                                                                    | 5 
|           |    |                                                                                                                         |   
|Item 2.    |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   | 9 
|           |    |                                                                                                                         |   
|Item 3.    |    | Quantitative and Qualitative Disclosures About Market Risk                                                              | 18
|           |    |                                                                                                                         |   
|Item 4.    |    | Controls and Procedures                                                                                                 | 18
|           |    |                                                                                                                         |   
|PART II    |    | OTHER INFORMATION                                                                                                       | 19
|           |    |                                                                                                                         |   
|Item 1.    |    | Legal Proceedings                                                                                                       | 19
|           |    |                                                                                                                         |   
|Item 6.    |    | Exhibits                                                                                                                | 20
|           |    |                                                                                                                         |   
|Signatures | 21

|
|



|PART I. FINANCIAL INFORMATION
      ITEM 1. FINANCIAL STATEMENTS
      AXONYX INC. Condensed Consolidated Balance Sheets
|------------------------------------------------------------------------------------------------------------------------
|                                                                                                                        

|                                                                                                          |                   |      
|--------------------------------------------------------------------------------------------------------- | ----------------- | -----
|                                                                                                          | **June 30,
2006** |      
|                                                                                                          |                   |      
|                                                                                                          | **(unaudited)**   |      
|**ASSETS**                                                                                                |                   |      
|                                                                                                          |                   |      
|Current assets:                                                                                           |                   |      
|Cash and cash equivalents                                                                                 |                   | **$**
|Investments                                                                                               |                   |      
|Other current assets                                                                                      |                   |      
|                                                                                                          |                   |      
|Total current assets                                                                                      |                   |      
|                                                                                                          |                   |      
|Property, plant and equipment, net                                                                        |                   |      
|                                                                                                          |                   |      
|Investment in OXIS                                                                                        |                   |      
|Security deposits                                                                                         |                   |      
|                                                                                                          |                   |      
|                                                                                                          |                   | **$**
|                                                                                                          |                   |      
|                                                                                                          |                   |      
|**LIABILITIES**                                                                                           |                   |      
|Current liabilities:                                                                                      |                   |      
|Accounts payable                                                                                          |                   | **$**
|Accrued expenses                                                                                          |                   |      
|                                                                                                          |                   |      
|Total liabilities                                                                                         |                   |      
|                                                                                                          |                   |      
|                                                                                                          |                   |      
|**STOCKHOLDERS EQUITY**                                                                                  |                   |      
|Preferred stock - $.001 par value, 15,000,000 shares authorized; none
    issued                          |                   |      
|Common Stock - $.001 par value, 150,000,000 authorized, 53,680,721
         shares issued and outstanding |                   |      
|Additional paid-in capital                                                                                |                   |      
|Unearned compensation - stock options                                                                     |                   |      
|Accumulated deficit                                                                                       |                   |      
|                                                                                                          |                   |      
|Total stockholders equity                                                                                |                   |      
|                                                                                                          |                   |      
|Total liabilities and stockholders equity                                                                |                   | **$**
|                                                                                                          |                   |      

|                                                            
|------------------------------------------------------------
|See notes to the condensed consolidated financial statements

|1
|-



|AXONYX INC.Condensed Consolidated Statements of Operations(unaudited)
|---------------------------------------------------------------------
|                                                                     

|                                               | **Three months ended June 30,** |                | **Six months ended June 30,** |  
|---------------------------------------------- | ------------------------------- | -------------- | ----------------------------- | -
|                                               | **2006**                        |                | **2005**                      |  
|                                               |                                 |                |                               |  
|                                              
|Product sales                                  | $                               | ****           |                               | $
|                                               |                                 |                |                               |  
|Cost of product sales                          |                                 |                |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Costs and expenses:                            |                                 |                |                               |  
|Research and development                       |                                 | **2,958,000**  |                               |  
|General and administrative                     |                                 | **1,683,000**  |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 | **4,641,000**  |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Loss from operations                           |                                 | **(4,641,000** | **)**                         |  
|                                               |                                 |                |                               |  
|Other income (expense)                         |                                 |                |                               |  
|Interest income                                |                                 | **625,000**    |                               |  
|Foreign exchange                               |                                 | **(32,000**    | **)**                         |  
|Gain (loss) on issuance of subsidiary stock    |                                 | **46,000**     |                               |  
|Equity in loss of OXIS                         |                                 | **(181,000**   | **)**                         |  
|Interest expense                               |                                 | ****           |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Net loss before outside interest in subsidiary | **$**                           | **(4,183,000** | **)**                         |  
|                                               |                                 |                |                               |  
|Outside interest in loss of subsidiary         |                                 |                |                               |  
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Net loss                                       | **$**                           | **(4,183,000** | **)**                         | $
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Net loss per common share                      | **$**                           | **(.08**       | **)**                         | $
|                                               |                                 |                |                               |  
|                                               |                                 |                |                               |  
|Weighted average shares basic and diluted      |                                 | **53,681,000** |                               |  
|                                               |                                 |                |                               |  

|                                                            
|------------------------------------------------------------
|See notes to the condensed consolidated financial statements

|2
|-



|AXONYX INC.Condensed Consolidated Statements of Changes in Stockholders Equity
|-------------------------------------------------------------------------------
|                                                                               

|                                                                                                |                   |  |                             |  |                                           |       
|----------------------------------------------------------------------------------------------- | ----------------- |  | --------------------------- |  | ----------------------------------------- | ------
|                                                                                                | Common Stock      |  |                             |  |                                           |       
|                                                                                                |                   |  | Additional
Paid-in 
Capital |  | Unearned 
    Compensation
Stock 
Options |       
|                                                                                                | Number
of 
Shares |  | Amount                      |  |                                           |       
|                                                                                                |                   |  |                             |  |                                           |       
|                                                                                               
|**Balance - December 31,
    2005**                                                             |                   |  | 53,680,721                  |  | $                                         | 54,000
|                                                                                                |                   |  |                             |  |                                           |       
|Issuance of common 
          stock options and 
         warrants for consulting 
    services |                   |  |                             |  |                                           |       
|                                                                                                |                   |  |                             |  |                                           |       
|Issuance of common 
    stock options to
    employees and 
    directors                       |                   |  |                             |  |                                           |       
|                                                                                                |                   |  |                             |  |                                           |       
|Amortization                                                                                    |                   |  |                             |  |                                           |       
|                                                                                                |                   |  |                             |  |                                           |       
|Net loss                                                                                        |                   |  |                             |  |                                           |       
|                                                                                                |                   |  |                             |  |                                           |       
|**Balance  June 30, 2006**
        *(unaudited)*                                               |                   |  | 53,680,721                  |  | $                                         | 54,000
|                                                                                                |                   |  |                             |  |                                           |       

|                                                            
|------------------------------------------------------------
|See notes to the condensed consolidated financial statements

|3
|-



|AXONYX INC.Condensed Consolidated Statements of Cash Flows(unaudited)
|---------------------------------------------------------------------
|                                                                     

