UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


_________________





**FORM
      10-Q**


___________





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2006





Commission
      File No. 0-31261





**ATHEROGENICS,
      INC.**


(Exact
      name of registrant as specified in its charter)





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





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


(Address
      of registrant's principal executive offices, including zip code)





_______________________





(Registrant's
      telephone number, including area code): **(678)
      336-2500**





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Act).


Large
      accelerated filer [ ]  Accelerated
      filer [ X ]   Non-accelerated
      filer [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes [ ]  No
      [ X
      ]





As
      of
      November 3, 2006 there were 39,452,927 shares of the registrant's common stock
      outstanding.





_________________________











**ATHEROGENICS,
      INC.**


**FORM
      10-Q**


**INDEX**








**PART
                I. FINANCIAL INFORMATION**
            **Page
                No.**Item
                1. Condensed Financial Statements (unaudited)Condensed
                Balance SheetsSeptember
                30, 2006 and December 31, 2005
            1Condensed
                Statements of OperationsThree
                and nine months ended September 30, 2006 and 2005
            2Condensed
                Statements of Cash FlowsNine
                months ended September 30, 2006 and 2005
            3Notes
                to Condensed Financial Statements
            4Item
                2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations
            8Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            15Item
                4. Controls and Procedures
            15**PART
                II. OTHER INFORMATION**Item
                6. Exhibits
            16**SIGNATURES**
            17











**PART
      I. - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**ATHEROGENICS,
      INC.**


**CONDENSED
      BALANCE SHEETS**


**(Unaudited)**





**September
                30,**
            
            **December
                31,****2006**
            
            **2005****Assets**Current
                assets:Cash
                and cash equivalents
            $
            100,729,039
            
            $
            82,831,679Short-term
                investments
            
            71,277,798
            
            
            99,672,844Accounts
                receivable
            
            6,814,698
            
            
            19,393Prepaid
                expenses
            
            5,219,741
            
            
            2,639,900Interest
                receivable and other assets
            
            708,810
            
            
            880,799Total
                current assets
            
            184,750,086
            
            
            186,044,615Equipment
                and leasehold improvements, net of accumulated
                depreciationand
                amortization
            
            5,923,097
            
            
            4,108,462Debt
                issuance costs and other assets
            
            5,994,633
            
            
            7,344,450Total
                assets
            $
            196,667,816
            
            $
            197,497,527**Liabilities
                and Shareholders' Deficit**Current
                liabilities:Accounts
                payable
            $
            3,261,257
            
            $
            2,188,461Accrued
                research and development
            
            7,138,929
            
            
            3,946,970Accrued
                compensation
            
            1,277,513
            
            
            2,649,640Accrued
                interest
            
            822,500
            
            
            2,750,000Accrued
                and other liabilities
            
            740,342
            
            
            1,344,876Current
                portion of deferred revenue
            
            25,000,000
            
            
            —Total
                current liabilities
            
            38,240,541
            
            
            12,879,947Convertible
                notes payable and equipment loan, net of current portion
            
            286,000,000
            
            
            300,053,796Long-term
                portion of deferred revenue
            
            8,333,333
            
            
            —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 —39,452,927
                and 38,143,678 shares at September 30, 2006and
                December 31, 2005, respectively
            
            204,828,125
            
            
            178,771,376Warrants
            
            613,021
            
            
            620,223Accumulated
                deficit
            
            (341,329,224
            )
            
            (294,674,874
            )Accumulated
                other comprehensive loss
            
            (17,980
            )
            
            (152,941
            )Total
                shareholders' deficit
            
            (135,906,058
            )
            
            (115,436,216
            )Total
                liabilities and shareholders' deficit
            $
            196,667,816
            
            $
            197,497,527





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


1








**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**








**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues:License fees
            $
            6,250,000
            
            $
            —
            
            $
            16,666,667
            
            $
            —Research and development
            
            4,042,683
            
            
            —
            
            
            4,042,683
            
            
            —Total revenues
            
            10,292,683
            
            
            —
            
            
            20,709,350
            
            
            —Operating
                expenses:Research and development
            
            21,806,971
            
            
            20,459,188
            
            
            54,514,773
            
            
            55,995,126Marketing, general and administrative
            
            3,111,042
            
            
            2,082,075
            
            
            9,990,244
            
            
            6,134,624Total operating expenses
            
            24,918,013
            
            
            22,541,263
            
            
            64,505,017
            
            
            62,129,750Operating
                loss
            
            (14,625,330
            )
            
            (22,541,263
            )
            
            (43,795,667
            )
            
            (62,129,750
            )Interest
                and other income
            
            2,391,460
            
            
            1,755,508
            
            
            6,998,118
            
            
            4,881,021Interest
                expense
            
            (2,139,450
            )
            
            (2,271,597
            )
            
            (6,335,565
            )
            
            (6,645,558
            )Other
                expense
            
            —
            
            
            —
            
            
            (3,521,236
            )
            
            —Net
                loss
            $
            (14,373,320
            )
            $
            (23,057,352
            )
            $
            (46,654,350
            )
            $
            (63,894,287
            )Net
                loss per share -basic and diluted
            $
            (0.36
            )
            $
            (0.61
            )
            $
            (1.19
            )
            $
            (1.69
            )Weighted
                average sharesoutstanding - basic and diluted
            
            39,451,933
            
            
            37,852,507
            
            
            39,359,938
            
            
            37,701,715





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





2


**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**








**Nine
                months ended****September
                30,****2006**
            
            **2005****Operating
                activities**Net
                loss
            $
            (46,654,350
            )
            $
            (63,894,287
            )Adjustments
                to reconcile net loss to net cashused in operating activities:Amortization of license fee
            
            (16,666,667
            )
            
            —Stock-based compensation
            
            6,724,633
            
            
            —Loss on debt conversion
            
            3,521,236
            
            
            —Amortization of debt issuance costs
            
            1,112,888
            
            
            1,108,784Depreciation and amortization
            
            688,295
            
            
            721,730Changes in operating assets and liabilities:Accounts receivable
            
            (6,795,305
            )
            
            (11,743
            )Prepaid expenses
            
            (2,579,841
            )
            
