----

**FORM      10-Q**

**ATHEROGENICS,      INC.**

| **Georgia**                             | **58-2108232**                                         |
|-----------------------------------------|--------------------------------------------------------|
| (State                of incorporation) | (I.R.S.                Employer Identification Number) |

**8995      Westside Parkway, Alpharetta, Georgia 30004**

**(678)      336-2500**

----

**ATHEROGENICS,      INC.**

**FORM      10-Q**

**INDEX**

| **PART                  I.  FINANCIAL INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | **Page                  No.** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  1.  Condensed Financial Statements (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
|      Condensed                  Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                          |
|           June                  30, 2007 and December 31,                  2006                                                                                                                               | 1                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
|      Condensed                  Statements of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                          |
|           Three                  and six months ended June 30, 2007 and                  2006                                                                                                                 | 2                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
|      Condensed                  Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                          |
|           Six                  months ended June 30, 2007 and                  2006                                                                                                                           | 3                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
|      Notes                  to Condensed Financial                  Statements                                                                                                                                                         | 4                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  2.  Management’s Discussion and Analysis of Financial                  Condition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                          |
|              and                  Results of                  Operations                                                                                                                       | 7                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  3.  Quantitative and Qualitative Disclosures About Market                  Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 14                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  4.  Controls and                  Procedures                                                                                                                                                                                    | 14                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| **PART                  II.  OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  1A.  Risk                  Factors                                                                                                                                                                                              | 14                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  4.  Submission of Matters to a Vote of Security                  Holders                                                                                                                                                        | 15                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| Item                  6.  Exhibits                                                                                                                                                                                                                    | 15                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |
| **SIGNATURES                                                                                                                **                                                                                                                                  | 16                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                          |

----

----

**PART      I. – FINANCIAL INFORMATION**

**Item      1.  Financial Statements**

**ATHEROGENICS,      INC.**

**CONDENSED      BALANCE SHEETS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **June                30,** |         |   | **December                31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **2007**                    |         |   | **2006**                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                        |         |   |                            |   |
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                        |         |   |                            |   |
| Cash                and cash                equivalents                                                                                                                    |   | $                           | 77,750,204   |   |                            | $      | 87,846,079 |   |
| Short-term                investments                                                                                                                                      |   |                        | 36,949,237   |   |                            |   | 63,964,860 |   |
| Accounts                receivable                                                                                                                                         |   |                        | 16,546,591   |   |                            |   | 6,537,892 |   |
| Prepaid                expenses                                                                                                                                            |   |                        | 2,811,277    |   |                            |   | 4,038,419 |   |
| Interest                receivable                                                                                                                                         |   |                        | 281,258      |   |                            |   | 643,097 |   |
| Total                current                assets                                                                                                                                                            |   |                        | 134,338,567  |   |                            |   | 163,030,347 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |
| Equipment                and leasehold improvements, net of accumulated                depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                        |         |   |                            |   |   |   |
| and                amortization                                                                                                                                            |   |                        | 2,478,579    |   |                            |   | 9,684,965 |   |
| Debt                issuance costs and other                assets                                                                                          |   |                        | 4,883,790    |   |                            |   | 5,624,352 |   |
| Total                assets                                                                                                                                                                                   |   | $                           | 141,700,936  |   |                            | $      | 178,339,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |
| **Liabilities                and Shareholders' Deficit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                        |         |   |                            |   |   |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                        |         |   |                            |   |   |   |
| Accounts                payable                                                                                                                                            |   | $                           | 10,538,771   |   |                            | $      | 3,183,511 |   |
| Accrued                research and                development                                                                                                             |   |                        | 8,091,803    |   |                            |   | 11,263,164 |   |
| Accrued                interest                                                                                                                                            |   |                        | 2,540,000    |   |                            |   | 2,540,000 |   |
| Accrued                compensation                                                                                                                                        |   |                        | 1,763,356    |   |                            |   | 1,465,644 |   |
| Accrued                and other                liabilities                                                                                                                |   |                        | 709,734      |   |                            |   | 791,661 |   |
| Current                portion of deferred                revenue                                                                                                          |   |                        | —      |   |                            |   | 25,000,000 |   |
| Total                current                liabilities                                                                                                                                                       |   |                        | 23,643,664   |   |                            |   | 44,243,980 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |
| Convertible                notes                payable                                                                                                     |   |                        | 286,000,000  |   |                            |   | 286,000,000 |   |
| Long-term                portion of deferred                revenue                                                                                         |   |                        | —      |   |                            |   | 2,083,333 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |
| Shareholders'                deficit:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                        |         |   |                            |   |   |   |
| Preferred                stock, no par value:  Authorized—5,000,000                shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                        | —      |   |                            |   | — |   |
| Common                stock, no par value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                        |         |   |                            |   |   |   |
| Authorized—100,000,000                shares; issued and outstanding —                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                        |         |   |                            |   |   |   |
| 39,508,492                and 39,452,927 shares at June 30, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                        |         |   |                            |   |   |   |
| and                December 31, 2006,                respectively                                                                                                                                                                           |   |                        | 212,251,743  |   |                            |   | 207,388,894 |   |
| Warrants                                                                                                                                                                   |   |                        | 613,021      |   |                            |   | 613,021 |   |
| Accumulated                deficit                                                                                                                                         |   |                        | (380,788,551 | )      |                            |   | (361,997,246 | ) |
| Accumulated                other comprehensive (loss)                gain                                                                                                  |   |                        | (18,941      | )      |                            |   | 7,682 |   |
| Total                shareholders'                deficit                                                                                                                                                     |   |                        | (167,942,728 | )      |                            |   | (153,987,649 | ) |
| Total                liabilities and shareholders'                deficit                                                                                                                                     |   | $                           | 141,700,936  |   |                            | $      | 178,339,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                        |         |   |                            |   |   |   |