|                                                                        |                                |      
|----------------------------------------------------------------------- | ------------------------------ | -----
|                                                                        | **Six Months Ended 
June 30,** |      
|                                                                        |                                |      
|                                                                        | **2006**                       |      
|                                                                        |                                |      
|**Cash flows from operating activities:**                               |                                |      
|Net loss                                                                |                                | **$**
|Adjustments to reconcile net loss to cash used in operating activities: |                                |      
|Depreciation and amortization                                           |                                |      
|Compensation related to options and warrants issued for services        |                                |      
|Minority interest in net loss of OXIS                                   |                                |      
|(Gain) Loss on issuance of subsidiary stock                             |                                |      
|Equity in loss of OXIS                                                  |                                |      
|Changes in:                                                             |                                |      
|Accounts receivable                                                     |                                |      
|Inventories                                                             |                                |      
|Other current assets                                                    |                                |      
|Security deposits and other assets                                      |                                |      
|Accounts payable                                                        |                                |      
|Accrued expenses                                                        |                                |      
|Accrued stock based compensation                                        |                                |      
|                                                                        |                                |      
|                                                                        |                                |      
|                                                                       
|Net cash used in operating activities                                   |                                |      
|                                                                        |                                |      
|                                                                        |                                |      
|**Cash flows from investing activities:**                               |                                |      
|Purchase of equipment                                                   |                                |      
|Additions to patents                                                    |                                |      
|Reduction in cash due to deconsolidation of OXIS                        |                                |      
|Purchases of investments                                                |                                |      
|Proceeds from sales and maturities of investments                       |                                |      
|                                                                        |                                |      
|                                                                       
|Net cash provided by investing activities                               |                                |      
|                                                                        |                                |      
|                                                                        |                                |      
|**Cash flows from financing activities:**                               |                                |      
|Net proceeds from issuance of common stock and warrants                 |                                |      
|Collection of stock subscription receivable - OXIS                      |                                |      
|Net proceeds from exercise of common stock options in OXIS              |                                |      
|                                                                        |                                |      
|                                                                       
|Net cash provided by financing activities                               |                                |      
|                                                                        |                                |      
|                                                                        |                                |      
|**Net increase (decrease) in cash and cash equivalents**                |                                |      
|Cash and cash equivalents at beginning of period                        |                                |      
|                                                                        |                                |      
|                                                                       
|**Cash and cash equivalents at end of period**                          |                                | **$**
|                                                                        |                                |      
|                                                                        |                                |      
|**Supplemental cash flow disclosures**                                  |                                |      
|Interest paid                                                           |                                |      
|**Supplemental disclosure of non-cash financing activity:**             |                                |      
|Minority interest in subsidiary equity transactions                     |                                |      

|                                                            
|------------------------------------------------------------
|See notes to the condensed consolidated financial statements

|4
|-



|Notes to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(1)  Recent Events
On June 8, 2006, Axonyx Inc. (the Company) announced that it had entered into a definitive
merger agreement with TorreyPines Therapeutics, Inc., a private company. The merger would create
a NASDAQ listed biopharmaceutical company that discovers and develops treatments for central nervous
system (CNS) disorders. The resulting company will be named TorreyPines Therapeutics, Inc. and be
headquartered in San Diego, California.
Under terms of the agreement, unanimously approved by both boards of directors, Axonyx would issue,

and TorreyPines stockholders would receive, in a tax-free transaction, shares of Axonyx common
stock
such that TorreyPines stockholders would own approximately 58% of the combined company and
Axonyx
stockholders would own approximately 42%. These relative percentages will be adjusted if
either party
out-licenses one or more product candidates prior to closing. In addition, TorreyPines
preferred
shareholders will receive warrants to purchase combined company shares that, if fully
exercised at
closing, would give TorreyPines shareholders approximately 62% of the combined company.
The transaction
is subject to Axonyx maintaining certain minimum cash levels, as well as certain
other customary
conditions, including obtaining approval of each companys stockholders. The
transaction is
expected to close during the fourth quarter of this year. Upon closing, the company
is expected to
trade on the NASDAQ Stock Market for which the company has reserved the symbol TPTX.
On July 25, 2006 the Company filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission (SEC) which details the required proxy disclosures in connection with the
merger.
The Companys common stock is listed on the NASDAQ Capital Market (formerly known as the NASDAQ
SmallCap Market). In order to maintain a listing, the Company must meet minimum financial and other
requirements. If the Company is unable to comply with NASDAQs listing standards, they may determine
to delist the common stock from the NASDAQ Capital Market. On August 2, 2006, the Company received
notice from NASDAQ stating that it was out of compliance with bid price requirements because the
closing bid price for its common stock was below $1.00 per share for 30 consecutive business days.
The Company would have 180 days to regain compliance with bid price requirements. To regain compliance
the closing bid price for the Companys common stock must be a minimum of $1.00 per share for
at least 10 consecutive business days. If NASDAQ made a determination to delist the Companys
common stock, the delisting procedure would involve a process beginning with NASDAQs notification
and would include a hearing and the possibility of appeal. There is no assurance that at the end
of this process the Companys common stock would continue to be listed on the NASDAQ Capital
Market. If the Companys common stock is delisted for any reason, it could reduce the value
of the Companys common stock and its liquidity, and could potentially adversely impact the
Companys proposed merger with TorreyPines Therapeutics Inc. Delisting could also adversely
affect the Companys ability to obtain financing for the continuation of its operations or to
its common stock in acquisitions. Delisting could result in the loss of confidence by suppliers, customers and employees.
(2) Financial Statement Presentation
The unaudited condensed consolidated financial statements of the Company herein have been prepared
pursuant to the rules and regulations of the SEC and, in the opinion of management, reflect all adjustments
necessary to present fairly the financial position at June 30, 2006, and the results of operations
and cash flows for the quarterly and six month periods presented. Certain information and footnote
disclosure normally included in financial statements, prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or omitted pursuant to such
rules and regulations. However, management believes that the disclosures are adequate to make the
information presented not misleading. These financial statements and notes thereto should be read
in conjunction with the financial statements and the notes thereto for the year ended December 31,
2005, included in the Companys Form 10-K filing. The results for the interim periods are not
necessarily indicative of the results for the full fiscal year.
The consolidated financial statements include the accounts of Axonyx Europe, B.V., a wholly owned subsidiary
organized in Holland.

|5
|-



|(3) Investment in OXIS International, Inc.
The Company consolidated the financial statements of OXIS International Inc. from the date of acquisition
of 52% of the outstanding voting stock of OXIS (January 15, 2004) through February 28, 2005, when
it no longer controlled the board of OXIS or directed its day-to-day management activities. The Companys
ownership in OXIS was reduced from 52% to 34% on December 31, 2004 as a result of a third party financing.
However, as the Company continued to control the board of OXIS and continued to direct the day-to-day
management activities consolidation of OXIS continued through February 28, 2005. Beginning March
1, 2005, the Company accounts for its investment in OXIS under the equity method of accounting, as
prescribed by Accounting Principals Board Opinion No. 18 The Equity Method of Accounting for
Investments in Common Stock.
The Company owns approximately 14 million common shares of OXIS International Inc. with a carrying
value at June 30, 2006 of $4,336,000. OXIS is traded on the bulletin board (OXIS.OB) with relatively
little trading volume. At June 30, 2006, the market value of these shares was $0.34 per share ($4,760,000).
Axonyx currently owns 32% of OXIS.
(4) Investments
The Company invests in auction-rate securities (ARS) that are held as investments available for sale.
Auction rate securities are instruments with long-term underlying maturities, but for which an auction
is conducted periodically, as specified, to reset the interest rate and allow investors to buy or
sell the instruments. Because auctions generally occur more often than annually, and because the
Company holds these instruments in order to meet short-term liquidity needs, the auction rate securities
are classified as short-term investments in the Condensed Consolidated Balance Sheet. Consistent
with our other securities that are classified as available-for-sale, the Condensed Consolidated Statement
of Cash Flows reflects the gross amount of the purchases of auction rate securities and the proceeds
from sales of auction rate securities.
(5) Stock-based Compensation
In 2000, the Board of Directors and the stockholders of the Company approved a Stock Option Plan (2000
Plan) which, as amended, provides for the granting of options to purchase up to 2,000,000 shares
of common stock and pursuant to which officers, directors, advisors and consultants are eligible
to receive incentive and/or non-statutory stock options. Incentive stock options granted under the
2000 Plan are exercisable for a period of up to 10 years from date of grant at an exercise price
which is not less than the fair value on date of grant, except that the exercise period of options
granted to a stockholder owning more than 10% of the outstanding stock may not exceed five years
and their exercise price may not be less than 110% of the fair value of the common stock at date
of grant. Vesting of 2000 Plan options varies from fully vested at the date of grant to multiple
year apportionment of vesting as determined by the Board of Directors. Pursuant to the 2000 stock
option plan as amended, 750,000 options were added to the share reserve effective January 1, 2003
and January 1, 2004. On March 30, 2004, the Company amended the 2000 Plan to increase the aggregate
number of shares from 3,500,000 to 7,500,000. Stockholder approval for the increase was received in June 2004.
Commencing January 1, 2006 the Company adopted Statement of Financial Accounting Standard No. 123R,
Share Based Payment (SFAS 123R), which requires all share-based payments, including
grants of stock options, to be recognized in the statement of operations as an operating expense,
based on fair values.
Prior to adopting SFAS 123R, the Company accounted for stock-based employee compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior to
adoption have not been restated.
The following table illustrates the effect on net loss and loss per share if the fair value based method
had been applied to all awards for the three and six months ended June 30, 2005 when APB opinion
No. 25 was followed.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|                                                                                    | Three Months Ended
      June 30, 2005 |            | Six Months Ended 
      June 30, 2005 |  
|----------------------------------------------------------------------------------- | -------------------------------------- | ---------- | ------------------------------------- | -
|
|
|Reported net loss attributable to common stockholders                               | $                                      | (8,179,000 | )                                     | $
|                                                                                   
|Stock-based employee compensation included in net loss                              |                                        | 52,000     |                                       |  
|                                                                                   
|Stock-based employee compensation determined under the 
    fair value based method |                                        | (735,000   | )                                     |  
|
|                                                                                   
|Pro forma net loss                                                                  | $                                      | (8,862,000 | )                                     | $
|
|                                                                                   
|Loss per common share attributable to common stockholders 
    (basic and diluted): |                                        |            |                                       |  
|As reported                                                                         | $                                      | (0.15      | )                                     | $
|
|Pro forma                                                                           | $                                      | (0.17      | )                                     | $
|
|                                                                                    |                                        |           

