SECURITIES AND
      EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT
PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended September 30, 2004 or |_| 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
(State or other jurisdiction of
incorporation or organization)
        86-0883978
(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. Yes |X| No |_|. Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes
|_|   No  |X|. As of November 10, 2004 the
Registrant had outstanding 53,039,155 shares of its $.001 par value Common Stock.    AXONYX INC.


INDEX

  PART
        I.
      
      
      FINANCIAL
        INFORMATIONItem
        1.
      
      
      Condensed
        Consolidated Financial StatementsCondensed
        Consolidated Balance Sheets as of September 30, 2004 (unaudited)and
        December 31, 2003
      
      
      
      1Condensed
        Consolidated Statements of Operations (unaudited) for the threeand
        nine months ended September 30, 2004 and 2003
      
      
      
      2Condensed
        Consolidated Statements of Changes in Stockholders Equity(unaudited)
        for the nine months ended September 30, 2004
      
      
      
      3Condensed
        Consolidated Statements of Cash Flows (unaudited) for the ninemonths
        ended September 30, 2004 and 2003
      
      
      
      4Notes
        to Condensed Consolidated Financial Statements
      
      
      
      5Item
        2.
      
      
      Managements
        Discussion and Analysis of Financial Condition andResults
        of Operations
      
      
      
      9Item
        3.
      
      
      Quantitative
        and Qualitative Disclosures About Market Risk
      
      
      
      17Item
        4.
      
      
      Controls
        and Procedures
      
      
      
      18PART
        II.
      
      
      OTHER
        INFORMATION
      
      
      
      18Item
        6.
      
      
      Exhibits
      
      
      
      18Signatures
      
      
      
      
      
      
      19
PART
          I. FINANCIAL INFORMATIONItem
           1. Condensed Consolidated Financial StatementsAXONYX INC.


Condensed Consolidated
Balance Sheets

ASSETS
    September
      30,
      2004
    
    December
      31,
      2003(unaudited)Current
      Assets:Cash
      and cash equivalents
    
    
    $
    87,664,000
    
    $
    28,780,000Accounts
      receivable
    
    
    
    370,000Inventories
    
    
    
    349,000Other
      current assets
    
    
    
    206,000Total
      current assets
    
    
    
    88,589,000
    
    
    28,780,000Equipment,
      net
    
    
    
    88,000
    
    
    24,000Technology
      for developed products, net
    
    
    
    6,996,000Patents
      and patents pending, net
    
    
    
    969,000Security
      deposit
    
    
    
    18,000
    
    
    11,000$
    96,660,000
    
    $
    28,815,000LIABILITIESCurrent liabilities:Accounts
      payable
    
    
    $
    3,036,000
    
    $
    1,284,000Accrued
      expenses
    
    
    
    2,524,000
    
    
    880,000Note
      payable
    
    
    
    160,000Convertible
      bridge loans
    
    
    
    404,000Total
      liabilities
    
    
    
    6,124,000
    
    
    2,164,000STOCKHOLDERS
      EQUITYPreferred
        stock - $.001 par value, 15,000,000 shares authorized; none issuedCommon
        Stock - $.001 par value, 150,000,000 and 75,000,000 shares authorized;as
        of 2004 and 2003 respectively; 51,706,222 and 33,919,948 sharesissued
        and outstanding in 2004 and 2003 respectively
    
    
    
    51,000
    
    
    34,000Additional
        paid-in capital
    
    
    
    144,238,000
    
    
    60,345,000Unearned
        compensation - stock options
    
    
    
    (177,000
    )
    
    Accumulated
      comprehensive loss
    
    
    
    (32,000
    )Accumulated
      deficit
    
    
    
    (53,544,000
    )
    
    (33,728,000
    )Total
      stockholders equity
    
    
    
    90,536,000
    
    
    26,651,000Total
      liabilities and stockholders equity
    
    
    $
    96,660,000
    
    $
    28,815,000See notes to condensed
consolidated financial statements.


1

  
  
AXONYX INC.



Condensed Consolidated
Statements of Operations     (unaudited)






  Three months
      ended Sept 30,
    
    NIne months
      ended September 30,2004
    
    2003
    
    2004
    
    2003RevenueLicensing
    
    
    $
    450,000
    
    $
    
    
    $
    450,000
    
    $
    1,000,000Product
      sales
    
    
    
    504,000
    
    
    
    
    
    1,415,000Total revenue
    
    
    
    954,000
    
    
    
    
    
    1,865,000
    
    
    1,000,000Cost of product
      sales
    
    
    
    282,000
    
    
    
    
    
    786,000Gross profit
    
    
    
    672,000
    
    
    
    
    
    1,079,000
    
    
    1,000,000Costs and
      expenses:Research
      and development
    
    
    
    6,054,000
    
    $
    986,000
    
    
    15,888,000
    
    
    3,262,000Sales,
      general and administrative
    
    
    
    1,540,000
    
    
    844,000
    
    
    6,038,000
    
    
    2,434,0007,594,000
    
    
    1,830,000
    
    
    21,926,000
    
    
    5,696,000Loss from
      operations
    
    
    
    (6,922,000
    )
    
    (1,830,000
    )
    
    (20,847,000
    )
    
    (4,696,000
    )Other income
      (expense)Interest
      income
    
    
    
    379,000
    
    
    22,000
    
    
    805,000
    
    
    59,000Foreign
      exchange
    
    
    
    (3,000
    )
    
    5,000
    
    
    (40,000
    )
    
    13,000Gain
      on issuance of subsidiary stock
    
    
    
    16,000
    
    
    
    
    
    71,000Financing
      fees
    
    
    
    (164,000
    )
    
    
    
    
    (464,000
    )Interest
      expense
    
    
    
    (13,000
    )
    
    
    
    
    (38,000
    )
    
    Net loss
      before minority interest in subsidiary
    
    
    
    (6,707,000
    )
    
    (1,803,000
    )
    
    (20,513,000
    )
    
    (4,624,000
    )Minority
      interest in loss of subsidiary
    
    
    
    14,000
    
    
    
    
    
    697,000
    
    
    Net loss
    
    
    
    (6,693,000
    )
    
    (1,803,000
    )
    
    (19,816,000
    )
    
    (4,624,000
    )Comprehensive
        lossForeign
        currency translation adjustment
    
    
    
    2,000
    
    
    
    
    
    (32,000
    )Comprehensive
        loss
    
    
    $
    (6,691,000
    )
    $
    (1,803,000
    )
    $
    (19,848,000
    )
    $
    (4,624,000
    )Net
        loss per common share
    
    
    $
    (0.13
    )
    $
    (0.07
    )
    $
    (0.40
    )
    $
    (0.18
    )Weighted
        average shares-basic and diluted
    
    
    
    51,701,443
    
    
    27,398,419
    
    
    48,974,854
    
    
    25,107,598See notes to condensed
consolidated financial statements.