            (153,752
            )Interest receivable and other assets
            
            171,989
            
            
            (815,062
            )Accounts payable
            
            1,072,796
            
            
            145,714Accrued research and development
            
            3,191,959
            
            
            120,117Accrued interest
            
            (1,649,250
            )
            
            (625,000
            )Accrued compensation
            
            (1,372,127
            )
            
            (236,672
            )Accrued and other liabilities
            
            (570,750
            )
            
            109,017Deferred revenue
            
            50,000,000
            
            
            —Net cash used in operating activities
            
            (9,804,494
            )
            
            (63,531,154
            )**Investing
                activities**Sales
                and maturities of short-term investments
            
            105,425,992
            
            
            106,291,903Purchases
                of short-term investments
            
            (76,895,985
            )
            
            (151,889,430
            )Purchases
                of equipment and leasehold improvements
            
            (2,502,930
            )
            
            (2,183,853
            )Net cash provided by (used in) investing activities
            
            26,027,077
            
            
            (47,781,380
            )**Financing
                activities**Proceeds
                from the exercise of common stock options
            
            1,762,357
            
            
            2,211,438Payments
                on equipment loan facility
            
            (87,580
            )
            
            (91,722
            )Proceeds
                from the issuance of 1.5% convertible notes
            
            —
            
            
            193,566,977Net cash provided by financing activities
            
            1,674,777
            
            
            195,686,693Increase
                in cash and cash equivalents
            
            17,897,360
            
            
            84,374,159Cash
                and cash equivalents at beginning of period
            
            82,831,679
            
            
            15,888,919Cash
                and cash equivalents at end of period
            $
            100,729,039
            
            $
            100,263,078**Supplemental
                disclosures**Interest
                paid
            $
            6,871,927
            
            $
            6,161,775





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





3


**ATHEROGENICS,
      INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**(Unaudited)**





**1.
      Organization and Nature of Operations**





AtheroGenics,
      Inc. (“AtheroGenics”) was incorporated on November 23, 1993 (date of inception)
      in the State of Georgia to focus on the discovery, development and
      commercialization of novel therapeutics for the treatment of chronic
      inflammatory diseases, including coronary heart disease, organ transplant
      rejection, rheumatoid arthritis and asthma.





**2.
      Basis of Presentation**





The
      accompanying unaudited condensed financial statements reflect all adjustments
      (consisting solely of normal recurring adjustments) which management considers
      necessary for a fair presentation of the financial position, results of
      operations and cash flows of AtheroGenics for the interim periods presented.
      Certain footnote disclosures normally included in financial statements prepared
      in accordance with U.S. generally accepted accounting principles have been
      condensed or omitted from the interim financial statements as permitted by
      the
      rules and regulations of the Securities and Exchange Commission (the “SEC”).
      Interim results are not necessarily indicative of results for the full year.





The
      interim results should be read in conjunction with the financial statements
      and
      notes thereto included in AtheroGenics' Annual Report on Form 10-K for the
      year
      ended December 31, 2005, filed with the SEC on March 10, 2006 (the “Form
      10-K”). Shareholders are encouraged to review the Form 10-K for a broader
      discussion of the opportunities and risks inherent in AtheroGenics' business.
      Copies of the Form 10-K are available on request.





**3.
      Accounts Receivable**





Accounts
      receivable consists of billed and unbilled receivables related to our license
      and collaboration agreement with AstraZeneca. Unbilled receivables represent
      amounts due, which have not been billed as of the current balance sheet date.
      As
      of September 30, 2006, accounts receivable was $3,931,897 and unbilled
      receivables were $2,882,801.





**4.
      Revenue Recognition**





AtheroGenics
      recognizes license fee revenues in accordance with the SEC’s Staff Accounting
      Bulletin (“SAB”) No. 101, *Revenue
      Recognition in Financial Statements,* as
      amended by SAB No. 104, *Revenue
      Recognition,* (“SAB
      104”). SAB 104 provides guidance in applying U.S. generally accepted accounting
      principles to revenue recognition issues, and specifically addresses revenue
      recognition for upfront, nonrefundable fees received in connection with research
      collaboration agreements.





In
      accordance with SAB 104, license fees, which are nonrefundable, are recognized
      over the period the related license agreements specify that efforts or
      obligations are required of AtheroGenics. In February 2006, AtheroGenics
      received a $50 million license fee in connection with its license and
      collaboration agreement with AstraZeneca. The upfront license payment will
      be
      recognized on a straight-line basis over the 24-month period that AtheroGenics
      estimates it is obligated to provide services to the licensee. In 2006, revenues
      will be approximately $23 million related to the amortization of the upfront
      license fee from AstraZeneca, of which $16.7 million has been recorded through
      September 30, 2006.





During
      the third quarter, AstraZeneca engaged AtheroGenics to perform FOCUS (Follow-up
      Of Clinical Outcomes: The Long-term AGI-1067 plus Usual Care Study), a follow-up
      Phase III clinical trial for patients who have completed ARISE (Aggressive
      Reduction of Inflammation Stops Events). Revenues under the research and
      development agreement pertaining to FOCUS are recognized in accordance with
      Emerging Issues Task Force (“EITF”) Issue No. 99-19, *Reporting
      Gross Revenue as a Principal vs. Net as an Agent.* According to the criteria established by EITF Issue No. 99-19, AtheroGenics
      is
      the primary obligor of the agreement because it is responsible for the
      selection, negotiation, contracting and payment of the third party suppliers.
      In
      addition, any liabilities


4


resulting
      from the agreement are the responsibility of AtheroGenics. Research and
      development revenues are recognized, on a gross basis, as activities are
      performed under the terms of the related agreement. Revenues that have not
      been
      invoiced are reflected as unbilled receivables as described in the accounts
      receivable note above.