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As of June 30, 2006, there was $1,560,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under existing stock option plans. This cost is expected
to be recognized over a weighted-average period of 1.1 years. The total measurement fair value of
shares vested during the six months ended June 30, 2006 was $832,000.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value
of options. The fair value of options at date of grant and the assumptions utilized to determine
are indicated in the following table:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                                                        | Six Months Ended 
      June 30 , |     
|--------------------------------------------------------------------------------------- | --------------------------------- | ----
|
|
|
|Weighted average fair value at date of grant for options granted during 
    the period | $                                 | 1.00
|                                                                                       
|Risk-free interest rates                                                                |                                   | 4.57
|Expected option life in years                                                           |                                   | 10  
|Expected stock price volatility                                                         |                                   | .93 
|Expected dividend yield                                                                 |                                   | -0- 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Under SFAS 123R forfeitures are estimated at the time of valuation and reduce expense ratably over
the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures
differ, or are expected to differ, from the previous estimate. Under SFAS 123 and APB 25, the Company
elected to account for forfeitures when awards were actually forfeited, at which time all previous
pro-forma expense was reversed to reduce pro- forma expense for the period. As of June 30, 2006,
the Company anticipates all outstanding options will vest.

|7
|-



|The following summarizes the activity of the Companys stock options for the six months ended
June 30, 2006.
|------------------------------------------------------------------------------------------------------------
|                                                                                                            

|                                 | **Shares** |               | **Weighted
      Average
      Exercise
      Price** |       | **Weighted 
      Average 
      Remaining 
      Contractual
      Term 
      (Years)** |  | **Aggregate
      Intrinsic
      Value** |     
|-------------------------------- | ---------- | ------------- | ----------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------- |  | ----------------------------------------- | ----
|                                 |            |              
|Outstanding at December 31, 2005 |            | **5,321,000** |                                                       | **$** | **3.97**                                                                                  |  |                                           |     
|Granted                          |            | **75,000**    |                                                       |       | **1.13**                                                                                  |  |                                           |     
|Exercised                        |            |               |                                                       |       |                                                                                           |  |                                           |     
|Canceled or expired              |            | **(241,000**  | **)**                                                 |       | **4.18**                                                                                  |  |                                           |     
|                                 |            |              
|Outstanding at June 30, 2006     |            | **5,155,000** |                                                       | **$** | **3.92**                                                                                  |  |                                           | 5.77
|                                 |            |              
|Exercisable at June 30, 2006     |            | **4,269,000** |                                                       | **$** | **4.13**                                                                                  |  |                                           | 5.16
|                                 |            |              

|                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------
|The following summarizes the activity of the Companys non-vested stock options for the six months
ended June 30, 2006.
|                                                                                                                       

|                               | **Shares** |           | **Weighted 
      Average 
      Fair Value** |  
|------------------------------ | ---------- | --------- | --------------------------------------------- | -
|                               |            |           |                                               |  
|Nonvested at December 31, 2005 |            | 1,034,000 |                                               | $
|Granted                        |            | 75,000    |                                               |  
|Vested                         |            | (223,000  | )                                             |  
|Nonvested at June 30, 2006     |            | 886,000   |                                               |  

|                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) Operating Segments
Beginning March 1, 2005, the OXIS segment reflects the Companys share of OXIS losses under the
equity method. Prior to that date, the Company was organized into two reportable segments: Axonyx
and OXIS.
The following table presents information about the Companys two operating segments for the quarter
and six months ended June 30, 2005:
|                                                                                                                                                                                                                                                                                                                                                                          

|                                    | **Axonyx Inc.** |             | **OXIS 
      Intl Inc.** |   | **Total** |  
|----------------------------------- | --------------- | ----------- | -------------------------- | - | --------- | -
|                                    |                 |             |                            |   |           |  
|*Quarter ended June 30, 2005*       |                 |             |                            |   |           |  
|*Segment Loss*                      | $               | (8,050,000  | )                          | $ | (129,000  | )
|                                    |                 |             |                            |   |           |  
|*Six months ended June 30, 2005*    |                 |             |                            |   |           |  
|Revenue including minority interest |                 |             |                            | $ | 403,000   |  
|Segment loss                        | $               | (18,286,000 | )                          | $ | (326,000  | )

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) Developments with SERONO International SA
Under a License Agreement with Applied Research Systems ARS Holding N.V. (ARS), a wholly owned subsidiary
of Serono International, S.A. (Serono) effective September 15, 2000, the Company granted to ARS a
sublicense of our patent rights and know-how regarding the development and marketing of the Amyloid
Inhibitory Peptide (AIPs) and the Prion Inhibitory Peptide (PIPs) technology which had been licensed
to us under a Research and License Agreement with New York University. The Company is negotiating
a re-acquisition of those rights from ARS and an option to license, on a non-exclusive basis, certain
Serono patents, technology and know-how related to AIPs and PIPs. If the Company exercises this option
and acquires the license, it would be obligated to pay to Serono an upfront payment and under certain
circumstances additional milestone payments and royalties would be due.
(7) Legal Proceedings
Several lawsuits were filed
against the Company in February 2005 in the U.S. District Court for the Southern District of New
York asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder on behalf of a class of purchasers of the Companys common stock during the
period from June 26, 2003, through and including February 4, 2005 (the Class Period).
Dr. M. Hausman (a director and former

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|CEO of Axonyx), and Dr. G. Bruinsma (Axonyx CEO) were also named as defendants in the lawsuits. On
April 10, 2006, following consolidation of the actions into a single class action
lawsuit, the lead plaintiffs filed a consolidated amended complaint. The Companys motion to
dismiss the consolidated amended complaint was filed on May 26, 2006 and will be submitted to the
Court for a decision following the parties filing of their legal briefs.
The class action plaintiffs allege generally that Axonyxs Phase III Phenserine development program

was subject to alleged errors of design and execution which resulted in the failure of the first

Phase III Phenserine trial to show efficacy. Plaintiffs allege the defendants failure to
disclose
the alleged defects resulted in the artificial inflation of the price of the Companys
shares
during the Class Period.
There is also a shareholder derivative suit pending in New York Supreme Court (New York County) against

current and former directors and officers of Axonyx. The named defendants are Marvin S. Hausman,