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

----

**ATHEROGENICS,      INC.**

**CONDENSED      STATEMENTS OF OPERATIONS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **Three                months ended** |       |   | **Six                months ended** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------|-------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **June                30,**           |       |   | **June                30,**         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2007**                              |       |   | **2006**                            |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |
| Revenues:                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |       |   |                                |   |   |   |   |   |   |   |
|    License                fees                                                                                                 |   | $                                     | 20,833,333 |   |                                | $      | 6,250,000 |   |   | $ | 27,083,333 |   |   | $ | 10,416,667 |   |
|    Research                and                development                                                                      |   |                                  | 9,425,371  |   |                                |   | — |   |   |   | 14,636,623 |   |   |   | — |   |
|       Total                revenues                                                                             |   |                                  | 30,258,704 |   |                                |   | 6,250,000 |   |   |   | 41,719,956 |   |   |   | 10,416,667 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Operating                expenses:                                                                                                                                                                                                                                                                                                                                                                           |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
|    Research                and                development                                                                      |   |                                  | 22,330,198 |   |                                |   | 16,447,180 |   |   |   | 42,294,473 |   |   |   | 32,707,802 |   |
|    Marketing,                general and administrative                                                                                                                                                                                                                                                                                                                                       |   |                                  | 3,587,195  |   |                                |   | 3,171,869 |   |   |   | 7,532,698 |   |   |   | 6,879,202 |   |
|    Restructuring                and impairment costs                                                                                                                                                                                                                                                                                                                                          |   |                                  | 9,996,332  |   |                                |   | — |   |   |   | 9,996,332 |   |   |   | — |   |
|       Total                operating                expenses                                                    |   |                                  | 35,913,725 |   |                                |   | 19,619,049 |   |   |   | 59,823,503 |   |   |   | 39,587,004 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Operating                loss                                                                                                                 |   |                                  | (5,655,021 | )      |                                |   | (13,369,049 | ) |   |   | (18,103,547 | ) |   |   | (29,170,337 | ) |
| Interest                income                                                                                                                |   |                                  | 1,604,120  |   |                                |   | 2,401,424 |   |   |   | 3,487,803 |   |   |   | 4,606,658 |   |
| Interest                expense                                                                                                               |   |                                  | (2,087,780 | )      |                                |   | (2,088,598 | ) |   |   | (4,175,561 | ) |   |   | (4,196,115 | ) |
| Other                expense                                                                                                                  |   |                                  | —    |   |                                |   | — |   |   |   | — |   |   |   | (3,521,236 | ) |
| Net                loss                                                                                                                       |   | $                                     | (6,138,681 | )      |                                | $      | (13,056,223 | ) |   | $ | (18,791,305 | ) |   | $ | (32,281,030 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Net                loss per share –                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
|    basic                and                diluted                                                                             |   | $                                     | (0.16      | )      |                                | $      | (0.33 | ) |   | $ | (0.48 | ) |   | $ | (0.82 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares                                                                                                                                                                                                                                                                                                                                                                       |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |
|    outstanding                – basic and diluted                                                                                                                                                                                                                                                                                                                                       |   |                                  | 39,498,338 |   |                                |   | 39,423,059 |   |   |   | 39,483,280 |   |   |   | 39,313,178 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |       |   |                                |   |   |   |   |   |   |   |   |   |   |   |