**5.
      Net Loss per Share**





Statement
      of Financial Accounting Standards (“SFAS”) No. 128, *Earnings
      per Share,* requires
      presentation of both basic and diluted earnings per share. Basic earnings per
      share is computed by dividing net income (loss) by the weighted average number
      of shares of common stock outstanding during the period. Diluted earnings per
      share is computed in the same manner as basic earnings per share except that
      diluted earnings per share reflects the potential dilution that would occur
      if
      outstanding options, warrants and convertible notes were exercised. Because
      AtheroGenics reported a net loss for all periods presented, shares associated
      with stock options, warrants and convertible notes are not included because
      their effect would be antidilutive. Basic and diluted net loss per share amounts
      are the same for the periods presented.





**6.** **Stock-Based
      Compensation**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123(R), *Share-Based
      Payment,* (“SFAS
      123(R)”), which revises SFAS No. 123 *Accounting
      for Stock-Based Compensation* (“SFAS
      123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”). SFAS 123(R) ** requires
      that companies recognize expense associated with stock option grants and other
      equity instruments to employees in the financial statements. SFAS 123(R) was
      effective January 1, 2006 and applies to all grants after the effective date
      and
      to the unvested portion of stock options outstanding as of the effective
      date.





On
      January 1, 2006, AtheroGenics adopted SFAS 123(R) using the modified prospective
      method. For the three and nine months ended September 30, 2006, AtheroGenics
      recorded approximately $2.4 million and $6.7 million, respectively of
      stock-based compensation expense. As a result of adopting SFAS 123(R),
      AtheroGenics’ net loss per share was impacted $(0.06) and $(0.17) for the three
      months and nine months ended September 30, 2006, respectively. AtheroGenics
      has
      a net operating loss carryforward as of September 30, 2006, and therefore no
      excess tax benefits for tax deductions related to the stock options were
      recognized. As of September 30, 2006, unamortized stock-based compensation
      expenses of approximately $20.1 million remain to be recognized over a weighted
      average period of approximately three years.





AtheroGenics
      estimated the fair value of stock options granted during the three and nine
      months ended September 30, 2006 using the Black-Scholes option valuation
      model. AtheroGenics has calculated a 6.44% forfeiture rate based on historical
      data. Expected volatility is based on historical volatility of AtheroGenics’
common stock. The expected term of the stock options granted is also based
      on
      historical data and represents the period of time that stock options granted
      are
      expected to be outstanding. The risk free interest rate is based on the U.S.
      Treasury rates in effect at the time of the grant for periods corresponding
      with
      the expected term of the options. The weighted average assumptions used in
      the
      Black-Scholes model for options granted are as follows:





**Three
                months ended**
            
            **Nine
                months ended****September
                30, 2006**
            
            **September
                30, 2006**Expected
                volatility
            66.37%
            
            69.62%Expected
                term
            5
                years
            
            5
                yearsRisk
                free interest rate
            4.67%
            
            4.70%Fair
                value of grants
            $7.98
            
            $9.26





Prior
      to
      the adoption of SFAS 123(R), AtheroGenics accounted for its stock-based
      compensation expenses under the provision of APB 25 and related interpretations.
      Under APB 25, if the exercise price of employee stock options equals or exceeds
      the market price of the underlying stock on the date of grant, no compensation
      expense is recognized. AtheroGenics had adopted the provisions of SFAS 123
      as
      amended by SFAS No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure,* using
      pro forma disclosure only. The following table


5


illustrates
      the effect on net loss and net loss per share as if the fair value based method
      had been applied to all outstanding and unvested options based on the provisions
      of SFAS 123.





**Three
                months ended**
            
            **Nine
                months ended****September
                30, 2005**
            
            **September
                30, 2005**Net
                loss, as reported
            $
            (23,057,352
            )
            $
            (63,894,287
            )Deduct:
                Total stock-based employee compensation expensedetermined under fair value based method for all awards
            
            (2,182,600
            )
            
            (6,841,315
            )Pro
                forma net loss
            $
            (25,239,952
            )
            $
            (70,735,602
            )Net
                loss per share:Basic
                and diluted, as reported
            $
            (0.61
            )
            $
            (1.69
            )Basic
                and diluted, pro forma
            $
            (0.67
            )
            $
            (1.88
            )





For
      stock
      options granted during the three and nine months ended September 30, 2005,
      the
      pro forma compensation expense under SFAS 123 was determined using the following
      weighted average assumptions:





**Three
                months ended**
            
            **Nine
                months ended****September
                30, 2005**
            
            **September
                30, 2005**Expected
                volatility
            76.88%
            
            78.05%Expected
                term
            5
                years
            
            5
                yearsRisk
                free interest rate
            4.17%
            
            4.18%Fair
                value of grants
            $11.12
            
            $8.71





AtheroGenics
      continues to account for transactions in which services are received in exchange
      for equity instruments based on the fair value of such services received from
      non-employees, in accordance with SFAS 123 and EITF Issue No. 96-18, *Accounting
      for Equity Instruments that Are Issued to Other than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services.*





As
      of
      January 1, 2006, AtheroGenics had the following equity incentive plans from
      which stock-based compensation awards could be granted: the Equity Ownership
      Plan, the 2001 Equity Ownership Plan and the 2004 Equity Ownership Plan (the
      “Plans”). All of the Plans have been approved by AtheroGenics’
shareholders.





Under
      the
      Plans, options to purchase AtheroGenics' common stock may be granted to
      employees, directors, consultants or contractors with exercise prices not less
      than the fair value of the shares on the dates of grant. As of
      September 30, 2006, AtheroGenics had 7,530,591 shares of common stock
      reserved for issuance under the Plans in connection with outstanding options
      or
      future grants. The Plans allow for grants of non-qualified options, incentive
      stock options and shares of restricted stock. Non-qualified options granted
      under the Plans may vest immediately for non-employees, but vest over a one
      to
      four-year period for employees and directors. Incentive stock options generally
      vest over four years.





6


The
      following is a summary of all stock option activity for the nine months ended
      September 30, 2006.