2




AXONYX INC.



Condensed Consolidated
Statements of Changes in Stockholders Equity                           (unaudited)
Common
        Stock
      
      Additional
        Paid-in
        Capital
      
      Unearned
        Compensation
        Stock
        Options
      
      Accumulated
        Deficit
      
      Accumulated
        Other
        Comprehensive
        Loss
      
      Total
        Stockholders
        EquityNumber
        of
        Shares
      
      AmountBalance
        - December 31, 2003
      
      
      
      33,919,948
      
      $
      34,000
      
      $
      60,345,000
      
      $
      
      
      $
      (33,728,000
      )
      $
      
      
      $
      26,651,000Issuance
        of common stock and warrants - net of expenses
      
      
      
      12,727,106
      
      
      13,000
      
      
      64,745,000
      
      
      
      
      
      
      
      
      
      
      
      64,758,000Issuance
        of common stock for the acquisition of 53% ofOxis
        International Inc.
      
      
      
      1,618,061
      
      
      1,000
      
      
      8,193,000
      
      
      
      
      
      
      
      
      
      
      
      8,194,000Issuance
        of common stock options and warrantsfor
        consulting services
      
      
      
      
      
      
      
      
      
      1,504,000
      
      
      
      
      
      
      
      
      
      
      
      1,504,000Issuance
        of common stock options
      
      
      
      
      
      
      
      
      
      387,000
      
      
      (387,000
      )
      
      
      
      
      
      
      
      Exercise
        of common stock warrants and options
      
      
      
      3,441,107
      
      
      3,000
      
      
      9,064,000
      
      
      
      
      
      
      
      
      
      
      
      9,067,000Amortization
      
      
      
      
      
      
      
      
      
      
      
      
      210,000
      
      
      
      
      
      
      
      
      210,000Foreign
        currency translation adjustment
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (32,000
      )
      
      (32,000
      )Net
        loss
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (19,816,000
      )
      
      
      
      
      (19,816,000
      )Balance
        - September 30, 2004
      
      
      
      51,706,222
      
      $
      51,000
      
      $
      144,238,000
      
      $
      (177,000
      )
      $
      (53,544,000
      )
      $
      (32,000
      )
      $
      90,536,000See notes to condensed
consolidated financial statements.



3




AXONYX INC.
                 Condensed Consolidated Statements of Cash Flows    (unaudited)
Nine
      months ended September 30,2004
    
    2003Cash
        flows from operating activities:Net
      Loss
    
    
    $
    (19,816,000
    )
    $
    (4,624,000
    )Adjustments
      to reconcile net loss to cash used inoperating
      activities:Depreciation
      and amortization
    
    
    
    657,000
    
    
    12,000Amortization
      of deferred financing costs
    
    
    
    404,000Minority
      interest in net loss of subsidiary
    
    
    
    (697,000
    )Compensation
      related to common stock issued for services
    
    
    
    47,000
    
    
    213,000Compensation
      related to options and warrants issued for services
    
    
    
    1,714,000
    
    
    310,000Gain
      on issuance of subsidiary stock
    
    
    
    (71,000
    )Changes
      in:Accounts
      receivable
    
    
    
    (103,000
    )Inventory
    
    
    
    (54,000
    )Other
      current assets
    
    
    
    10,000
    
    
    (38,000
    )Other
      assets
    
    
    
    25,000
    
    
    44,000Accounts
      payable
    
    
    
    1,202,000
    
    
    (461,000
    )Accrued
      expenses and other
    
    
    
    1,409,000
    
    
    (250,000
    )Accrued
      stock based compensation
    
    
    
    (121,000
    )
    
    258,000Net
      cash used in operating activities
    
    
    
    (15,394,000
    )
    
    (4,536,000
    )Cash flows
      from investing activities:Cash
      acquired in connection with Oxis acquistion
    
    
    
    714,000Costs
      related to Oxis acquistion
    
    
    
    (52,000
    )Additions
      to patents
    
    
    
    (240,000
    )Purchase
      of equipment
    
    
    
    (49,000
    )
    
    Net
      cash provided from investing activities
    
    
    
    373,000
    
    
    Cash flows
      from financing activitiesNet
      proceeds from issuance of common stock and warrants
    
    
    
    64,758,000
    
    
    26,661,000Net
      proceeds from exercise of common stock options and warrants
    
    
    
    9,067,000Net
      proceeds from exercise of common stock options in Oxis
    
    
    
    80,000Collection
      of stock subscriptions receivable and cash held in escrow
    
    
    
    
    
    
    4,868,000Net
      cash provided from financing activities
    
    
    
    73,905,000
    
    
    31,529,000Net increase
      in cash and cash equivalents
    
    
    
    58,884,000
    
    
    26,993,000Cash and
      cash equivalents at beginning of period
    
    
    
    28,780,000
    
    
    3,021,000Cash and
      cash equivalents at end of period
    
    
    $
    87,664,000
    
    $
    30,014,000Supplemental
      disclosures of non-cash financing activityCommon
      stock issued in connection with acquisition
    
    
    $
    8,194,000Unearned
      compensation recorded for common stock options issued
    
    
    $
    387,000See notes to condensed
consolidated financial statements.