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

----

**ATHEROGENICS,      INC.**

**CONDENSED      STATEMENTS OF CASH FLOWS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **Six                months ended** |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **June                30,**         |        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **2007**                            |        |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                |        |   |   |   |
| **Operating                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                |        |   |   |   |
| Net                loss                                                                                                                                                                            |   | $                                   | (18,791,305 | ) |   | $ | (32,281,030 | ) |
| Adjustments                to reconcile net loss to net cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                |        |   |   |   |   |   |
|    (used                in) provided by operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                |        |   |   |   |   |   |
|        Asset                impairment                costs                                                                                                     |   |                                | 9,005,153   |   |   |   | — |   |
|        Amortization                of deferred                revenue                                                                                           |   |                                | (27,083,333 | ) |   |   | (10,416,667 | ) |
|        Stock-based                compensation                                                                                                                  |   |                                | 4,842,775   |   |   |   | 4,341,492 |   |
|        Amortization                of debt issuance                costs                                                                                        |   |                                | 740,562     |   |   |   | 743,462 |   |
|        Depreciation                and                amortization                                                                                              |   |                                | 495,165     |   |   |   | 453,683 |   |
|        Loss                on debt                conversion                                                                                                    |   |                                | —     |   |   |   | 3,536,962 |   |
|        Changes                in operating assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                |        |   |   |   |   |   |
|          Accounts                receivable                                                                                                           |   |                                | (10,008,699 | ) |   |   | (1,335,714 | ) |
|          Prepaid                expenses                                                                                                              |   |                                | 1,227,142   |   |   |   | (910,523 | ) |
|          Interest                receivable                                                                                                           |   |                                | 361,839     |   |   |   | 144,631 |   |
|          Accounts                payable                                                                                                              |   |                                | 7,355,260   |   |   |   | (92,588 | ) |
|          Accrued                research and                development                                                                               |   |                                | (4,804,600  | ) |   |   | (1,057,371 | ) |
|          Accrued                compensation                                                                                                          |   |                                | 297,712     |   |   |   | (1,732,804 | ) |
|          Accrued                and other                liabilities                                                                                  |   |                                | (81,927     | ) |   |   | (623,167 | ) |
|          Deferred                revenue                                                                                                              |   |                                | —     |   |   |   | 50,000,000 |   |
|             Net                cash (used in) provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                | (36,444,256 | ) |   |   | 10,770,366 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                |        |   |   |   |   |   |
| **Investing                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                |        |   |   |   |   |   |
| Sales                and maturities of short-term                investments                                                                                                                       |   |                                | 71,295,574  |   |   |   | 63,497,596 |   |
| Purchases                of short-term                investments                                                                                                                                  |   |                                | (44,306,574 | ) |   |   | (50,643,999 | ) |
| Purchases                of equipment and leasehold improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                | (660,693    | ) |   |   | (1,161,749 | ) |
|             Net                cash provided by investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                | 26,328,307  |   |   |   | 11,691,848 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                |        |   |   |   |   |   |
| **Financing                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                |        |   |   |   |   |   |
| Proceeds                from the exercise of common stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                | 20,074      |   |   |   | 1,751,036 |   |
| Payments                on equipment loan                facility                                                                                                                                  |   |                                | —     |   |   |   | (87,580 | ) |
|             Net                cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                | 20,074      |   |   |   | 1,663,456 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                |        |   |   |   |   |   |
| (Decrease)                increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                | (10,095,875 | ) |   |   | 24,125,670 |   |
| Cash                and cash equivalents at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                | 87,846,079  |   |   |   | 82,831,679 |   |
| Cash                and cash equivalents at end of                period                                                                                                                           |   | $                                   | 77,750,204  |   |   | $ | 106,957,349 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                |        |   |   |   |   |   |
| **Supplemental                disclosures**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                |        |   |   |   |   |   |
| Interest                paid                                                                                                                                                                       |   | $                                   | 3,435,000   |   |   | $ | 3,435,000 |   |