**Weighted****Weighted**
            
            **Average**
            
            **Aggregate****Number
                of**
            
            **Average**
            
            **Remaining**
            
            **Intrinsic****Shares**
            
            **Exercise
                Price**
            
            **Contractual
                Life**
            
            **Value**Outstanding
                at January 1, 2006
            
            4,375,632
            
            $
            11.17Granted
            
            1,400,109
            
            
            15.09Exercised
            
            (224,249
            )
            
            7.86Canceled
            
            (178,206
            )
            
            18.71Outstanding
                at September 30, 2006
            
            5,373,286
            
            
            12.08
            
            
            6.91
            
            $
            19,955,127Exercisable
                at September 30, 2006
            
            3,239,346
            
            $
            8.99
            
            
            5.62
            
            $
            19,688,324





**7.
      Convertible Notes Payable**





In
      August
      2003, AtheroGenics issued $100.0 million in aggregate principal amount of 4.5%
      convertible notes due September 1, 2008 with interest payable semi-annually
      in March and September. Net proceeds to AtheroGenics were approximately $96.7
      million, after deducting expenses and underwriter’s discounts and commissions.
      The issuance costs related to the notes are recorded as debt issuance costs
      and
      other assets and are being amortized to interest expense over the five-year
      life
      of the notes. The 4.5% convertible notes may be converted at the option of
      the
      holder into shares of AtheroGenics common stock prior to the close of business
      on September 1, 2008 at a conversion rate of 65.1890 shares per $1,000 principal
      amount of notes, representing a conversion price of approximately $15.34 per
      share. In January 2006, AtheroGenics exchanged $14.0 million in aggregate
      principal amount of the 4.5% convertible notes for approximately 1.1 million
      shares of AtheroGenics common stock. In accordance with SFAS No. 84, *Induced
      Conversion of Convertible Debt* ,
      this
      transaction resulted in a non-cash charge of approximately $3.5 million related
      to the premium paid in excess of the conversion price in order to induce
      conversion of the notes.





In
      January 2005, AtheroGenics issued $200.0 million in aggregate principal amount
      of 1.5% convertible notes due February 1, 2012 with interest payable
      semi-annually in February and August. Net proceeds to AtheroGenics were
      approximately $193.6 million, after deducting expenses and underwriter’s
      discounts and commissions. The issuance costs related to the notes are recorded
      as debt issuance costs and other assets and are being amortized to interest
      expense over the seven-year life of the notes. The 1.5% convertible notes are
      convertible into shares of common stock, at the option of the holder, at a
      conversion rate of 38.5802 shares per $1,000 principal amount of notes, which
      represents a conversion price of approximately $25.92 per share.





The
      conversion rate for both series of notes is subject to adjustment for stock
      dividends and other dilutive transactions. In addition, AtheroGenics’ Board of
      Directors may, to the extent permitted by applicable law, increase the
      conversion rate provided that the Board of Directors has determined that such
      increase is in the best interest of AtheroGenics and such increase remains
      effective for a period of at least twenty days. AtheroGenics may also be
      required to redeem the notes on an accelerated basis if AtheroGenics defaults
      on
      certain other debt obligations or if AtheroGenics common stock or consideration
      received in exchange for such common stock is not tradable on a national
      securities exchange or system of automated quotations.





As
      of
      September 30, 2006, AtheroGenics has reserved a total of 13,322,307 shares
      of
      common stock for future issuances in connection with the 4.5% convertible notes
      and the 1.5% convertible notes. In addition, as of September 30, 2006,
      there was approximately $322,500 of accrued interest expense related to the
      4.5%
      notes, which is due March 1, 2007 and $500,000 of accrued interest expense
      related to the 1.5% convertible notes, which is due February 1,
      2007.





7


**8.
      Commitments and Contingencies**





Except
      as
      set forth below, AtheroGenics' commitments and contingencies have not changed
      materially from those previously discussed in its Form 10-K.





In
      March
      2005, AtheroGenics committed to purchase approximately $3.5 million of
      commercial manufacturing equipment for AGI-1067, to be delivered in 2006. In
      March 2006, AstraZeneca assumed this commitment, and the costs are shared by
      both AtheroGenics and AstraZeneca as part of the joint license and collaboration
      agreements that were signed in December 2005. AtheroGenics expects its portion
      of the cost of the equipment and the construction, installation and start-up
      costs related to the equipment to be approximately $9.0 million over the life
      of
      the project. Under the terms of the license agreement, this amount may be
      reimbursed by AstraZeneca when certain termination rights expire. As of
      September 30, 2006, AtheroGenics has recorded $2.3 million as equipment and
      leasehold improvements related to its portion of the cost of the equipment
      and
      construction which has occurred to date.





**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, 2005. 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, 2005 and in Forward -Looking Statements” below. In this
      report, "AtheroGenics," "we," "us" and "our" refer to AtheroGenics,
      Inc.*





**Overview**





AtheroGenics
      is a research-based pharmaceutical company focused on the discovery, development
      and commercialization of novel drugs for the treatment of chronic inflammatory
      diseases, including coronary heart disease, organ transplant rejection,
      rheumatoid arthritis and asthma. We have developed a proprietary vascular
      protectant, or v-protectant ® ,
      technology platform to discover drugs to treat these types of diseases. Based
      on
      our v-protectant ® platform, we have two drug development programs in clinical trials and are
      pursuing a number of other preclinical programs.





AGI-1067
      is our v-protectant ® candidate that is most advanced in clinical development. AGI-1067 is designed
      to
      benefit patients with coronary heart disease, or CHD, which is atherosclerosis
      of the blood vessels of the heart. Atherosclerosis is a common disease that
      results from inflammation and the buildup of plaque in arterial blood vessel
      walls.





In
      2004,
      we completed a Phase IIb clinical trial called CART-2, a 465-patient study
      that
      examined the effect of 12 months of AGI-1067 therapy on atherosclerosis and
      post-angioplasty restenosis. Two leading cardiac intravascular ultrasound
      laboratories independently analyzed the final data from CART-2. The primary
      endpoint of the trial was a change in coronary atherosclerosis, measured as
      total plaque volume after a 12-month treatment period compared to baseline
      values. Combined results of the final analysis from the two laboratories, which
      were based on an evaluation of intravascular ultrasounds from approximately
      230
      patients in the study, indicate that AGI-1067 reduced plaque volume by an
      average of 2.3%, which was statistically significant. Results from the patient
      group receiving both placebo and “standard of care” indicated a plaque volume
      measure that was not statistically different from baseline. While the plaque
      regression observed in the AGI-1067 group exceeded that observed in the standard
      of care group numerically, the difference did not reach statistical
      significance, although a trend towards significance was seen in one laboratory’s
      analysis. An important secondary endpoint from the trial, change in plaque
      volume in the most severely diseased subsegment, showed statistically
      significant regression from baseline by an average of 4.8%. The results also
      demonstrated a significant reduction in myeloperoxidase, an inflammatory
      biomarker that correlates with future cardiovascular events. Overall adverse
      event rates were similar in the AGI-1067 and standard of care groups, and
      AGI-1067 was generally well tolerated.