4




Notes
    to Condensed Consolidated Financial Statements
  
  (1)
    Financial Statement Presentation
  The
    unaudited condensed consolidated financial statements of Axonyx Inc. (the
    Company) herein have been prepared pursuant to the rules and regulations
    of the Securities and Exchange Commission (SEC) and, in the opinion
    of management, reflect all adjustments (consisting only of normal recurring
    accruals) necessary to present fairly the financial position at September
    30, 2004 and the results of operations for the quarterly and nine month periods
    presented. Certain information and footnote disclosure normally included in
    the 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, 2003 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
    condensed consolidated financial statements of Axonyx include the accounts
    of OXIS International Inc. (OXIS) from the acquisition date of
    January 15, 2004. The minority interest in the condensed consolidated financial
    statements represents the minority stockholders proportionate share of equity
    in OXIS. All significant inter-company accounts and transactions have been
    eliminated in consolidation.
  (2)
    Acquisition of OXIS International, Inc.
  On
    January 15, 2004, the Company entered into agreements to acquire approximately
    53% of the outstanding voting stock of OXIS. OXIS is a biopharmaceutical company
    engaged in the development of research diagnostics, nutraceuticals and therapeutics
    in the field of oxidative stress. Under the terms of separate agreements entered
    into with several holders of OXIS common stock, the Company acquired an aggregate
    of approximately 14 million shares of OXIS stock, in consideration for the
    issuance of an aggregate of approximately 1.6 million shares of our unregistered
    common stock, which the Company registered in May 2004. The Companys
    Chairman and Chief Executive Officer owns 1,161,532 shares of OXIS common
    stock, representing approximately 4% of the OXISs voting stock. Those
    shares of OXISs common stock were not acquired.
  The
    aggregate purchase price was $8,246,000, which includes the fair value of
    the Companys common shares that were issued as consideration and transaction
    costs.
  The
    allocation of the cost of the acquisition is a follows:
  

Current
            assets
          
          
          $
          1,492,000Equipment
          
          
          
          41,000Technology
            and developed products
          
          
          
          7,622,000Patents
            and other assets
          
          
          
          765,000Current
            liabilities
          
          
          
          (1,039,000
          )Minority
            interest
          
          
          
          (635,000
          )Deferred
            tax liability (1)
          
          
          
          (3,011,000
          )Deferred
            tax liability (2)
          
          
          
          3,011,000$
          8,246,000
  
  
  5


(1)
      Represents
          the tax effect of the excess of the financial statement basis over the
          tax basis for acquired technology for developed products.
  (2)
      Represents
          the tax benefit of OXIS net operating loss carryfoward and deductible
          temporary differences recognized as an offset against the deferred tax
          liability attributable to the acquired technology for developed products.
  The
    following proforma information gives effect to the acquisition as if it had
    occurred on the first day of each of the quarters and nine months ended September
    30, 2004 and 2003.
  



  Three months
      ended Sept. 30,
    
    Nine months
      ended Sept. 30,2004
      
    2003
    
    2004
    
    2003Total
      revenues
    
    
    $
    954,000
    
    $
    560,000
    
    $
    1,954,000
    
    $
    2,770,000Net loss
      including minority interest in subsidiary
    
    
    
    (6,707,000
    )
    
    (2,135,000
    )
    
    (20,630,000
    )
    
    (5,760,000
    )Net loss
    
    
    
    (6,693,000
    )
    
    (2,067,000
    )
    
    (19,893,000
    )
    
    (5,492,000
    )Basic and
      diluted net loss per common share
    
    
    
    (0.13
    )
    
    (0.07
    )
    
    (0.40
    )
    
    (0.21
    )
  (3)
      Stock-based
          Compensation
  The
    Company follows the intrinsic value based method in accounting for stock-based
    employee compensation under Accounting Principles Board Opinion No. 25, Accounting
    for Stock Issued to Employees, and related interpretations. The Company
    has adopted the disclosure-only provisions of Statement of Financial Accounting
    Standard (SFAS) No. 123, Accounting for Stock-Based Compensation
    and SFAS No. 148, Accounting for Stock-Based CompensationTransition
    and Disclosure. The Company follows the fair value based method for
    awards to non-employees.
  
  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:
  


Three months
      ended Sept. 30,
    
    Nine months
      ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Net
      loss
    
    
    $
    (6,693,000
    )
    $
    (1,803,000
    )
    $
    (19,816,000
    )
    $
    (4,624,000
    )Stock-based
      employee compensation includedin
      net loss
    
    
    
    33,000
    
    
    
    
    
    210,000Stock-based
      employee compensation determinedunder
      the fair value based method
    
    
    
    (636,000
    )
    
    (592,000
    )
    
    (1,879,000
    )
    
    (2,313,000
    )Minority
      interest in stock-based employeecompensation
      determined under the fair valuebased
      method
    
    
    
    149,000
    
    
    
    
    
    214,000Pro
      forma net loss
    
    
    $
    (7,147,000
    )
    $
    (2,395,000
    )
    $
    (21,271,000
    )
    $
    (6,937,000
    )Loss
      per common share(basic
      and diluted):As
      reported
    
    
    $
    (0.13
    )
    $
    (0.07
    )
    $
    (0.40
    )
    $
    (0.18
    )Pro
      forma
    
    
    $
    (0.14
    )
    $
    (0.09
    )
    $
    (0.44
    )
    $
    (0.28
    )
  
  6



(4)
    Private Placement
  
  In
    January 2004, we completed a private placement for $50 million of securities
    through the sale of 9,650,183 shares of common stock at $5.15 per share with
    new and existing institutional investors. This placement also involved the
    acquisition by the investor group of five-year warrants to purchase an additional
    2,412,546 shares of the Companys stock at an exercise price of $7.25
    per share.
  
  In
    May 2004, we completed a private placement for $20 million of securities through
    the sale of 3,076,923 shares of common stock at $6.50 per share with new institutional
    investors. This placement also involved the acquisition by the investor group
    of five-year warrants to purchase an additional 923,077 shares of the Companys
    stock at an exercise price of $8.50 per share.
  
  
  (5)
      Operating
          Segments
  The
    Company is organized into two reportable segments: Axonyx and OXIS. While
    OXIS has historically been organized into two reportable segments (health
    products and therapeutic development), Oxis currently manages its operations
    in one segment in order to better monitor and manage its basic business: the
    development of research diagnostics, nutraceutical and therapeutic products.
  
  The
    following table presents information about the Companys two operating
    segments:
  


Axonyx Inc.
    
    Oxis 
      Intl Inc.
    