Gosse B. Bruinsma, S. Colin Neill, Louis G. Cornacchia, Steven H. Ferris, Gerald J. Vlak, Ralph
Snyderman
and Michael A. Griffith. Defendants are alleged to have breached their duties to the
Company and
misused inside information regarding clinical trials of Phenserine. This action has
been stayed pending
further developments in the federal class action.
The complaints seek unspecified damages. The Company believes the complaints are without merit and

intends to defend these lawsuits vigorously. However, the Company cannot make assurances that it

will prevail in these actions, and, if the outcome is unfavorable to Axonyx, its reputation, operations

and share price could be adversely affected.
(8) New Accounting Pronouncement
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement
No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material
impact on our financial reporting, and the Company is currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q contains forward-looking statements, as defined in the Private Securities
Litigation Reform Act of 1995 that are based on current expectations, estimates and projections.
Statements that are not historical facts, including statements about our beliefs and expectations,
are forward-looking statements. These statements involve potential risks and uncertainties; therefore,
actual results may differ materially. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they were made. We do not undertake any obligation
to update any forward-looking statements, whether as a result of new information, future events or
otherwise.
Specifically, with respect to our drug candidates Phenserine, Posiphen and Bisnorcymserine, Axonyx
cannot assure that: any preclinical studies or clinical trials, whether ongoing or conducted in the
future, will prove successful, and if successful, that the results can be replicated; safety and
efficacy profiles of any of its drug candidates will be established, or if established, will remain
the same, be better or worse in future clinical trials, if any; pre-clinical results related to cognition
and the regulation of beta-APP will be substantiated by ongoing or future clinical trials, if any,
or that any of its drug candidates will be able to improve the signs or symptoms of their respective
clinical indication or slow the progression of Alzheimers disease; any of its drug candidates
will support an NDA filing, will be approved by the FDA or its equivalent, or if approved, will prove
competitive in the market; or that Axonyx will have or obtain the necessary financing to support
its drug development programs. Axonyx cannot assure that it will be successful with regard to identifying
a (sub-) licensing partner for any of its compounds, or that any such partner will successfully develop
or commercialize any of such compounds. Axonyx undertakes no obligation to publicly release the result
of any revisions to such forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
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|We refer you to our report on form 10-K for the year ended December 31, 2005 filed with the SEC, where these risks and others are more fully described.
      We do not undertake to discuss matters relating to our ongoing clinical trials or our regulatory strategies beyond those which have already been made public or discussed herein.
      Recent Events
      On June 8, 2006, the Company announced that it had entered into a definitive merger agreement with TorreyPines Therapeutics, Inc., a private company. The merger would create a NASDAQ listed biopharmaceutical company that discovers and develops treatments for central nervous system (CNS) disorders. The resulting company will be named TorreyPines Therapeutics, Inc. and be headquartered in San Diego, California.
      Under terms of the agreement, unanimously approved by both boards of directors, Axonyx would issue, and TorreyPines stockholders would receive, in a tax-free transaction, shares of Axonyx common stock such that TorreyPines stockholders would own approximately 58% of the combined company and Axonyx stockholders would own approximately 42%. These relative percentages will be adjusted if either party out-licenses one or more product candidates prior to closing. In addition, TorreyPines preferred shareholders will receive warrants to purchase combined company shares that, if fully exercised at closing, would give TorreyPines shareholders approximately 62% of the combined company.
The transaction is subject to Axonyx maintaining certain minimum cash levels, as well as certain other customary conditions, including obtaining approval of each companys stockholders. The transaction is expected to close during the fourth quarter of this year. Upon closing, the company is expected to trade on the NASDAQ Stock Market for which the company has reserved the symbol TPTX.
      On July 25, 2006 the Company filed a Registration Statement on Form S-4 with the SEC which details the required format proxy disclosure in connection with the merger.
      Our common stock is listed on the NASDAQ Capital Market (formerly known as the NASDAQ SmallCap Market). In order to maintain our listing, we must meet minimum financial and other requirements. If we are unable to comply with NASDAQs listing standards, may determine to delist our common stock from the NASDAQ Capital Market. On August 2, 2006, we received notice from NASDAQ stating that we were out of compliance with bid price requirements because the closing bid price for our common stock was below $1.00 per share for 30 consecutive business days. We would have 180 days to regain compliance with bid price requirements.
To regain compliance the closing bid price for our common stock must be a minimum of $1.00 per share for at least 10 consecutive business days. If NASDAQ made a determination to delist our common stock, the delisting procedure would involve a process beginning with NASDAQs notification and would include a hearing and the possibility of appeal. There is no assurance that at the end of this process our common stock would continue to be listed on the NASDAQ Capital Market. If our common stock is delisted for any reason, it could reduce the value of our common stock and its liquidity, and could potentially adversely impact our proposed merger with TorreyPines Therapeutics Inc. Delisting could also adversely affect our ability to obtain financing for the continuation of our operations or to use our common stock in acquisitions. Delisting could result in the loss of confidence by suppliers, customers and employees.
      Overview of our Company
    We are a biopharmaceutical company, specializing in central nervous system (CNS) neurodegenerative diseases, engaged in the business of acquiring patent rights to clinical stage compounds, compounds with strong proof of concept data and compounds ready for proof of concept validation with convincing scientific rationale, or potentially another company with similar rights. We further develop and add value to these compounds and then seek to out-license or partner them when we believe it business prudent. We have acquired patent rights to three main classes of therapeutic compounds designed for the treatment of Alzheimers disease (AD), Mild Cognitive Impairment, and related diseases.
We have acquired patent rights to a class of potential therapeutic compounds designed for the treatment of prion related diseases, which are degenerative diseases of the brain that are thought to be caused by an infectious form of a protein called a prion. Prions, unlike viruses, bacteria and fungi, have no DNA and consist only of protein. Such diseases include Creutzfeldt Jakob Disease, new variant in humans, Bovine Spongiform Encephalopathy (BSE or Mad Cow Disease) in cows, and Scrapies disease in sheep. We have licensed
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|these patent rights from New York University. We also have co-ownership rights to patent applications
regarding the therapeutic compound named Posiphen designed for the treatment of AD progression
and Bisnorcymserine (BNC) in development for the treatment of severe AD.
Our mission is to be a leading biopharmaceutical company that develops products and technologies to
treat central nervous system disorders. Our initial business strategy has been focused primarily
on three compounds in development for AD. These are:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |        Phenserine  A symptomatic and disease progression
  treatment of mild to moderate AD
| | ---------------------------------------------------------------------------------------------
| |                                                                                              
| |        Posiphen  A disease progression treatment for AD                                   
| |                                                                                              
| |        Bisnorcymserine (BNC)  A symptomatic treatment
  of severe AD                       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|Our current business strategy includes identifying and seeking to in-license potential compounds or
partner with companies to expand our product development portfolio. Partnering may take the form
of a business combination in which we merge with, acquire, or are acquired by, another company. See
Recent Events, above.
Phenserine is an inhibitor of acetylcholinesterase for the potential treatment of mild to moderate
AD. Acetylcholinesterase is an enzyme active in the nerve synapse that degrades the neurotransmitter
acetylcholine in the brain and other tissues of the body. Acetylcholinesterase inhibitors are drugs
designed to selectively inhibit acetylcholinesterase. Acetylcholine is a chemical substance that
sends signals between nerve cells, called neurotransmission, and is therefore called a neurotransmitter.
Neurotransmitters are secreted by neurons, or nerve cells, into the space between neurons called
the synapse. Acetylcholine is a primary neurotransmitter in the brain, and is associated with memory
and cognition. Inhibition of its breakdown in AD patients has been shown to improve memory and cognition.
Posiphen is a compound that appears to decrease the formation of the beta amyloid precursor protein
(beta-APP) and amyloid with potential applications in the treatment of AD progression. Posiphen
is the positive isomer of Phenserine. As such, it appears to affect the messenger RNA of beta-APP
as well as inhibit beta secretase whereby levels of neurotoxic beta amyloid, in preclinical animal
models, are reduced.
Bisnorcymserine is a butyrylcholinesterase inhibitor. Butyrylcholinesterase is found in high concentration
in the plaques taken from individuals who have died from AD. Butyrylcholinesterase is an enzyme that
is normally found widely in the body and butyrylcholine appears to play a relatively increasingly
important role in advancing AD. Inhibition of the enzyme may prove valuable in the treatment of severe
AD.
The Phenserine Development Program
Our most advanced compound, Phenserine, selectively inhibits acetylcholinesterase, the enzyme primarily
responsible for degrading acetylcholine at the synaptic gap between neurons, thus increasing the
availability of this neurotransmitter. Phenserine has been shown to be a potent and selective inhibitor
of this enzyme in the rat brain and increases memory and learning over a wide therapeutic dosage
range in aged rats without causing toxic side effects. The compound readily enters the brain, has
minimal activity in other organs outside the brain, and has a long duration of action. In pre-clinical
studies, Phenserine was shown to have a brain to blood ratio of 10:1. Increasing the concentration
of the active drug agent in the brain versus the rest of the body potentially maximizes the effects
of the drug while potentially reducing peripherally mediated side effects.
Phenserine also has been shown to have the ability to inhibit the formation of the beta-amyloid precursor
protein (beta-APP), a large protein that is the source of the neurotoxic peptide , beta amyloid.
By inhibiting the formation of beta-APP, Phenserine can decrease the presence of the soluble beta
amyloid protein that is potentially deposited in the brain as amyloid plaques, apparently causing
eventual neuronal cell death. These studies were conducted at laboratories at the National Institute
of Aging (NIA) in human neuroblastoma cell cultures and in vivoin rodents. Studies in human neuroblastoma cell lines showed that the compound reduces the formation
of beta-amyloid peptide. Neuroblastoma cell cultures are a type of cell derived from the human brain
that can be grown in containers in the lab (in vitro) where they are able to reproduce and carry out many activities as if they were residing in the brain,
including the synthesis and secretion of proteins such as the beta-amyloid protein which, in the
human brain, can form plaques. A neuroblastoma cell culture is used to study brain cell function
in a simple in vitrosystem, which allows testing of the ability of drugs to prevent the formation of the beta-amyloid precursor
protein and