8





Based
      on
      the results of an End of Phase II meeting with the Food and Drug Administration
      (“FDA”), we developed a pivotal Phase III clinical trial protocol to evaluate
      AGI-1067 for the treatment of atherosclerosis. The Phase III protocol received
      a
      Special Protocol Assessment from the FDA. A Special Protocol Assessment is
      written confirmation from the FDA that the protocol is adequately designed
      to
      support a New Drug Application (“NDA”) for the drug in the specified treatment
      area.





In
      2003,
      we initiated the pivotal Phase III trial, referred to as ARISE (Aggressive
      Reduction of Inflammation Stops Events), which is being conducted in cardiac
      centers in the United States, Canada, the United Kingdom and South Africa.
      ARISE
      will evaluate the impact of AGI-1067 on important outcome measures such as
      death
      due to coronary disease, myocardial infarction, stroke, coronary
      re-vascularization and unstable angina in patients who have CHD. The study
      will
      assess the incremental benefits of AGI-1067 versus the current standard of
      care
      therapies in this patient population. As such, all patients in the trial,
      including those on placebo, will be receiving other appropriate heart disease
      medications, including statins and other cholesterol-lowering therapies, high
      blood pressure medications and anti-clotting agents.





We
      have
      completed patient enrollment with a total of 6,127 patients in the study. The
      target number of events in the study of 990 will yield greater than 95 percent
      statistical power to detect a 20 percent difference in clinical events between
      the study arms. We expect to complete the ARISE trial at the end of 2006 and
      announce the results in early 2007. Assuming positive results, we plan to file
      an NDA with the FDA as soon as possible thereafter.





In
      the
      second half of 2006, we were engaged by AstraZeneca to conduct FOCUS (Follow-up
      Of Clinical Outcomes: The Long-term AGI-1067 plus Usual Care Study). FOCUS
      is a
      follow-up Phase III clinical trial for patients exiting ARISE, designed to
      collect extended safety information. AstraZeneca will be funding the entire
      cost
      of the trial, which could last two years beyond ARISE.





In
      December 2005, we announced a license and collaboration agreement with
      AstraZeneca for the global development and commercialization of AGI-1067. Under
      the terms of the agreement, we received an upfront license fee of $50 million
      and, subject to the achievement of specific milestones, including a successful
      outcome in ARISE, we will be eligible for development and regulatory milestones
      of up to an aggregate of $300 million. The agreement also provides for
      progressively demanding sales performance related milestones, the achievement
      of
      which could result in up to an additional $650 million in the aggregate. In
      addition, we will also receive royalties on product sales. AstraZeneca has
      the
      right to terminate the license and collaboration agreement at specified periods
      as further described in our Form 10-K for the year ended December 31,
      2005.





AGI-1096,
      our second v-protectant ® candidate, is a novel antioxidant and selective anti-inflammatory agent that
      is
      being developed to address the accelerated inflammation of grafted blood
      vessels, known as transplant arteritis, common in chronic organ transplant
      rejection. We are working with Astellas Pharma Inc. (“Astellas”) to further
      develop AGI-1096 in preclinical and early-stage clinical trials. In a Phase
      I
      clinical trial investigating the safety and tolerability of oral AGI-1096 in
      combination with Astellas’ tacrolimus (Prograf ® )
      conducted in healthy volunteers, results indicated that regimens of AGI-1096
      administered alone, and concomitant with tacrolimus, were generally
      well-tolerated, and there were no serious adverse events associated with either
      regimen during the study. AGI-1096 has also demonstrated pharmacological
      activity in certain preclinical studies that were conducted as part of the
      ongoing collaboration. In February 2006, we announced the extension of our
      collaboration with Astellas to conduct additional trials, with Astellas funding
      all development costs during the term of the agreement. Astellas will also
      retain the exclusive option to negotiate with us for late stage development
      and
      commercial rights to AGI-1096.





We
      have
      also identified additional potential v-protectant ® candidates to treat other chronic inflammatory diseases, including rheumatoid
      arthritis and asthma. We are evaluating these v-protectants ® to
      determine lead drug candidates for clinical development. We plan to develop
      these compounds rapidly and may seek regulatory fast track status, if available,
      to expedite development and commercialization.





9


The
      following table provides information regarding our research and development
      expenses for our major product candidates:





**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Direct
                external AGI-1067 costs
            $
            12,256,126
            
            $
            12,981,694
            
            $
            31,930,434
            
            $
            40,975,276Unallocated
                internal costs and other programs
            
            9,550,845
            
            
            7,477,494
            
            
            22,584,339
            
            
            15,019,850Total
                research and development
            $
            21,806,971
            
            $
            20,459,188
            
            $
            54,514,773
            
            $
            55,995,126





From
      inception, we have devoted the large majority of our research and development
      efforts and financial resources to support development of the AGI-1067 product
      candidate. We will retain responsibility for the ongoing ARISE clinical trial
      and for regulatory filings in the United States. We will conduct the FOCUS
      clinical trial for which we will be compensated by AstraZeneca. AstraZeneca
      will
      have full responsibility for pre-commercialization activities involving AGI-1067
      and will oversee all aspects of the marketing, sales and distribution of
      AGI-1067 on a worldwide basis. AstraZeneca will also be responsible for all
      non-U.S. regulatory filings. Spending for the AGI-1096 program in 2006 and
      2005
      was funded by our collaborative development partner, Astellas.