    TotalQuarter
      ended September 30, 2004Revenue
      including minority interest
    
    
    
    
    
    $
    954,000
    
    $
    954,000Segment
      loss
    
    
    $
    (6,466,000
    )
    $
    (227,000
    )
    $
    (6,693,000
    )Quarter
      ended September 30, 2003Revenue
      including minority interestSegment
      loss
    
    
    $
    (1,803,000
    )
    
    
    
    $
    (1,803,000
    )Nine
      months ended September 30, 2004Revenue
      including minority interest
    
    
    
    
    
    $
    1,865,000
    
    $
    1,865,000Segment
      loss
    
    
    $
    (18,226,000
    )
    $
    (1,590,000
    )
    $
    (19,816,000
    )Segment
      assets including minorityinterest
      at September 30, 2004
    
    
    $
    87,002,000
    
    $
    9,658,000
    
    $
    96,660,000Nine
      months ended September 30, 2003Revenue
      including minority interest
    
    
    $
    1,000,000
    
    
    
    
    $
    1,000,000Segment
      loss
    
    
    $
    (4,624,000
    )
    
    
    
    $
    (4,624,000
    )Segment
      assets at September 30, 2003
    
    
    $
    30,091,000
    
    
    
    
    $
    30,091,000
  
  
  7




(6)
    Related Party Transaction
  In
    June 2004, Axonyx Inc., which holds a controlling interest in OXIS International,
    Inc., loaned OXIS $1.2 million, which will be due and payable in one year
    or until a qualified financing occurs (whichever is earlier). Interest on
    this loan accrues at 7% per annum and is payable quarterly. This loan is partially
    secured by certain assets of OXIS. The loan, in the form of a one-year secured
    note, will be used to continue the advancement of OXIS oxidative stress
    programs and other working capital purposes.
  
  (7)
    Developments with SERONO International SA
  In
    July 2004, Axonyx and Serono International, S.A. (NYSE: SRA) signed a non-binding
    Memorandum of Understanding (MOU) for the research and joint development of
    therapeutic compounds (including the Amyloid Inhibitory and Prion Inhibitory
    Peptides described in more detail in Item 2 below) and diagnostic technologies
    in the field of protein mis-folding disorders such as Parkinsons Disease,
    Downs Syndrome, Diabetic disorders, Lou Gehrigs Disease, Alzheimers
    Disease, Transmissible Spongioform Encephalopathies (TSEs) i.e. Mad
    Cow Disease (BSE) and Creutzfeldt Jakob Disease new variant (CJDnv).
  
  The
    MOU proposes that Serono and Axonyx each will transfer certain technologies
    and proprietary rights to a public entity they will jointly acquire, including
    technologies previously licensed by Axonyx to Serono, as well as additional
    related intellectual property and expertise subsequently developed by Serono.
    In addition to contributing specifically enumerated technologies to the new
    venture, Axonyx will invest $5 million. The parties anticipate that some time
    after its formation, the new venture will then separately raise additional
    capital in the public markets to fund its research and development activities.
    The ultimate objective is to form a company that will specialize in the development
    of therapeutic compounds for the diagnosis and treatment of protein mis-folding
    disorders.
  
  Under
    the terms of the MOU, the Chief Operating Officer of the new venture will
    be Dr. Silvano Fumero, formerly the head of research and development
    at Serono, and the parties anticipate that the new venture will enter into
    a collaborative research agreement with Creabilis Therapeutics srl, a private
    company controlled by Dr. Fumero. The Chief Scientific Officer will be
    Dr. Claudio Soto, who was responsible for the initial discovery and development
    of the key technology that will be contributed to the joint venture. Axonyx
    will have a majority of the voting stock of the new venture and initially
    will designate a majority of its directors.
  
  Serono
    will have the exclusive option to license key technologies that have successfully
    completed Phase II clinical trials, in which case milestone payments and royalties
    would be payable to the new venture by Serono based on the attainment of certain
    milestones and commercialization. If Serono does not exercise such option
    for a particular drug compound, upon successful commercialization of the drug
    compound, the new venture would pay royalties to Serono.
  
  The
    execution of the MOU by the parties is a result of previously disclosed discussions
    about alternative structures and collaborations to current licensing arrangements
    covering the amyloid and prion inhibitory peptide technologies.
  
  Following
    the signing of the MOU, the parties have been negotiating the terms of definitive
    agreements. Although there is no assurance that a closing will occur, the
    parties hope to be able to finalize documents and consummate the transactions
    in the near future. When the agreements contemplated under the MOU are finalized,
    the revenues and milestone payments described in earlier SEC filings under
    the original licensing agreements with SERONO will not occur.
  
  8


(8)
    Oxis International License Agreement
  
  On
September 28, 2004, Oxis International (Oxis), of which the Company owns 53%,
and HaptoGuard Inc. (HaptoGuard) entered into a license agreement
relating to Oxis proprietary compound BXT 51072 and related compounds.
 Under the agreement, HaptoGuard has exclusive worldwide rights to develop,
manufacture and market BXT-51072 and related compounds from the Oxis library of
such antioxidant compounds. Further, HaptoGuard is responsible for worldwide
product development programs with respect to licensed compounds. HaptoGuard
has paid Oxis an upfront license fee of $300,000, and an additional
$150,000 in upfront license fees remains payable by HaptoGuard. The
agreement provides that HaptoGuard must pay royalties to Oxis, as well as
additional fees for the achievement of development milestones in excess of $21
million if all milestones are met and regulatory approvals are granted. However,
there can be no assurances that royalty payments will result or that milestone
payments will be realized.
  
  
  Item
    2. Managements Discussion and Analysis of Financial Condition and Results
    of Operations
  
  THIS
    QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
    WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
    AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS,
    OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY
    REFERENCE INTO THIS FORM 10-Q ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
    WHEN USED IN THIS DOCUMENT, THE WORDS ANTICIPATE, ESTIMATE,
    PROJECT, AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
    STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
    UNCERTAINTIES AND ASSUMPTIONS INCLUDING AMONG OTHERS, THE RISK THAT OUR CLINICAL
    TRIALS WILL NOT PROVE SUCCESSFUL, THAT WE WILL NOT BE ABLE TO OBTAIN FINANCING
    TO COMPLETE ANY FUTURE TRIALS, THAT THE FDA WILL NOT GRANT MARKETING APPROVAL
    FOR PHENSERINE OR THAT, IF APPROVED, PHENSERINE WILL NOT PROVE COMPETITVE
    IN THE MARKETS. THESE RISKS AND OTHERS ARE MORE FULLY DESCRIBED IN OUR REPORT
    ON THIS FORM 10-Q AND IN OUR OTHER PUBLIC FILINGS, INCLUDING OUR FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2003. SHOULD ONE OR MORE OF THESE RISKS OR
    UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
    ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
    ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS INCLUDED IN SUCH FORWARD-LOOKING
    STATEMENTS ARE REASONABLE, WE CANNOT GIVE ANY ASSURANCES THAT THESE EXPECTATIONS
    WILL PROVE TO BE CORRECT. WE UNDERTAKE 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.
  