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|secretion of beta amyloid. Additional animal studies using the transgenic mouse have confirmed these
findings. The transgenic mouse is a bio-engineered animal that mimics hallmark pathologic changes
that occur in the human AD brain. These results suggest that Phenserine may have the ability to slow
the progression of AD in addition to providing symptomatic relief for the cognitive changes.
In December 1999, we initiated Phase I human clinical trials for Phenserine utilizing healthy elderly
patients at a U.S. research center. These Phase I safety and tolerance trials involving both single
and multiple ascending doses were successfully completed in September 2000.
In October 2001, we completed a Phase II proof-of-concept double-blind placebo-controlled clinical
trial with Phenserine in AD patients. This Phase II proof-of-concept trial was designed to determine
the drugs safety and possibly a trend toward efficacy in patients exhibiting mild to moderate
AD. The trial included 72 patients, with 48 patients receiving two daily doses of Phenserine 10mg
and 24 patients received a placebo. The safety results from the trial substantiated Phase I results
indicating that the drug is safe and well tolerated. Although the trial was not of the duration necessary
and did not include the number of patients required to detect statistically significant clinical
improvement in efficacy, nevertheless certain memory tests showed statistically significant results
while other tests showed a trend towards statistical significance.
To date, we have conducted the following Phase III clinical trials with Phenserine: AX-CL-06/06e, AX-CL-09,
AX-CL-010, as well as a Phase IIb trial, AX-CL-06a.
Protocol AX-CL-06 was a double-blind, placebo controlled trial initiated in June 2003 comparing the
efficacy and tolerability of Phenserine 10mg or 15mg twice daily doses with twice daily placebo in
patients who met the diagnostic criteria for probable mild to moderate AD. Two different regimens,
10mg twice daily and 15mg twice daily, were compared with placebo in this trial. The randomization
was 1:2:2 for placebo: 10mg twice daily: 15mg twice daily respectively. Patients randomized to active
treatment were started on a 5mg twice daily regimen for the first month of treatment. This was increased
to 10mg twice daily for the second month of treatment. The dose was then increased to 15mg twice
daily during the third through sixth month for those patients randomized to the highest dose regimen.
Once a patient reached his or her target dose, it was maintained for a total treatment duration of
26 weeks. Patients who could not tolerate their target dose were discontinued. Discontinued patients
were not replaced. A total of 384 patients were enrolled in the study. Of these, 377 received treatment.
The remaining 7 never received drug treatment so they were excluded from the data analyses.
The primary
efficacy variables were the Alzheimers Disease Assessment Scale-cognitive subscale (ADAS-Cog)
and Clinical Interview Based Impression of Change (CIBIC+). The Phenserine groups showed consistently
greater improvement in ADAS-Cog and CIBIC+ scores than the placebo group although the differences
did not achieve statistical significance.
Protocol AX-CL-06a was a double-blind placebo controlled study of the effect of Phenserine 10- or 15mg
twice daily on cerebrospinal and plasma amyloid peptides from baseline and, at 26 weeks, initiated
in June 2003. Both doses of Phenserine tended to lower the plasma levels of beta-amyloid peptides
more than placebo, while beta- amyloid levels in the CSF declined in those patients treated with
placebo. This decline of amyloid levels in the CSF of untreated AD patients is consistent with historical
and epidemiological data. None of the differences achieved statistical significance.
Protocol AX-CL-06e was an open-label extension to studies AX-CL-06 and AX-CL-06a that allowed all patients
who had successfully completed either trial to continue on Phenserine 15mg twice daily dose for up
to an additional six months. This extension was to gather additional safety data on Phenserine treatment.
Protocol AX-Cl-09/010, initiated in the second half of 2004, was originally initiated as two identical
26-week placebo controlled trials of 450 AD patients each. During the implementation of the studies,
results of Protocol AX-CL-06 became available. The results of this earlier study showed a numerical
benefit of Phenserine treatment relative to placebo but failed to achieve statistical significance.
Based on these results, enrollment in the two ongoing studies was halted at 255 patients in total,
and the primary endpoint analysis was shortened to 12 weeks. Because the individual curtailed studies
were underpowered, their data were combined and analyzed as a single trial. This was a randomized,
multinational, multicenter placebo-controlled parallel-group study. Because the study was curtailed,
many patients did not reach the originally scheduled 26-week end of treatment. However, all patients
were allowed to complete at least 12 weeks of therapy. Patients were screened within 21 days of entry
and randomly assigned to receive 10 or 15 mg of Phenserine twice daily or placebo. A titration schedule
was used so that patients
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|randomized to active treatment received 5mg twice daily for the first 4 weeks of the study followed
by 10mg twice daily for 4 weeks. Patients randomized to 15mg twice daily received this dose starting
in the ninth week. Treatment at the assigned doses was continued for up to 26 weeks. At the 12-week
visit, patients randomized to 10mg twice daily had received this dose for approximately 8 weeks.
Patients randomized to receive 15mg twice daily had received this dose for approximately 4 weeks.
Although
the study did not achieve statistical significance in its primary endpoints, a subgroup of
patients, who received Phenserine 15mg twice daily, demonstrated a statistically significant benefit
over placebo as measured by the ADAS-cog,
when treated for more than 12 weeks. Additionally, this subgroup showed a positive trend towards
improvement in the CIBIC+ test, which approached
statistical significance. There were no unexpected safety or tolerability concerns associated with
Phenserine treatment.
We have
comprehensive data sets on Phenserine having completed extensive manufacturing scale-up, preclinical
studies and taken the drug into three Phase III clinical trials for mild to moderate AD. The Company has determined that it will not commit further resources to these Phase III
trials, and is seeking to identify strategic partners that are able and willing to commit the necessary
financial resources to Phenserines further development and marketing approval.
On January 4, 2006, we announced that we had granted to Daewoong Pharmaceutical Company Ltd. (Daewoong)
an exclusive license for the use of Phenserine in the South Korean market. Under the terms of the
agreement Daewoong, at its own costs, undertakes to pursue the product development and regulatory
work necessary for a New Drug Application (NDA) (or its equivalent) in South Korea with respect to
Phenserine for the treatment of AD. The financial terms of the deal include royalty payments to us
based on sales of Phenserine by Daewoong in the South Korean market.
On January 31, 2006, we announced that three presentations of data on our drug development candidate,
Phenserine, and one presentation of data on its drug development candidate, Posiphen, would
be made at the 9th International Geneva/Springfield Symposium on Advances in Alzheimer Therapy in
Geneva, Switzerland, being held April 19-22, 2006. Phenserine has been in development by the Company
for the treatment of mild to moderate Alzheimers disease (AD) and Posiphen is currently
in clinical development for the treatment of AD progression.
On
February 14, 2006, we reported a statistically significant reduction compared to baseline in the plasma levels of beta-amyloid
1-42 (Aß-42) in healthy human subjects treated with Phenserine for 35 days in a previously conducted
Phase I study.
On April 19, 2006 we reported an analysis of results suggesting stabilization of total brain volume
and brain parenchymal fraction of mild-to-moderate Alzheimers disease (AD) patients treated
with Phenserine 10mg or 15mg twice daily (BID) for 26-weeks. The data was presented in its entirety
as a poster in Geneva on Thursday, April 20, 2006 at the 9th International Geneva/Springfield Symposium on Advances in Alzheimer Therapy.
On April 20, 2006 we reported on data showing an increase in brain glucose metabolism and reduction
of brain amyloid levels in the memory and cognition areas in brains of mild-to-moderate Alzheimers
disease (AD) patients treated with Phenserine 15mg twice daily (BID) for 13-weeks. The data was included
in an oral presentation by Prof. Dr. Agneta Nordberg, MD, PhD of the Karolinska Institute, Stockholm,
Sweden, on Friday, April 21st, 2006 at the 9th International Geneva/Springfield Symposium on Advances in Alzheimer Therapy.
The Posiphen Development Program
Posiphen is the
positive isomer of Phenserine. It appears to decrease the formation of beta-amyloid (Aß)
with potential application in the treatment of AD progression.