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

----

**ATHEROGENICS,      INC.**

**NOTES      TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.   Organization      and Nature of Operations**

**2.   Basis      of Presentation**

**3.   Accounts      Receivable**

**4.   Revenue      Recognition**

*Revenue Recognition in Financial Statements,*
*Revenue Recognition, *

*Reporting Gross Revenue      as a Principal vs. Net as an Agent.*

----

**5.   Restructuring      and Impairment Costs**

*Accounting for      Costs Associated with Exit or Disposal Activities,*

*Accounting for the Impairment or Disposal of Long-Lived Assets,*

**6.   Income      Tax**

*Accounting for Uncertainty in Income Taxes*

**7.   Net      Loss per Share**

*Earnings per Share,*

----

**8.   Stock-Based      Compensation**

*Share-Based Payment.  *

** **

|                                                                                                                                                                                                                                                                                                                                                                                      | **Three                months ended**           |   | **Six                months ended** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|--------|-------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                      | **June                30,**                     |   | **June                30,**         |
|                                                                                                                                                                                                                                                                                                                                                                                      | **2007**                                        |   | **2006**                            |   | **2007** |   | **2006** |
|                                                                                                                                                                                                                                                                                                                                                                                      |                                            |   |                                |   |   |   |   |
| Expected                volatility                                                                          |     83.10%                  |   | 67.79%                              |   |     83.10% |   | 69.99% |
| Expected                term                                                                                | 3.48                years                       |   |  5                years        |   | 3.48                years |   |  5                years |
| Risk                free interest                rate                                                       |       4.92%       |   |   5.04%                   |   |       4.92% |   |   4.70% |
| Fair                value of                grants                                                          |        $1.42 |   |    $8.24             |   |        $1.42 |   |    $9.40 |

**9.   Convertible      Notes Payable**

*Induced Conversion of Convertible Debt*

----

**10.   Commitments      and      Contingencies**

**11.   Subsequent      Event**

*Debtor’s Accounting for a Modification or      Exchange of Debt Instruments,*

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**Item      2.  *Management's Discussion and Analysis of Financial Condition      and Results of Operations***

*The      following should be read with the financial statements and related footnotes      and      Management's Discussion and Analysis of Financial Condition and Results of      Operations included in AtheroGenics' Annual Report on Form 10-K for the fiscal      year ended December 31, 2006.  The results discussed below are not      necessarily indicative of the results to be expected in any future      periods.  The following discussion contains forward-looking statements      that are subject to risks and uncertainties which could cause actual results      to      differ from the statements made.  These risks are set forth in more      detail in our Form 10-K for the fiscal year ended December 31, 2006 under the      headings “Risk Factors” and “ Forward –Looking Statements” below as well as the      risks described in Part II, Item 1A.. “Risk Factors” in this quarterly report on      Form 10-Q.  In this report, "AtheroGenics," "we," "us" and "our" refer      to AtheroGenics, Inc.*