  
  
  9



Axonyxs
    primary corporate business objective is,to successfully
    establish Axonyx as a later-stage, biopharmaceutical product development company
    specialized in the CNS area, with a focus on commercializing effective therapeutics
    for neurodegenerative diseases, as well as for other medical conditions associated
    with cognitive impairment.We are engaged in the business
    of acquiring and developing post-discovery central nervous system drug candidates,
    primarily in areas of memory and cognition. We acquire patent rights to central
    nervous system pharmaceutical compounds we believe may have significant potential
    market impact and work to advance the compounds through pre-clinical and clinical
    development towards regulatory approval. We have acquired worldwide exclusive
    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 these patent rights separately from New
    York University and from the National Institutes of Health/National Institute
    on Aging (via a sublicense). We also have co-inventorship rights to a patent
    application regarding a therapeutic compound named Posiphen designed for the
    treatment of Alzheimers disease.
  
  We
    out-source all of our pre-clinical and clinical research and development,
    utilizing contract research organizations, or CROs, and sponsored research
    arrangements. We have contracted with several CROs to undertake the pre-clinical
    and clinical development of Phenserine. We have entered into a License Agreement
    with Applied Research Systems ARS Holding N.V. (ARS), a subsidiary of Serono
    International, S.A. (Serono), a Swiss biopharmaceutical company, under which
    ARS has the rights to conduct research and development on certain of our licensed
    technologies. We received an up-front fee and a milestone payment, and may
    receive future milestone payments and royalties, under the License Agreement.
    We are currently renegotiating our arrangement with Serono as discussed in
    note (7) to the condensed consolidated financial statements contained elsewhere
    herein. We do not currently maintain any laboratory or research premises.
  
  Our
    current business strategy is to concentrate our financial resources primarily
    on the further development of our licensed compounds, and in particular, Phenserine,
    an inhibitor of acetylcholinesterase, that is our lead drug candidate for
    the treatment of AD. Acetylcholinesterase is an enzyme in the synapse that
    degrades the neurotransmitter acetylcholine in the brain and other tissues
    of the body. 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.
  
  In
    early June 2003, we initiated a Phase IIb clinical trial designed to evaluate
    the effects of Phenserine on the levels of beta-amyloid precursor protein
    and beta amyloid in the plasma and cerebrospinal fluid of AD patients. The
    beta amyloid protein is one of more than a dozen types of amyloid proteins
    found in the body. Beta amyloid is derived from the beta-amyloid precursor
    protein normally present in the brain of healthy individuals in small quantities.
    Beta-amyloid, derived from the beta-amyloid precursor protein, is over-produced
    in AD and Downs Syndrome. In AD, the beta-amyloid protein undergoes
    a conformational change, aggregates and is deposited as insoluble fibrils
    in amyloid plaques in the brain. The beta-amyloid precursor protein is present
    in the cell wall of numerous cells within the body including nerve cells of
    the brain. Beta-amyloid protein is derived from this larger protein. In late
    June 2003, we also initiated a Phase III potentially pivotal clinical trial
    to further examine the safety and efficacy of Phenserine on AD patients. In
    June 2004, we completed enrollment in the 1st Phase
    III trial and initiated a 2nd
    Phase III trial with 450 patients. We initiated a third Phase III cognition
    trial, also with 450 patients, in September 2004.
  
  10


In
    addition to the Phenserine clinical program, we are sponsoring pre-clinical
    research relating to an assay method for screening drug candidates for Alzheimers
    disease. Pursuant to a sublicense agreement with ARS, ARS has the rights to
    undertake research and development concerning the development of (1) compounds
    called Amyloid Inhibitory Peptides (AIPs), which may prevent and
    reverse the formation of amyloid plaques in AD, and (2) a pharmaceutical compound
    for prion-related diseases. In Alzheimers disease the conversion of
    beta-amyloid protein into insoluble beta-sheets that aggregate to form insoluble
    fibrous masses (fibrils) is a key event that leads eventually to neuronal
    cell death in the brains of AD patients. These fibrils are deposited as part
    of the amyloid plaques that appear to be a cause of the death of neurons in
    the brain. The AIPs, also referred to as beta-sheet breaker peptides, have
    been designed to block the aggregation of beta-amyloidin a competitive manner by binding to the beta-sheet
    form of the amyloid protein, thus preventing the formation of amyloid plaques
    in the brain. The beta-sheet breaker peptide is a molecule composed of naturally
    occurring amino acids, the building blocks of proteins, which is designed
    to bind to and prevent the conversion of the normal form of protein to the
    misshapen form that is found in amyloid plaques.
  
  We
    have initiated the preclinical development of Posiphen, a compound that appears
    to decrease the formation of the beta-amyloid precursor protein with potential
    applications in the treatment of AD, and given sufficient financial resources,
    we may, in the future, sponsor further pre-clinical development of Tolserine,
    another acetylcholinesterase inhibitor and one of our butyrylcholinesterase
    inhibitors. Acetylcholinesterase inhibitors are drugs designed to selectively
    inhibit acetylcholinesterase. Butyrylcholinesterase is an enzyme that is normally
    found widely in the body. Its function in the central nervous system remains
    to be fully understood. Amongst other roles, it degrades acetylcholine, a
    primary neurotransmitter in the brain. Butyrylcholinesterase is found in high
    concentration in the plaques taken from individuals who have died from AD.
    This enzyme also functions to degrade a number of drugs and natural products
    and is involved in their elimination from the body.
  
  The
    AD targeted approaches include:
  
  1)
      Phenserine,
          an inhibitor of acetylcholinesterase and the beta-amyloid precursor
          protein, our lead drug candidate, and Tolserine, another follow-on acetylcholinesterase
          inhibitor;
  2)
      a
          butyrylcholinesterase inhibitor which will be chosen from a series of
          selectively acting compounds;
  3)
      Posiphen,
          a compound that decreases the formation of beta-amyloid precursor protein;
  4)
      through
          our sublicense with ARS, a subsidiary of Serono, which is described
          in greater detail below, compounds called Amyloid Inhibitory Peptides
          (AIPs) which may prevent and reverse the formation of amyloid plaques
          in AD.
  On
    May 2, 2000, ARS, a subsidiary of Serono, exercised its right to license certain
    of our patent rights under the Development Agreement and Right to License
    signed with us in May of 1999. Under that agreement, ARS paid us a $250,000
    non-refundable fee for the right to license. Pursuant to the resulting License
    Agreement, which became effective on September 15, 2000, ARS acquired exclusive
    worldwide patent rights to our AIP and Prion Inhibitory Peptide technologies,
    called the Licensed Products. In conjunction with the signing of the License
    Agreement with ARS, we generated $1.5 million of revenue in the form of an
    up-front license fee. We received a milestone payment of $1 million in April
    2003 from ARS in relation to the initiation of a Phase I clinical trial with
    a licensed AIP compound. Previous SEC filings described in detail the additional
    revenues and milestone payments that the company would receive
    depending on the development progress made by SERONO with the licensed technologies.
    As described in the footnote number 7 to the financial statements in this
    Form 10Q under the heading Developments with SERONO International SA
    we have signed a non-binding memorandum of understanding for the research
    and join development of therapeutic compounds, including the licensed technologies.
    The intent of the company and SERONO is to shortly complete this agreement
    and establish a new venture to develop the technologies. Under this scenario
    the revenues and milestone payments previously detailed would not occur.