The build-up of beta-amyloid (Aß) is generally believed to
be causative of the dementia of Alzheimers disease and its progression.

Posiphens mechanism of action is potentially through RNA translational inhibition and possibly beta secretase inhibition. Posiphen
has been shown to lower beta amyloid precursor protein (beta-APP) and beta-amyloid levels in pre-clinical
studies. The primary mechanism of action results in a dose dependent reduction of beta-amyloid, which
may result in slowing AD progression. The initial pre-clinical side effect rates potentially allow
for higher clinical doses. On August 1, 2005 we announced that the US Food and Drug Administration
(FDA) approved our investigational new drug (IND) application allowing Phase I clinical testing of
Posiphen. The first Phase I single ascending dose clinical study commenced in August 2005 and
evaluated the safety of Posiphen in healthy volunteers.
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|In January 2006, we completed a single ascending dose Phase I trial with Posiphen. This double-blind,
placebo controlled study of Posiphen in healthy men and women sought to establish well tolerated
doses. Posiphen appears to be well tolerated at single doses up to and including 80mg. Blood
levels of Posiphen associated with this study were higher than those associated with beneficial
effects on beta-amyloid metabolism in animal models. The build-up of beta-amyloid (Aß) is generally
believed to be causative of the dementia of AD. No serious adverse events were reported at any dose
level. We initiated a Phase I multiple ascending dose study in the first quarter of 2006.
On April 24, 2006, we announced the results of an independent research study showing that Posiphen
increased the ability of transplanted human neuronal stem cells (HNSC) to differentiate into neurons
in APP transgenic mice, a model of Alzheimers disease (AD) in humans.
On May 15, 2006 we announced the completion of a multiple dose Phase I study with Posiphen in
clinical development for the treatment of Alzheimers disease progression.
This
double-blind, placebo-controlled multiple ascending dose safety and pharmacokinetic study of Posiphen
in healthy volunteers sought to establish well tolerated doses. The initial review of the clinical
adverse event data appears to be generally consistent with the results of the earlier single ascending
dose Phase I study that suggested that the mean Posiphen blood levels associated with well tolerated
doses in humans are higher than those associated with potentially beneficial effects on beta-amyloid
metabolism in animal models. No serious adverse
events were reported at any dose level in this second Phase I study.
This multiple ascending-dose study examined the effects of Posiphen 20, 40 and 60mg given four times
daily, for a period of 7, 7 and 10 days respectively. On the first and last day of each dosing period
one single dose of Posiphen was given. Each dose period was completed and evaluated for safety and
tolerance before the next higher dose level was initiated. Each cohort was composed of a different
set of 16 subjects, comprised of 12 who received Posiphen and 4 who received placebo, with equal
numbers of males and females in each.
The necessary detailed safety, pharmacokinetic and pharmacodynamic analyses are ongoing. Based on this
favorable clinical outcome, we are evaluating plans regarding the further clinical development steps
for Posiphen.
The Bisnorcymserine Development Program
Our butyrylcholinesterase inhibitor compounds are designed to selectively inhibit butyrylcholinesterase,
an enzyme similar to acetylcholinesterase. Normally these two enzymes coexist throughout the body,
with acetylcholinesterase predominating in degrading acetylcholine. In the brain of AD patients,
as acetylcholinesterase levels gradually fall, there appears to be a concomitant increase in butyrylcholinesterase
levels in specific nerve pathways within the cortex and the hippocampus, areas associated with AD.
Like acetylcholinesterase, butyrylcholinesterase degrades acetylcholine at the synaptic gap between
neurons, decreasing the availability of this key neurotransmitter. This enzyme was identified as
a target for inhibition in AD as it also terminates the action of the neurotransmitter acetylcholine
in specific nerve pathways in regions of the brain associated with AD and is found in high concentration
in amyloid plaques in the brains of AD patients. Our butyrylcholinesterase inhibitor compounds act
to counter butyrylcholinesterase, thus enhancing the availability of acetylcholine, potentially improving
memory and cognition. Inhibition of butyrylcholinesterase may also reduce any increased toxicity
of beta-amyloid caused by the presence of butyrylcholinesterase in amyloid plaques.
Several butyrylcholinesterase inhibitor drug candidates, including Bisnorcymserine, have been studied
extensively in pre-clinical studies and have been found to have many of the characteristics desirable
for use in AD. Like Phenserine, these compounds have a dual mechanism of action in that, in addition
to inhibiting the butyrylcholinesterase enzyme, they also inhibit the formation of beta-APP in cell
culture, and in rats. These pre-clinical findings indicate that these butyrylcholinesterase inhibitor
compounds may have an important role in preventing the formation of amyloid plaques in AD, in addition
to its inhibition of butyrylcholinesterase. The compounds readily enter the brain, they have a long
duration of action and are highly active in improving memory and learning in the aged rat. Currently
it appears that Bisnorcymserine has several advantages over the other
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|compounds in pre-clinical results. Bisnorcymserine appears to be the most potent butyrylcholinesterase
inhibitor in our patent portfolio. It has a 100-fold selectivity over acetylcholinesterase. Behavioral
work shows it to improve memory in rodent models, and it reduces beta-APP in tissue cultures. Bisnorcymserine
has three potential uses: (1) as an inhibitor of butyrylcholinesterase, (2) as an inhibitor of the
production of beta-APP, thus inhibiting the formation of amyloid plaques, and (3) as an early diagnostic
marker.
Bisnorcymserine
(BNC) is a highly selective butyrylcholinesterase inhibitor. Butyrylcholinesterase
is found in high concentration in the plaques taken from individuals who have died from AD. Butyrylcholinesterase
appears to have an increasing role with advancing AD and its primary mechanism of action results
in a dose dependent reduction of acetylcholine. The initial pre-clinical side effect rate potentially
allows higher clinical doses. A secondary mechanism of action is associated with dose dependent reductions
of beta APP and amyloid beta. BNC, the lead compound from our butyrylcholinesterase family, is currently
in full pre-IND development and we plan an IND submission in third quarter 2006 followed by the
potential to initiate Phase I clinical trials thereafter. A recently published article in the Proceedings
of the National Academy of Science describes the underlying mechanism, in vitro and cognition results
in animal models.
RESULTS OF OPERATIONS
Revenues
The Company had no revenue for the quarters ended June 30, 2006 and 2005. The Company had no revenue