The
      nature, timing and costs of the efforts to complete the successful development
      of any of our product candidates are highly uncertain and subject to numerous
      risks, and therefore cannot be accurately estimated. These risks include the
      rate of progress and costs of our clinical trials, clinical trial results,
      cost
      and timing of regulatory approval and establishing commercial manufacturing
      supplies. These risks and uncertainties, and their effect on our operations
      and
      financial position, are more fully described in our risk factors included in
      our
      Form 10-K for the year ended December 31, 2005, under the headings “ *Risks
      Related to Development and Commercialization of Our Product
      Candidates*  *and
      Dependence on Third Parties”* and
      “ *Risks
      Related to Regulatory Approval of Our Product Candidates* .”





We
      have
      not derived any commercial revenues from product sales. We expect to incur
      significant losses in most years prior to deriving any such product revenue
      as
      we continue to increase research and development costs. We have funded our
      operations primarily through sales of equity and debt securities. We have
      incurred significant losses since we began operations and, as of September
      30,
      2006, had an accumulated deficit of $341.3 million. We cannot assure you that
      we
      will become profitable or receive any milestone-related revenues under our
      agreement with AstraZeneca. We expect that losses will fluctuate from quarter
      to
      quarter and that these fluctuations may be substantial. Our ability to achieve
      profitability depends upon our ability, alone or with others, to complete the
      successful development of our product candidates, to obtain required regulatory
      clearances and to manufacture and market our future products.





**Critical
      Accounting Policies and Use of Estimates**





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      and
      select accounting policies that affect the amounts reported in our financial
      statements and the accompanying notes. Actual results could significantly differ
      from those estimates. We have identified the following policies and related
      estimates as critical to our business operations and the understanding of our
      results of operations. A description of these critical accounting policies
      and a
      discussion of the significant estimates and judgments associated with these
      policies are set forth below.





*Research
      and Development Accrual*





As
      part
      of the process of preparing our financial statements, we are required to
      estimate expenses that we believe we have incurred, but for which we have not
      yet been billed. This process involves identifying services and activities
      that
      have been performed by third party vendors on our behalf and estimating the
      level to which they have been performed and the associated cost incurred for
      such service as of each balance sheet date in our financial statements. Examples
      of expenses for which we accrue include fees for professional services, such
      as
      those provided by certain clinical research organizations and investigators
      in
      conjunction with clinical trials, and fees owed to contract manufacturers in
      conjunction with the manufacture of clinical trial materials. We make these




10


estimates
      based upon progress of activities related to contractual obligations and also
      information received from vendors.




*Revenue
      Recognition*





We
      recognize revenue in accordance with the SEC’s Staff Accounting Bulletin (“SAB”)
      No. 101, *Revenue
      Recognition in Financial Statements,* as
      amended by SAB No. 104, *Revenue
      Recognition,* (“SAB
      104”). SAB 104 provides guidance in applying U.S. generally accepted accounting
      principles to revenue recognition issues, and specifically addresses revenue
      recognition for upfront, nonrefundable fees received in connection with research
      collaboration agreements.





In
      accordance with SAB 104, license fees, which are nonrefundable, are recognized
      when the related license agreements specify that no further efforts or
      obligations are required of us. In February 2006, we received a $50 million
      license fee in connection with our license and collaboration agreement with
      AstraZeneca. The upfront license payment will be recognized on a straight-line
      basis over the 24-month period that we estimate we are obligated to provide
      services to the licensee. In 2006, revenues will be approximately $23 million
      related to the amortization of the upfront license fee from
      AstraZeneca.





During
      the third quarter, AstraZeneca engaged AtheroGenics to perform FOCUS, a
      follow-up Phase III clinical trial for patients who have completed ARISE. Revenues
      under the research and development agreement pertaining to the FOCUS clinical
      trial are recognized in accordance with Emerging Issues Task Force (“EITF”)
      Issue No. 99-19, *Reporting
      Gross Revenue as a Principal vs. Net as an Agent.* According to the criteria established by EITF Issue No. 99-19, we are the
      primary obligor of the agreement because we are responsible for the selection,
      negotiation, contracting and payment of the third party suppliers. In addition,
      any liabilities resulting from the agreement are the responsibility of
      AtheroGenics. Research and development revenues are recognized, on a gross
      basis, as activities are performed under the terms of the related agreement.
      Revenues that have not been invoiced are reflected as unbilled receivables
      as
      described in the accounts receivable note.





*Stock-Based
      Compensation*





Effective
      January 1, 2006, we adopted the provisions of the Financial Accounting Standards
      Board (“FASB”) SFAS No. 123(R), *Share-Based
      Payment* (“SFAS
      123(R)”), which revises SFAS No. 123, *Accounting
      for Stock-Based Compensation* and
      supersedes Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* . SFAS
      123(R) requires that companies recognize compensation expense associated with
      stock option grants and other equity instruments to employees in the financial
      statements. SFAS 123(R) applies to all grants after the effective date and
      to
      the unvested portion of stock options outstanding as of the effective date.
      The
      pro forma disclosures previously permitted under SFAS 123 are no longer an
      alternative to financial statement recognition. We are using the
      modified-prospective method and the Black-Scholes valuation model for valuing
      the share-based payments. We will continue to account for transactions in which
      services are received in exchange for equity instruments based on the fair
      value
      of such services received from non-employees, in accordance with SFAS 123
      and EITF Issue No. 96-18, *Accounting
      for Equity Instruments that Are Issued to Other than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services.*





**Results
      of Operations**





**Comparison
      of the Three and Nine Months Ended September 30, 2006 and
      2005**





*Revenues*





Total
      revenues were $10.3 million and $20.7 million for the three and nine months
      ended September 30, 2006, respectively. The license fee revenues of $6.3
      million and $16.7 million for the three and nine months ended September 30,
      2006, respectively, are attributable to the license and collaboration agreement,
      effective January 2006, with AstraZeneca for the development and
      commercialization of AGI-1067. This amount represents the earned portion of
      the
      $50.0 million license fee that is being amortized over 24 months. The research
      and development revenues of $4.0 million for the three and nine months ended
      September 30, 2006 are for services performed for AstraZeneca related to the
      FOCUS clinical trial. There were no revenues during 2005.