  

  11


We
    are also funding research at Monash University in Australia relating to the
    development of an assay method for the rapid screening of potential drug candidates
    for the treatment of Alzheimers disease. We have signed a Research Agreement
    with the principal researcher, David Henry Small, Ph.D., to fund this research
    over a three-year period ending in September 2005. It is anticipated that
    the Axonyx rights to the assay may be transferred to the Serono-Axonyx public
    entity as described in note (7) to the condensed consolidated financial statements
    contained elsewhere herein.
  In
    December 2000 The Company incorporated Axonyx Europe BV, a wholly owned subsidiary,
    in the Netherlands. Gosse Bruinsma, M.D., currently the President and Chief
    Operating Officer of Axonyx Inc., was appointed the President of Axonyx Europe
    BV. The majority of our clinical development activities and a significant
    amount of our preclinical development activities are carried out in Europe.
    The Axonyx Europe BV office manages, directs, and controls these activities.
    Axonyx Europe BV explores and pursues in-licensing and out-licensing opportunities
    for The Companys licensed technologies in Europe and elsewhere, and
    facilitates communication with The Companys European shareholders and
    Serono.
  
  We
    have incurred net losses and negative cash flows from operations since the
    inception of the Company in 1997. As of September 30, 2004, we had an accumulated
    deficit of $53,544,000 including a net loss of $19,816,000 for the nine months
    ended September 30, 2004, and our operating losses are expected to continue.
    Except for OXIS, we have no products available for sale and we do not expect
    to have any products commercially available for several years, if at all.
  
  On
    January 15, 2004, we entered into agreements to acquire approximately 53%
    of the outstanding voting stock of OXIS is a biopharmaceutical/diagnostic
    company engaged in the development of research diagnostics, nutraceuticals
    and therapeutics in the field of oxidative stress. Under the terms of separate
    agreements entered into with several holders of OXIS common stock, we acquired
    an aggregate of approximately 14 million shares of OXIS stock, in consideration
    for our issuance of an aggregate of approximately 1.6 million shares of our
    unregistered common stock. We filed a registration statement on Form S-3 to
    register the shares of Axonyx common stock that were issued in the exchange.
    Marvin S. Hausman, M.D., our Chairman and Chief Executive Officer, owns 1,161,532
    shares of OXIS common stock, representing approximately 4% of OXIS voting
    stock. Dr. Hausmans shares of OXIS common stock were not subject
    to this exchange for our common stock.
  
  Axonyx
    Inc. was incorporated in Nevada on July 29, 1997. Our principal executive
    offices are located at 500 Seventh Avenue, 10th
    Floor, New York, New York 10018, and our telephone number is (212) 645-7704.

12


RESULTS
    OF OPERATIONS
  
  Revenues
  
  The
    Company had revenue of $954,000 and $-0- for the three months ended September
    30, 2004 and 2003 respectively. The Company had revenue of $1,865,000 and
    $1,000,000 for the nine months ended September 30, 2004 and 2003 respectively.
    Revenue in 2004 was derived from the sale of research assays and fine chemicals
    at Oxis and a licensing agreement at Oxis for $450,000. In April 2003, Axonyx
    received a milestone payment of $1,000,000 from Serono International S.A.
    (Serono) under the terms of a license agreement for beta-sheet breaker technology
    that was signed in September 2000. The milestone payment was triggered when
    Serono initiated a Phase I clinical trial with a beta-sheet breaker peptide
    for the potential treatment of Alzheimers disease.
  
  Costs
    of Sales
  
  The
    Companys costs of sales were entirely related to its majority owned
    subsidiary, OXIS. The percentage of cost of sales for both the quarter and
    nine months ended September 30, 2004 was 56%.
  
  Research
    and Development
  
  Research
    and development expenses were $6,054,000 and $986,000 for the quarters ended
    September 30, 2004 and 2003, respectively. Research and development expenses
    were $15,888,000 and $3,262,000 for the nine months ended September 30, 2004
    and 2003, respectively. The increase is primarily attributable to the ongoing
    Phase IIB and Phase III pivotal trials underway in Europe. These trials commenced
    in June 2003. In June 2004, we have initiated a 2nd
    Phase III trial and incurred start up costs including the initial investigators
    meeting. Addditionally, preclinical studies in carcinogenicity and Absorption,
    Distribution, Metabolism and Excretion (ADME) increased by $2,292,000 from
    the same nine month period in 2003.
  
  Sales,
    General and Administrative
  Sales,
    general and administrative expenses were $1,540,000 and $844,000 for the quarters
    ended September 30, 2004 and 2003, respectively. Sales, general and administrative
    expenses were $6,038,000 and $2,434,000 for the nine months ended September
    30, 2004 and 2003, respectively. Non-cash charges relating to stock option
    grants to consultants were $1,484,000 compared to $544,000 in the nine months
    ended September 30, 2004 and 2003, respectively. Professional fees were $1,050,000
    compared to $664,000 in the nine months ended September 30, 2004 and 2003,
    respectively. The increase in professional fees is primarily attributed to
    acquisition costs, utilization of outside council and patent filings. $2,122,000
    of sales, general and administrative expenses relate to OXIS.
  Other
    Income (Expense)
  Interest
    income was $379,000 and $22,000 for the quarters ending September 30, 2004
    and 2003, respectively. Interest income was $805,000 and $59,000 for the nine
    months ended September 30, 2004 and 2003. The increase reflects the higher
    cash and cash equivalent balances held in 2004 resulting from the cash collected
    from several private placements occurring in late 2003 and 2004.
  Foreign
    exchange for the nine months ended September 30, 2004 was a loss of $40,000
    compared to a foreign exchange gain of $13,000 for the nine months ended September
    30, 2003. The loss reflects the increased transactions in Euro denominated
    currency and the valuation changes between the Euro and the
    U.S. dollar.