for the six months ended June 30, 2006 and $403,000 in revenue for the six months ended June 30,
2005. Revenue in 2005 was derived exclusively from the sale of research assays and fine chemicals
at OXIS. The reduction in revenue in 2006 from prior year levels results from the fact that OXIS
operations are no longer being consolidated with our results effective March 1, 2005 as discussed
in Note 3 to the condensed consolidated financial statements.
Costs of Sales
The Companys costs of sales were entirely related to its subsidiary, OXIS. The percentage of
cost of sales for the six months ended June 30, 2005 was 52%.
Research and Development
Research and development expenses were $2,958,000 and $7,351,000 for the quarters ended June 30, 2006
and 2005, respectively. Research and development costs declined by $4,393,000 from the prior years
quarter ended June 30, 2005. This reduction reflects a decline in Phenserine program expenditures
of $5,282,000 due to the completion/curtailment of the Phenserine trials in late 2005. This reduction
is offset, in part, by increased expenditures of $429,000 in the Posiphen program, $377,000 in the
Bisnorcymserine program and $252,000 in non cash employee option charges incurred for related to
the adoption of FASB 123(R) as discussed in note 5 in the notes to consolidated financial statements.
In 2006 Posiphen is in clinical Phase I studies and Bisnorcymserine was in pre-clinical development
towards filing an investigational new drug application (IND). Additional research and development
expense reductions include research project costs, insurance and salary expenses.
Research and development expenses were $5,619,000 and $16,673,000 for the six months ended June 30,
2006 and 2005, respectively. Research and development costs declined by $11,054,000 from the six
months ended June 30, 2005. This reduction reflects a decline in Phenserine program expenditures
of $12,328,000 due to the completion/curtailment of the Phenserine trials in late 2005. This reduction
is offset, in part, by increased expenditures of $519,000 in the Posiphen program and $521,000 in
the Bisnorcymserine program. Additional research and development expense reductions include travel
costs, consultants and salary expenses.
Sales, General and Administrative
Sales, general and administrative expenses were $1,683,000 and $1,213,000 for the quarters ended June
30, 2006 and 2005, respectively. Sales, general and administrative expenses increased $470,000 over the
prior years quarter ended June 30, 2005. This increase is attributed to a $436,000 increase
in professional fees primarily resulting from costs related to the merger agreement discussed in
note 1, Recent Events and a $125,000 increase in non-cash charges related to employee stock option
grants related to the adoption of FASB 123(R) as discussed in note 5 in the
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|notes to consolidated financial statements. These increases are offset in part by an $86,000 reduction
in investor relations costs.
Sales, general and administrative expenses were $3,553,000 and $2,876,000 for the six months ended
June 30, 2006 and 2005, respectively. Sales, general and administrative expenses increased $677,000
from the six months ended June 30, 2005. This increase is attributed to a $400,000 increase in patent
acquisition costs, a $440,000 increase in non-cash charges related to stock option grants to consultants
and employees and a $201,000 increase in professional fees primarily resulting from costs related
to the merger agreement discussed in note 1, Recent Events. These increases are offset in part by
a $116,000 reduction in investor relations costs and a $332,000 reduction in OXIS expenses which
are no longer consolidated with our results effective March 1, 2005 as discussed in Note 3 to the
condensed consolidated financial statements.
Other Income (Expense)
Interest income was $625,000 and $558,000 for the quarters ending June 30, 2006 and 2005, respectively.
Interest income was $1,332,000 and $1,130,000 for the six months ended June 30, 2006 and 2005, respectively.
Interest income reflects the decline in cash and investment balances offset by a rise in short term
interest rates.
Foreign exchange losses for the quarters ended June 30, 2006 and 2005 were $32,000 and $56,000, respectively.
Foreign exchange losses of $23,000 and $81,000 were incurred for the six months ended June 30, 2006
and 2005, respectively. The decline in foreign exchange losses reflects more stable exchange rates
and a decline in the volume of Euro denominated transactions which reflects the completion of Phenserine
trials occurring in Europe in late 2005.
Gain on issuance of subsidiary stock was $78,000 net for the six months ended June 30, 2006. This gain
on issuance of subsidiary stock results from common stock equity transactions in OXIS.
Equity in loss of OXIS of $415,000 reflects the Companys proportional share of OXIS losses for
the six months ended June 30, 2006 under the equity method of accounting.
Net Loss
The Company experienced net losses of $4,183,000 ($0.08 per share-basic and diluted) and $8,179,000
($0.15 per share-basic and diluted) for the quarters ended June 30, 2006 and 2005, respectively.
The Company experienced net losses of $8,200,000 ($0.15 per share basic and diluted) and $18,612,000
($0.35 basic and diluted) for the six months ended June 30, 2006 and 2005, respectively. The decline
in loss primarily reflects reduced expenditures in 2006 due to the completion/curtailment of the
Phenserine development program in late 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006 we had $50,730,000 in cash, cash equivalents and investments, and $46,624,000 in
working capital. We do not have any available lines of credit. Since inception we have financed our
operations from private placements of equity securities, the exercise of common stock purchase warrants,
license fees, interest income and loans from a shareholder.
Net cash used in operating activities for the six months ended June 30, 2006 was $7,608,000 resulting
from a net loss of $8,200,000 and a decline of $2,017,000 in accounts payable. These declines are
offset in part by non-cash expenses of $251,000 in depreciation and amortization, $843,000 in compensation
related to options and warrants issued for services, $415,000 in equity in loss of OXIS and $274,000
in other current assets.
Net cash provided by investing activities for the six month ended June 30, 2006 resulted from investment
sales and maturities in excess of investment purchases.
We plan to finance our needs principally from the following:
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |  | our existing capital resources and interest earned on that capital; and
| | - | -----------------------------------------------------------------------
| |   |                                                                        
| |  | future private placement financing or other equity financings.         

|                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|We believe that we have sufficient capital resources to finance our plan of operation at least through
June 30, 2007. However, as this is a forward-looking statement, and there may be changes that could
consume available resources significantly before such time including the impact of our proposed merger
with TorreyPines Therapeutics