11








*Expenses*





*Research
      and Development.* Research
      and development expenses increased 7% to $21.8 million for the three months
      ended September 30, 2006 from $20.5 million for the comparable period in 2005,
      and decreased 3% to $54.5 million for the nine months ended September 30, 2006
      from $56.0 million for the comparable period in 2005. The increase in research
      and development expenses for the three months ended September 30, 2006 is
      primarily due to costs for the initiation of FOCUS of approximately $4.0 million
      and non-cash stock-based compensation of $1.2 million. These costs were largely
      offset by lower spending related to other trials in the AGI-1067 clinical
      program. The decrease in research and development for the nine months ended
      September 30, 2006 is primarily due to lower development expenses for
      AtheroGenics’ ongoing AGI-1067 clinical program, including clinical supplies and
      manufacturing scale-up activities, partially offset by the costs associated
      with
      the initiation of FOCUS of approximately $4.0 million and non-cash stock-based
      compensation expense of $3.6 million.





*Marketing,
      General and Administrative.* Marketing,
      general and administrative expenses increased 49% to $3.1 million for the three
      months ended September 30, 2006 from $2.1 million for the comparable period
      in
      2005, and 63% to $10.0 million for the nine months ended September 30, 2006
      from
      $6.1 million for the comparable period in 2005. The increase during both periods
      is primarily due to non-cash stock-based compensation expense of $1.1 million
      and $3.1 million for the three and nine months ended September 30, 2006,
      respectively, reflecting the adoption of SFAS 123(R) in January
      2006.





*Interest
      and Other Income*





Interest
      and other income is primarily comprised of interest income earned on our cash
      and short-term investments. Interest and other income was $2.4 million and
      $7.0
      million for the three and nine months ended September 30, 2006,
      respectively, compared to $1.8 million and $4.9 million for the three and nine
      months ended September 30, 2005, respectively. The increase for the three and
      nine months ended September 30, 2006 is due to an increase in interest rates
      on
      our interest bearing accounts.





*Interest
      Expense*





Interest
      expense was $2.1 million and $6.3 million for the three and nine months ended
      September 30, 2006, respectively and $2.3 million and $6.6 million for the
      three
      and nine months ended September 30, 2005, respectively. The decrease for the
      three and nine-month period is due to the lower aggregate principal amount
      of
      our 4.5% convertible notes outstanding compared to the prior year.




*Other
      Expense*




Other
      expense was $3.5 million for the nine months ended September 30, 2006. The
      increase in other expense is due to $3.5 million of non-cash expense related
      to
      the exchange of $14.0 million of AtheroGenics’ 4.5% convertible notes for common
      stock in the first quarter of 2006.




**Liquidity
      and Capital Resources**




Since
      inception, we have financed our operations primarily through sales of equity
      securities and convertible notes. At September 30, 2006, we had cash, cash
      equivalents and short-term investments of $172.0 million, compared with $182.5
      million at December 31, 2005. Working capital at September 30, 2006 was $146.5
      million, compared to $173.2 million at December 31, 2005. The decrease in cash,
      cash equivalents and short-term investments and working capital for the nine
      months ended September 30, 2006 is due to the use of funds for operating
      purposes and capital equipment purchases, partially offset by the $50.0 million
      license fee received from AstraZeneca in connection with our license and
      collaboration agreement.







Net
      cash
      used in operating activities was $9.8 million for the nine months ended
      September 30, 2006 compared to net cash used in operating activities of $63.5
      million for the nine months ended September 30, 2005.


12


The
      decrease in net cash used in operating activities for the nine months ended
      September 30, 2006 is principally due to cash used to fund our operating
      activities, including the expenditures for our ARISE and FOCUS Phase III
      clinical trials and our other ongoing product development programs, partially
      offset by the $50.0 million license fee received from AstraZeneca and the
      increase in accounts receivable related to research and development agreements.
      We anticipate net cash usage in 2006 and 2007 for ARISE to be an aggregate
      of
      approximately $45.0 million. We anticipate net cash usage in 2006 for ARISE
      and
      our other ongoing preclinical and clinical programs, as well as our other
      operating activities, to be in a range of $30.0 million to $35.0 million, which
      is net of the $50.0 million license fee received from AstraZeneca in February
      2006.





Net
      cash
      provided by investing activities was $26.0 million for the nine months ended
      September 30, 2006 compared to net cash used in investing activities of $47.8
      million for the nine months ended September 30, 2005. Net cash provided by
      investing activities for the nine months ended September 30, 2006 consisted
      primarily of the net sales of short-term investments, partially offset by the
      purchases of equipment and leasehold improvements. The net cash used in
      investing activities for the nine months ended September 30, 2005 consisted
      primarily of net purchases of available-for-sale securities.





Net
      cash
      provided by financing activities was $1.7 million for the nine months ended
      September 30, 2006 compared to $195.7 million for the nine months ended
      September 30, 2005. Net cash provided by financing activities for the nine
      months ended September 30, 2006 consisted primarily of the proceeds received
      upon exercise of common stock options. Net cash provided by financing activities
      for the nine months ended September 30, 2005 consisted primarily of $193.6
      million received from the issuance of 1.5% convertible notes in January 2005.





In
      August
      2003, we issued $100 million in aggregate principal amount of 4.5% convertible
      notes due 2008 through a Rule 144A private placement to qualified institutional
      buyers. These notes initially are convertible into our common stock at a
      conversion rate of 65.1890 shares per $1,000 principal amount of notes, or
      approximately $15.34 per share. Net proceeds were approximately $96.7 million.
      Interest on the 4.5% convertible notes is payable semi-annually in arrears
      on
      March 1 and September 1. In January 2006, we exchanged $14.0 million in
      aggregate principal amount of the 4.5% convertible notes for 1,085,000 shares
      of
      our common stock. From time to time, we may enter into additional exchange
      offers and/or purchases of these notes. As of September 30, 2006, we have
      recorded $322,500 of accrued interest expense related to the 4.5% notes, which
      is due March 1, 2007.