  13


Gain
    on issuance of subsidiary stock was $71,000 for the nine months ended September
    30, 2004. This gain results from common stock issued in OXIS.
  Financing
    fees and interest expense reflect the cost of borrowing incurred by OXIS in
    obtaining temporary short term financing.
  Net
    Loss
  
  The
    Company experienced net losses of $6,693,000 ($0.13 per share-basic and diluted)
    and $1,803,000 ($0.07 per share-basic and diluted) for the quarters ended
    September 30, 2004 and 2003, respectively. The Company experienced net losses
    of $19,816,000 ($0.40 per share-basic and diluted) and $4,624,000 ($0.18 per
    share-basic and diluted) for the nine months ended September 30, 2004 and
    2003, respectively. The increase in the net loss is primarily due to the expense
    of the ongoing Phase IIB and Phase III clinical trials for Phenserine, initiation
    of the 2nd Phase III clinical
    trial, an increase in the non-cash stock and option charges and our share
    of the net loss of OXIS.
  
  Comprehensive
    Loss
  
  The
    Company reported for the nine months ended September 30, 2004 a $32,000 foreign
    currency translation adjustment occurring in the OXIS subsidiary.
  
  LIQUIDITY
    AND CAPITAL RESOURCES
  
  As
    of September 30, 2004, we had $87,664,000 in cash and cash equivalents, and
    $82,465,000 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 nine months ended September 30,
    2004 was $15,394,000 resulting from a net loss of $19,816,000, offset in part
    by an increase in accounts payable and accrued expenses of $2,490,000,
    equity based compensation of $1,761,000 and depreciation and amortization
    expense of $1,061,000. Net cash used in operating activities for the nine
    months ended September 30, 2003 was $4,536,000 resulting from a net loss of
    $4,624,000, equity based compensation of $523,000 and a decrease in accounts
    payable and accrued expenses of $453,000.
  Net
    cash provided from investing activities was $373,000 for the nine months ended
    September 30, 2004. $714,000 was acquired in connection with the Oxis acquisition
    offset in part by costs related to additions to patents, the acquisition of
    OXIS and office equipment purchases.
  Net
    cash from financing activities for the nine months ended September 30, 2004
    was $73,905,000. In January we received net proceeds of $46,394,000 from a
    private placement of $50,000,000 of securities through the sale of 9,650,183
    shares of common stock and warrants. In May we received net proceeds of $18,364,000
    from the private placement of $20,000,000 of securities through the sale of
    3,076,923 shares of common stock and warrants. Additionally, we received $9,067,000
    during the period from the exercise of stock options and warrants and $80,000
    from the exercise of common stock options in OXIS.
  
  Net
    cash from financing for the nine months ended September 30, 2003 was $31,529,000
    of which $4,868,000 was from the collection of stock subscriptions receivable
    held in escrow from a private  placement
    of shares of common stock and warrants that closed on December 31, 2002. Net
    cash from financing in June 2003 was $3,243,000. In June 2003, we received
    aggregate gross proceeds of approximately $2.3 million and issued 919,130
    shares of common stock upon the exercise of warrants by fifteen holders of
    AXC warrants pursuant to a special offer. In June 2003, we raised aggregate
    gross proceeds of $575,000 through the sale of 230,000 shares of common stock
    at $2.50 per share in a private placement with four European accredited investors.
    Also in June 2003, we received gross proceeds of approximately $345,000 and
    issued approximately 775,000 shares to holders of AXD warrants who exercised
    their warrants. In September 2003, we received net proceeds of $23,418,000
    from a private placement of common stock and warrants which closed on September
    11, 2003.
14


We
    currently have contracts with JSW Research of Austria, to undertake the ongoing
    Phenserine Phase IIb and Phase III clinical trials. We also have contracts
    with other CROs to provide services relating to Phenserine research and development
    activities including completing pre-clinical tests on the final drug formulation
    of Phenserine, undertaking carcinogenicity studies, bio-assays of blood plasma
    samples, and finalizing drug stability studies. We are currently finalizing
    a contract with a large CRO to conduct second and third pivotal cognition
    Phase III trials for Phenserine, each with a target enrollment of 450 patients.
    This multi-year contract is expected to be in the range of $20 million, depending
    upon the number of patients to be included in the trial. The studies commenced
    in 3rd quarter 2004 and
    are expected to run 24 to 30 months. Finally, under our Research Agreement
    we are funding a three year research program at the laboratory of Dr. David
    Small at Monash University in Australia concerning an assay method that is
    designed to screen potential drug compounds for Alzheimers disease that
    have an effect on beta-amyloid. This research project cost $75,000 in 2003,
    and it is anticipated to cost an additional $75,000 in the 2004 year. Under
    our Research and License Agreement with New York University, we must pay minimum
    annual royalty payments of $150,000 per year beginning in 2004 through the
    expiration or termination of that agreement. Our current real estate leases
    are all on a short-term basis.
  
  We plan to finance our needs principally from the following:
  
  
      our
          existing capital resources and interest earned on that capital;
  
      future
          private placement financing or other equity financings..
  We
    believe that we have sufficient capital resources to finance our plan of operation
    for at least the next twenty-four months. However, as this is a forward-looking
    statement, and there may be changes that could consume available resources
    significantly before such time. Our long term capital requirements and the
    adequacy of our available funds will depend on many factors, including the
    eventual contract costs of undertaking the Phenserine Phase III clinical trials,
    regulatory delays, patent costs for filing, prosecuting, maintaining and defending
    our patent rights, among others.
  We
    are regularly seeking potential equity financing, sub-licensing and other
    collaborative arrangements that may generate additional capital for us if
    the FDA requires us to enroll more patients or to conduct additional pivotal
    Phase III clinical trials. We cannot assure you that we will generate sufficient
    additional capital or revenues, if any, to fund our operations beyond the
    24 month period ending September 30, 2006, 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.
  The
    Companys liquidity and capital resources position is currently adequate
    to support its own development plans for at least the next 24 months. However,
    the liquidity and capital resource position of the Companys majority
    owned subsidiary, OXIS, standing alone, is not adequate to support its ongoing operations
    without additional capital. OXIS working capital deficit increased during
    the first nine months of 2004 to $1,313,000, from a deficit of $36,000 at
    December 31, 2003.
  