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|Inc. (see Recent Events above). Our long term capital requirements and the adequacy of our available
funds will depend on many factors, including the effects of the proposed merger with TorreyPines
Therapeutics Inc., eventual contract costs of undertaking large later stage clinical trials with
any of our compounds under development, the potential cost of acquiring or developing compounds that
we may license in, regulatory delays, patent costs for filing, prosecuting, maintaining and defending
our patent rights, and defending our current class action securities litigation, among others.
We may be periodically seeking potential equity financing, sub-licensing and other collaborative arrangements
that may generate additional capital for us in order to support our research and development activities.
We cannot assure you that we will generate sufficient additional capital or revenues, if any, to
fund our operations beyond June 30, 2007, that any future equity financings will be successful, or
that other potential financings through bank borrowings, debt or equity offerings, or otherwise,
will be available on acceptable terms or at all.
As described in Recent Events above, and elsewhere in our SEC filings, we have entered into a definitive
merger agreement with TorreyPines Therapeutics Inc. The completion of this merger is subject to shareholder
approval and is expected to close during the fourth quarter of 2006. Our business plan, portfolio
prioritization and liquidity needs will all be reassessed upon completion of the merger.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations are based on our
financial statements that have been prepared under generally accepted accounting principles (GAAP)
of the United States of America. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires our management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could materially differ from
those estimates. We have disclosed all significant accounting policies in note B to the financial
statements included in our annual report on Form 10-K for the year ended December 31, 2005. Our critical
accounting policies are:
Principles of consolidation: Our consolidated financial statements include the accounts of Axonyx Europe, B.V., a wholly owned
subsidiary organized in The Netherlands.
Revenue recognition: We defer recognition of revenue from fees received in advance unless they represent the culmination
of a separate earnings process. Such deferred fees are recognized as revenue over the term of the
arrangement as they are earned, in accordance with the agreement. License fees represent the culmination
of a separate earnings process if they are sold separately without obligating us to perform research
and development activities or other services. Right to license fees is recognized over the term of
the arrangement. Nonrefundable, non-creditable license fees that represent the culmination of a separate
earnings process are recognized upon execution of the license agreement. Revenue from the achievement
of milestone events stipulated in the agreements will be recognized when the milestone is achieved.
Royalties will be recognized as revenue when the amounts earned become fixed and determinable.
Research, development costs: Research and development costs are expensed as incurred.
Stock-based compensation: Commencing January 1, 2006 we adopted Statement of Financial Accounting Standard No. 123R, Share
Based Payment (SFAS 123R), which requires all share-based payments, including grants
of stock options, to be recognized in the statement of operations as an operating expense, based
on fair values on grant date. Prior to adopting SFS 123R, we accounted for stock-based employee compensation
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
We have applied the modified prospective method in adopting SFAS 123R. Accordingly, periods prior
to adoption have not been restated.
Accounting for Investment in OXIS: Beginning March 1, 2005, the Company accounts for its investment in OXIS under the equity method of
accounting, as prescribed by Accounting Principals Board Opinion No. 18 The Equity Method of
Accounting for Investments in Common Stock. (See Note 3 to Condensed Consolidated Financial
Statements)
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|Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have foreign currency accounts that are exposed to currency exchange risk. These foreign currency
accounts have been utilized to fund the operations of our wholly owned subsidiary, Axonyx Europe,
based in The Netherlands. We had a net foreign exchange losses of $23,000 and $81,000 for the six
months ended June, 2006 and 2005, respectively. If the foreign currency rates were to fluctuate by
10% from rates at June 30, 2006, the effect on our financial statements would not be material. However,
there can be no assurance there will not be a material impact in the future. During 2003, we adopted
a policy to limit the purchase of foreign currencies to the amounts necessary to cover firm contractual
commitments in foreign currencies for the forward six months. However, as long as we continue to
fund our foreign operations and activities, we will be exposed to some currency exchange risks. The
majority of our ongoing clinical trials are/were being conducted in Europe.
We consider our investments in money market accounts and time deposits as cash and cash equivalents
that have original maturities of three months or less at inception. The carrying values of these
investments approximate fair value because of the nature of these instruments and accounts. We classify
our investments in auction rate securities as short-term investments. The carrying value of these
securities approximates fair value because of the liquidity they are traded as short term investments
due to the interest reset feature. Therefore, changes in the markets interest rates do not
affect the value of the investments as recorded by us.
We do not enter into or trade derivatives or other financial instruments or conduct any hedging activities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, under the supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness
of the Companys disclosure controls and procedures as of June 30, 2006. Disclosure controls
and procedures are defined in the Securities Exchange Act as controls and other procedures of the
Company designed to ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms and include controls
and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits to the SEC is accumulated and communicated to the Companys
management, including the CEO and CFO, to allow timely decisions regarding required disclosure. Based
on its review and evaluation, the Companys management has concluded that the Companys
disclosure controls and procedures were effective as of June 30, 2006.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with
the evaluation of our internal control performed during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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|PART II  OTHER INFORMATION
Item 1. Legal Proceedings
Several lawsuits were filed
against the Company in February 2005 in the U.S. District Court for the Southern District of New
York asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder on behalf of a class of purchasers of the Companys common stock during the
period from June 26, 2003, through and including February 4, 2005 (the Class Period).
Dr. M. Hausman (a director and former CEO of Axonyx), and Dr. G. Bruinsma (Axonyx CEO) were also
named as defendants in the lawsuits. On April 10, 2006, following consolidation of the actions into
a single class action lawsuit, the lead plaintiffs filed a consolidated amended complaint. The Companys
motion to dismiss the consolidated amended complaint was filed on May 26, 2006 and will be submitted
to the Court for a decision following the parties filing of their legal briefs.
The class action plaintiffs allege generally that Axonyxs Phase III Phenserine development program

was subject to alleged errors of design and execution which resulted in the failure of the first

Phase III Phenserine trial to show efficacy. Plaintiffs allege the defendants failure to
disclose
the alleged defects resulted in the artificial inflation of the price of the Companys
shares
during the Class Period.
There is also a shareholder derivative suit pending in New York Supreme Court (New York County) against

current and former directors and officers of Axonyx. The named defendants are Marvin S. Hausman,

Gosse B. Bruinsma, S. Colin Neill, Louis G. Cornacchia, Steven H. Ferris, Gerald J. Vlak, Ralph
Snyderman
and Michael A. Griffith. Defendants are alleged to have breached their duties to the
Company and
misused inside information regarding clinical trials of Phenserine. This action has
been stayed pending
further developments in the federal class action.
The complaints seek unspecified damages. The Company believes the complaints are without merit and

intends to defend these lawsuits vigorously. However, the Company cannot make assurances that it

will prevail in these actions, and, if the outcome is unfavorable to Axonyx, its reputation, operations

and share price could be adversely affected.
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|Item 6. Exhibits.
|-----------------
|                 

|Number |  | Exhibits                                                                                                                                                                                                                                                                                                                                               
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|2.1    |  | Agreement and Plan of Merger and Reorganization, dated as of June 7, 2006, between Axonyx Inc.
           and TorreyPines Therapeutics, Inc. (incorporated by reference to the correspondingly-numbered
           exhibit to the registrants Current Report on Form 8-K filed June 12, 2006)                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|2.2    |  | Form of Voting Agreement, dated as of June 7, 2006, between Axonyx Inc. and certain
           stockholders of TorreyPines Therapeutics, Inc. (incorporated by reference to the
           correspondingly-numbered exhibit to the registrants Current Report on Form 8-K filed June 12,
           2006)                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|2.3    |  | Form of Voting Agreement, dated as of June 7, 2006, between TorreyPines Therapeutics, Inc. and
           certain stockholders of Axonyx Inc. (incorporated by reference to the correspondingly-numbered
           exhibit to the registrants Current Report on Form 8-K filed June 12, 2006)                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|4.1    |  | Rights Agreement Amendment, dated as of June 7, 2006, to the Rights
           Agreement, dated as of May 13, 2005, between Axonyx Inc. and The
           Nevada Agency and Trust Company (incorporated by reference to the
           correspondingly-numbered exhibit to the registrants Current Report
           on Form 8-K filed June 12, 2006)
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|31.1   |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14 (a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|31.2   |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14 (a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                        
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                         

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|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.
Dated August 8, 2006.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                         

| | AXONYX INC.                                 
| | --------------------------------------------
| |                                             
| | By: /s/ Gosse B. Bruinsma, M.D.             
| |                                             
| | Gosse B. Bruinsma, M.D.                     
| | President and Chief Executive Officer       
| |                                             
| | By: /s/ S. Colin Neill                      
| |                                             
| | S. Colin Neill                              
| | Chief Financial Officer,                    
| | Secretary and Treasurer                     
| | (Principal Financial and Accounting Officer)

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