In
      January 2005, we issued $200 million in aggregate principal amount of 1.5%
      convertible notes due 2012 through a Rule 144A private placement to qualified
      institutional buyers. These notes are convertible into shares of our common
      stock at a conversion rate of 38.5802 shares per $1,000 principal amount of
      notes, or approximately $25.92 per share. Interest on the 1.5% convertible
      notes
      is payable semi-annually in arrears on February 1 and August 1. Net proceeds
      were approximately $193.6 million. We are using the net proceeds from the sale
      of the 1.5% notes to fund the ongoing costs of the ARISE Phase III clinical
      trial for AGI-1067 and other research and development activities, including
      clinical trials, and for general corporate purposes, including working capital.
      Pending these uses, the net proceeds have been invested in interest-bearing,
      investment grade securities. As of


September
      30, 2006, we have recorded $500,000 of accrued interest expense related to
      the
      1.5% notes, which is due February 1, 2007.





In
      March
      2005, we committed to purchase approximately $3.5 million of commercial
      manufacturing equipment for AGI-1067, to be delivered in 2006. In March 2006,
      AstraZeneca assumed this commitment, and the costs are shared by both
      AtheroGenics and AstraZeneca as part of the joint license and collaboration
      agreements that were signed in December 2005. We expect our portion of the
      cost
      of the equipment and the construction, installation and start-up costs related
      to the equipment to be approximately $9.0 million over the life of the project.
      Under the terms of the license agreement, this amount may be reimbursed by
      AstraZeneca when certain termination rights expire. As of September 30, 2006,
      we
      have recorded $2.3 million as equipment and leasehold improvements related
      to
      our portion of the cost of the equipment and construction which has occurred
      to
      date.





Based
      upon the current status of our product development and commercialization plans,
      we believe that our existing cash, cash equivalents and short-term investments
      will be adequate to satisfy our capital needs for at least the next 12 months.
      However, our actual capital requirements will depend on many factors, including
      the following:





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


13





·
            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;





·
            our
                ability to maintain our collaborations with AstraZeneca and Astellas
                and
                the financial terms of our collaborations;





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





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





We
      have
      historically accessed the capital markets from time to time to raise adequate
      funds for operating needs and cash reserves. Although we believe we have
      adequate cash for at least the next 12 months, we may access capital markets
      when we believe market conditions or company needs merit doing so.





**FORWARD-LOOKING
      STATEMENTS**





The
      Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides
      a
      safe harbor for forward-looking statements made by or on behalf of AtheroGenics.
      AtheroGenics and its representatives may from time to time make written or
      oral
      forward-looking statements, including statements contained in this report and
      our other filings with the Securities and Exchange Commission and in our reports
      to our shareholders. Generally, the words "believe," "expect," "intend,"
      "estimate," "anticipate," "will" and similar expressions identify
      forward-looking statements. All statements which address operating performance,
      events or developments that we expect or anticipate will occur in the future,
      such as projections about our future results of operations or our financial
      condition, research, development and commercialization of our product candidates
      and anticipated trends in our business, are forward-looking statements within
      the meaning of the Reform Act. The forward-looking statements are and will
      be
      based on management's then current views and assumptions regarding future events
      and operating performance, and speak only as of their dates. AtheroGenics
      undertakes no obligation to publicly update or revise any forward-looking
      statements, whether as a result of new information, future events or otherwise.





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





·
            AGI-1067
                and 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 fromdeveloping
                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 safetyand
                efficacy;·
            our
                substantial dependence on our AstraZeneca collaboration, which may
                ultimately be unsuccessful;·
            possible
                delays in our clinical trials;·
            our
                inability to predict whether or when we will obtain regulatory approval
                to
                commercialize ourproduct
                candidates or the timing of any future revenue from these product
                candidates;




14


·
            our
                need, or our partner AstraZeneca’s need, to comply with applicable
                regulatory requirements in themanufacture
                and distribution of our products to avoid incurring penalties that
                my
                inhibit our abilityto
                commercialize our products;·
            our
                ability to protect adequately or enforce our intellectual property
                rights
                or secure rights to thirdparty
                patents;·
            the
                ability of our competitors to develop and market anti-inflammatory
                products that are moreeffective,
                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 ourclinical
                trials or hinder our commercialization prospects;·
            our
                ability to create sales, marketing and distribution capabilities
                or enter
                into agreements with thirdparties
                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 maybe
                unable to obtain future product liability insurance at reasonable
                prices,
                if at all, either of whichcould
                diminish our ability to commercialize our future products;
                and·
            the
                conversion of our $86 million principal amount, 4.5% convertible
                notes and
                our $200 millionprincipal
                amount, 1.5% convertible notes would dilute the ownership interest
                of
                existing shareholdersand
                could adversely affect the market price of our common
                stock.





The
      foregoing list of important factors is discussed in more detail in our Form
      10-K
      and is not an exhaustive list.





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





Market
      risk represents the risk of loss that may impact our financial position,
      operating results or cash flows due to changes in U.S. interest rates. This
      exposure is directly related to our normal operating activities. Our cash,
      cash
      equivalents and short-term investments are invested with high quality issuers
      and are generally of a short-term nature. Interest rates payable on our
      convertible notes are fixed. As a result, we do not believe that near-term
      changes in interest rates will have a material effect on our future results
      of
      operations.





**Item
      4. Controls and Procedures**





*Evaluation
      of disclosure controls and procedures.* Our
      chief executive officer and chief financial officer are responsible for
      establishing and maintaining "disclosure controls and procedures" (as defined
      in
      the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for
      AtheroGenics. Our chief executive officer and chief financial officer, after
      evaluating the effectiveness of our disclosure controls and procedures as of
      the
      end of the period covered by this quarterly report, have concluded that our
      disclosure controls and procedures are effective.





*Changes
      in internal control over financial reporting.* There
      were no changes in our internal control over financial reporting that occurred
      during our most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





15


**Item
      6. Exhibits**





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**





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








**ATHEROGENICS,
                INC.**Date:
                November 8, 2006
            /s/MARK
              P. COLONNESEMark
                P. ColonneseExecutive
                Vice President, Commercial Operations andChief
                Financial Officer








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