  OXIS
    expects to incur operating losses for the foreseeable future. There can be
    no assurance that OXIS will ever achieve profitable operations. The report
    of the OXIS independent auditors on the companys financial statements
    for the period ended December 31, 2003, includes an explanatory paragraph
    referring to OXIS ability to continue as a going concern.
15


OXIS
    needs to raise additional capital for continuing operations of the health
    products segment and to complete its contemplated drug development programs
    and no assurances can be given that OXIS will be able to raise such capital
    on favorable terms. As the majority stockholder and an interested person
    under Delaware law, the Company is limited in the ways in which it can provide
    financial assistance to OXIS. The unavailability of additional capital could
    cause OXIS to cease or curtail its operations and/or delay or prevent the
    development and marketing of the Companys existing and potential products.
  Executive
    Stock Trading Program
  In
    June 2004, the Chairman of the Board and Chief Executive Officer of the Company,
    Marvin S. Hausman, M.D., adopted a pre-arranged stock trading plan in accordance
    with guidelines specified by Rule 10b5-1 under the Securities Exchange Act
    of 1934.
  Rule
    10b5-1 permits officers and directors of public companies to adopt pre-determined
    plans for selling specified amounts of stock. The plans may be entered into
    only when the director or officer is not in possession of material, non-public
    information and may be used to gradually diversify investment portfolios over
    a period of time.
  Dr. Hausman
    will only sell shares of stock if the Companys stock price exceeds $6.00
    per share. As of November 2, 2004, Dr. Hausman has sold 80,000 shares,
    with a first trade on September 16, 2004. Under the terms of Dr. Hausmans
    one-year plan, he may, prior to July 10, 2005, sell, on a pro rated monthly
    basis, up to an aggregate of 200,000 shares, which represents approximately
    6.4% of the total number of shares and currently exercisable warrants and
    options he currently holds. Dr. Hausman has adopted his stock selling
    plan for financial planning purposes and to diversify his personal portfolio.
  
  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 accounting
    principles generally accepted in 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 Form 10-K for the year ended December 31, 2003.
    Our critical accounting policies are:
  
  Inventories:Inventories are stated at the lower of cost or market.
    Cost has been determined by using the first-in, first-out method.

  
  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. Rights to license fees are 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.
16


Oxis manufactures, or has manufactured on a contract basis, products that are sold to customers. Oxis recognizes
product sales upon sales of the product to the customers.Oxis
    recognizes license fee revenue for licenses to intellectual property when
    earned under the terms of the agreements. Generally, revenue is recognized
    upon transfer of the license unless Oxis has continuing obligations for which
    fair value cannot be established, in which case the revenue is recognized
    over the period of the obligation. If there are extended payment terms, Oxis
    recognizes license fee revenue as these payments become due. All arrangements
    with payment terms extending beyond 12 months are not considered to be fixed
    or determinable. In certain licensing arrangements there is provision for
    a variable fee as well as a non-refundable minimum amount. In such arrangements,
    the amount of the non-refundable minimum guarantee is recognized upon transfer
    of the license unless we have continuing obligations for which fair value
    cannot be established and the amount of the variable fee in excess of the
    guaranteed minimum is recognized as revenue when it is fixed and determinable.
    Oxis recognizes royalty revenue based on reported sales by third party licensees
    of products containing its materials, software and intellectual property.
    If there are extended payment terms, royalty revenues are recognized as these
    payments become due. Non-refundable royalties, for which there are no further
    performance obligations, are recognized when due under the terms of the agreements.
  
  Research,
    development costs:Research and development costs
    are expensed as incurred.
  
  Risks
    and Uncertainties
  
  The
    Companys lead compound, Phenserine, is currently undergoing clinical
    testing in three Phase III trials and a Phase IIb clinical trial. Enrollment
    in the first Phase III trial was completed in June 2004 and the Company expects
    to have data from this trial, plus interim analysis data from the Phase IIb
    trial, available during the first quarter of 2005. Until the trial is unblinded
    and the results analyzed, there cannot be any assurance that the clinical
    endpoints in the protocol have been met.
  
  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 loss of $40,000 for the nine months ended September
    30, 2004 and a gain of $13,000 for the nine months ended September 30, 2003.
    If the foreign currency rates were to fluctuate by 10% from rates at September
    30, 2004 and 2003, 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, we will be
    exposed to some currency exchange risks. The majority of our ongoing clinical
    trials are being conducted in Europe.
  We
    consider our investments in money market accounts, short term commercial paper
    and time deposits as cash and cash equivalents. The carrying values of these
    investments approximate fair value because of the short maturities (three
    months or less) of these instruments and accounts. 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.

  17


Item 4. Controls and Procedures.Evaluation
    of Disclosure Controls and Procedures
  
  Our
    management, with the participation of our principal executive officer and
    principal financial officer, has evaluated the effectiveness of the design
    and operation of our disclosure controls and procedures (as defined in Rules
    13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
    as of the end of the period covered by this quarterly report on Form 10-Q.
    Based on this evaluation, our principal executive officer and principal financial
    officer concluded that these disclosure controls and procedures are effective
    and designed to ensure that the information required to be disclosed in our
    reports filed or submitted under the Securities Exchange Act of 1934 is recorded,
    processed, summarized and reported within the requisite time periods.
  
  Our
    management, including our Chief Executive Officer and Chief Financial Officer,
    does not expect that our disclosure controls and procedures or internal control
    over financial reporting will prevent all errors and all fraud. A control
    system, no matter how well conceived and operated, can provide only reasonable,
    not absolute, assurance that the objectives of the system are met and cannot
    detect all deviations. Because of the inherent limitations in all control
    systems, no evaluation of controls can provide absolute assurance that all
    control issues and instances of fraud or deviations, if any within the company
    have been detected. While we believe that our disclosure controls and procedures
    have been effective, in light of the foregoing, we intend to continue to examine
    and refine our disclosure control and procedures to monitor ongoing developments
    in this area.
  
  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.
  
  
  PART
          II  OTHER INFORMATIONItem 6  Exhibits


Number
Exhibit31.1
Certification
of Chief Executive  Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-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 15(d)-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 2002.18


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
    November 10, 2004.


AXONYX INC.

By: /s/ Marvin S. Hausman, M.D.

Marvin S. Hausman, M.D.               
Chairman and Chief Executive OfficerBy: /s/ S. Colin Neill


S. Colin Neill                                 
Chief Financial Officer,                       
Secretary and Treasurer                        
(Principal Financial and Accounting Officer)19