**Overview**

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|                                                                              |   | **Three                months ended** |       |   | **Six                months ended** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------|-------------------------------------|--------|
|                                                                              |   | **June                30,**           |       |   | **June                30,**         |   |
|                                                                              |   | **2007**                              |       |   | **2006**                            |   |   | **2007** |   |   | **2006** |   |
|                                                                              |   |                                  |       |   |                                |   |   |   |   |   |   |   |
|    Direct                external AGI-1067 costs                   |   | $                                     | 15,168,587 |   |                                | $      | 9,239,454 |   |   | $ | 25,611,487 |   |   | $ | 18,626,936 |   |
|    Unallocated                internal costs and other programs    |   |                                  | 7,161,611  |   |                                |   | 7,207,726 |   |   |   | 16,682,986 |   |   |   | 14,080,866 |   |
|       Total                research and development |   | $                                     | 22,330,198 |   |                                | $      | 16,447,180 |   |   | $ | 42,294,473 |   |   | $ | 32,707,802 |   |

| ·   | announced                the focus on diabetes as the next step in the development of AGI-1067                and                commenced a new Phase III clinical trial, called ANDES, studying                the                effect of AGI-1067 in patients with                diabetes; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | reduced                AtheroGenics’ near term cash requirements by exchanging $38.0 million of                the 4.5% convertible notes due September 2008 for $60.4 million of                4.5%                convertible notes that will be due in March                2011; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | reduced                the workforce by approximately 50%, resulting in a staff of 67 employees;                and |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | implemented                a retention/incentive program for key executive officers and                employees. |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

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*Risks Related to Development and Commercialization of Our Product      Candidates*
*and Dependence on Third Parties” *
*Risks Related      to Regulatory Approval of Our Product Candidates*
*as well as the risks      described in Part II, Item 1A. “Risk Factors” in this quarterly report on Form      10-Q.*

**Critical      Accounting Policies and Use of Estimates**

**Results      of Operations**

**Comparison      of the Three and Six Months Ended June 30, 2007 and 2006**

*Revenues*

*Expenses*

*Research      and      Development.  *

----

*Marketing,      General and      Administrative.  *

*Restructuring      and Impairment      Costs.*

*Interest      Income*

*Interest      Expense*

*Other      Expense*

**Liquidity      and Capital Resources**

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| ·   |  the                scope and results of                our research, preclinical and clinical development                activities; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                timing of, and the                costs involved in, obtaining regulatory                approvals; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                timing, receipt and amount of sales and royalties, if any, from our                potential product candidates; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                timing, receipt and                amount of milestone and other payments, if                any; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                timing of, and the                costs involved in, transitioning the AstraZeneca                collaboration; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                costs involved in                preparing, filing, prosecuting, maintaining and enforcing patent                claims                and other patent-related                costs;  |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |  if                our common stock is no                longer traded on a national securities exchange or system of automated                quotations, the holders of our convertible notes have the right to                require                us to immediately repay                amounts outstanding   under such notes, together with accrued                interest up to such date; and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   |  the                extent to which we                acquire or invest in businesses, products and                technologies. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|

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**FORWARD-LOOKING      STATEMENTS**

| · | our                inability to commercialize AGI-1067 following the release of the                ARISE                Phase III clinical trial results;                                                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | the                ability of AGI-1067 to treat diabetes and other                diseases;                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | if                our common stock is no longer traded on a national securities exchange                or                system of automated quotations, the holders of our convertible notes                have                the right to require us to immediately repay amounts outstanding                under                such notes, together with accrued interest up to such                date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | AGI-1096                may fail in clinical trials;                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to generate positive cash flow in light of our history of                operating losses;                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                inability to obtain additional financing on satisfactory terms, which                could preclude us from                                                                                                                                                                                                                                                                                    |
|   | developing                or marketing our products;                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to successfully develop our other product                candidates;                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to commercialize our product candidates if we fail to demonstrate                adequately their safety                                                                                                                                                                                                                                                                               |
|   | and                efficacy;                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | possible                delays in our clinical trials;                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                inability to predict whether or when we will obtain regulatory approval                to                commercialize our                                                                                                                                                                                                                                                                     |
|   | product                candidates or the timing of any future revenue from these product                candidates;                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                need to comply with applicable regulatory requirements in the manufacture                and distribution                                                                                                                                                                                                                                                                                      |
|   | of                our products to avoid incurring penalties that my inhibit our ability                to                commercialize our product;                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to protect adequately or enforce our intellectual property                rights                or secure rights to third                                                                                                                                                                                                                                                              |
|   | party                patents;                                                                                                                                                                                                                                                                                                                                                                                     |

----

|   |                                                                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | the                ability of our competitors to develop and market anti-inflammatory                products that are more                           |
|   | effective,                have fewer side effects or are less expensive than our current or                future                product candidates;  |
|   |                                                                                                                                                  |
| · | third                parties' failure to synthesize and manufacture our product candidates,                which could delay our                      |
|   | clinical                trials or hinder our commercialization prospects;                                                                             |
|   |                                                                                                                                                  |
| · | our                ability to create sales, marketing and distribution capabilities                or enter                into agreements with third |
|   | parties                to perform these functions;                                                                                                    |
|   |                                                                                                                                                  |
| · | our                ability to attract, retain and motivate skilled personnel and cultivate                key academic collaborations;                |
|   |                                                                                                                                                  |
| · | our                ability to obtain an adequate level of reimbursement or acceptable                prices                for our products;          |
|   |                                                                                                                                                  |
| · | we                may face product liability lawsuits which may cause us to incur                substantial financial loss or we may                 |
|   | be                unable to obtain future product liability insurance at reasonable                prices,                if at all, either of which  |
|   | could                diminish our ability to commercialize our future products;                and                                                    |
|   |                                                                                                                                                  |
| · | our                ability to repay $48 million principal amount on the 4.5% convertible                notes due September 1, 2008;                  |
|   | and                                                                                                                                                   |
|   |                                                                                                                                                  |
| · | the                conversion of our convertible notes would dilute the ownership interest                of                existing shareholders     |
|   | and                could adversely affect the market price of our common                stock.                                                        |

**Item      3.  Quantitative and Qualitative Disclosures About Market      Risk**

**Item      4.  Controls and Procedures**

*Evaluation      of disclosure controls      and procedures.*

*Changes      in internal control over      financial reporting.*

**PART      II - OTHER INFORMATION**

**Item      1A.  Risk Factors**

***           Although      we currently meet the standards for continued listing on the Nasdaq Global      Market, or Nasdaq, we may be unable to continue to meet these standards in      the      future.  Failure to continue to be listed on***

----

***Nasdaq      or another national securities exchange would give the holders of our      convertible notes the right to require us to immediately repay amounts      outstanding under such notes.***

***           Our      business is heavily dependent on AGI-1067.  If we are unable to      commercialize this product or are unsuccessful in completing our ANDES trial      our      business will be materially adversely effected.***

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

| **Name                of Nominee**  | **No.                of Votes For** | **No.                of Votes Withheld** |
|-------------------------------------|-------------------------------------|------------------------------------------|
|                                |                                |                                     |
| David                Bearman        | 29,646,733                          | 215,413                                  |
| Vaughn                D. Bryson     | 29,323,810                          | 538,336                                  |
| T.                Forcht Dagi, M.D. | 29,643,533                          | 218,613                                  |

| **No.                of Votes For** | **No.                of Votes Against** | **Abstention** |
|-------------------------------------|-----------------------------------------|----------------|
|                                |                                    |           |
| 29,675,558                          | 145,108                                 | 41,480         |

**Item      6.  Exhibits**

|                        |   |                                                                                                                    |
|-----------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|
| Exhibit                31.1 | -      | Certifications                of Chief Executive Officer under Rule 13a-14(a).                                          |
|                        |   |                                                                                                                    |
| Exhibit                31.2 | -      | Certifications                of Chief Financial Officer under Rule 13a-14(a).                                          |
|                        |   |                                                                                                                    |
| Exhibit                32   | -      | Certifications                of Chief Executive Officer and Chief Financial Officer under Section                1350. |

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**SIGNATURES**

|                                           | **ATHEROGENICS,                INC.**                              |
|------------------------------------------------|--------------------------------------------------------------------|
|                                           |                                                               |
| Date:  August                9, 2007 | /s/MARK                P. COLONNESE                                |
|                                           | Mark                P. Colonnese                                   |
|                                           | Executive                Vice President, Commercial Operations and |
|                                           |    Chief                Financial Officer           |
|                                           |                                                               |
|                                           |                                                               |

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