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 June 30, 2005





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 an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes
      [ X ]  No
      [
      ]





As
      of
      July 22, 2005 there were 37,769,419 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 SheetsJune
                30, 2005 and December 31, 2004
            1Condensed
                Statements of OperationsThree
                and six months ended June 30, 2005 and 2004
            2Condensed
                Statements of Cash FlowsSix
                months ended June 30, 2005 and 2004
            3Notes
                to Condensed Financial Statements
            4Item
                2. Management's Discussion and Analysis of Financial Conditionand Results of Operations
            7Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            13Item
                4. Controls and Procedures
            13**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            13Item
                4. Submission of Matters to a Vote of Security Holders
            13Item
                6. Exhibits
            14**SIGNATURES**
            15








i


**PART
      I. - FINANCIAL
      INFORMATION**





**Item
      1. Financial Statements**





**ATHEROGENICS,
      INC.**


**CONDENSED
      BALANCE
      SHEETS**


**(Unaudited)**




**June
                30,**
            
            **December
                31,****2005**
            
            **2004****ASSETS**Current
                assets:Cash and cash equivalents
            
            $
            92,774,728
            
            $
            15,888,919Short-term investments
            
            
            126,585,833
            
            
            51,035,096Prepaid expenses
            
            
            2,444,435
            
            
            2,634,297Notes receivable and other current assets
            
            
            1,148,319
            
            
            566,208Total current assets
            
            
            222,953,315
            
            
            70,124,520Equipment
                and leasehold improvements, net ofaccumulated depreciation and amortization
            
            
            3,418,503
            
            
            1,940,011Debt
                issuance costs and other assets
            
            
            8,135,226
            
            
            2,397,796Total assets
            
            $
            234,507,044
            
            $
            74,462,327**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                liabilities:Accounts payable
            
            $
            3,715,802
            
            $
            2,838,053Accrued and other liabilities
            
            
            3,482,909
            
            
            2,243,515Accrued research and development
            
            
            2,075,619
            
            
            4,083,894Accrued compensation
            
            
            754,556
            
            
            1,239,247Total current liabilities
            
            
            10,028,886
            
            
            10,404,709Convertible
                notes payable and capital lease,net of current portion
            
            
            300,070,889
            
            
            100,000,000Shareholders’
                deficit:Preferred stock, no par value: Authorized - 5,000,000
                shares
            
            
            —
            
            
            —Common stock, no par value: Authorized - 100,000,000
                shares;issued and outstanding - 37,759,339 and 37,368,658
                sharesat June 30, 2005 and December 31, 2004, respectively
            
            
            176,923,000
            
            
            175,713,265Warrants
            
            
            761,940
            
            
            828,804Deferred stock compensation
            
            
            (123,016
            )
            
            (324,607
            )Accumulated deficit
            
            
            (252,957,483
            )
            
            (212,120,547
            )Accumulated other comprehensive loss
            
            
            (197,172
            )
            
            (39,297
            )Total shareholders’ deficit
            
            
            (75,592,731
            )
            
            (35,942,382
            )Total liabilities and shareholders’ deficit
            
            $
            234,507,044
            
            $
            74,462,327





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


1




**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS
      OF OPERATIONS**


**(Unaudited)**





**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenues
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Operating
                expenses:Research and development
            
            
            19,380,868
            
            
            13,836,448
            
            
            35,535,938
            
            
            27,847,193General and administrative
            
            
            2,231,731
            
            
            1,761,507
            
            
            4,052,549
            
            
            3,431,609Total operating expenses
            
            
            21,612,599
            
            
            15,597,955
            
            
            39,588,487
            
            
            31,278,802Operating
                loss
            
            
            (21,612,599
            )
            
            (15,597,955
            )
            
            (39,588,487
            )
            
            (31,278,802
            )Interest
                and other income
            
            
            1,677,608
            
            
            375,095
            
            
            3,125,512
            
            
            746,083Interest
                expense
            
            
            (2,270,388
            )
            
            (1,302,299
            )
            
            (4,373,961
            )
            
            (2,595,140
            )Net
                loss
            
            $
            (22,205,379
            )
            $
            (16,525,159
            )
            $
            (40,836,936
            )
            $
            (33,127,859
            )Net
                loss per share -basic and diluted
            
            $
            (0.59
            )
            $
            (0.45
            )
            $
            (1.09
            )
            $
            (0.90
            )Weighted
                average sharesoutstanding - basic and diluted
            
            
            37,716,509
            
            
            37,015,455
            
            
            37,625,069
            
            
            36,941,064





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


2


**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS
      OF CASH FLOWS**


**(Unaudited)**





**Six
                months ended****June
                30,****2005**
            
            **2004****Operating
                activities**Net
                loss
            
            $
            (40,836,936
            )
            $
            (33,127,859
            )Adjustments
                to reconcile net loss to net cash usedin operating activities:Depreciation and amortization
            
            
            459,909
            
            
            668,422Amortization of debt issuance costs
            
            
            713,395
            
            
            326,490Changes in operating assets and liabilities:Prepaid expenses
            
            
            189,862
            
            
            (63,581
            )Notes receivable and other assets
            
            
            (599,913
            )
            
            59,652Accounts payable
            
            
            174,715
            
            
            (414,797
            )Accrued research and development
            
            
            (2,008,275
            )
            
            (335,137
            )Accrued compensation and other liabilities
            
            
            909,214
            
            
            (252,238
            )Net cash used in operating activities
            
            
            (40,998,029
            )
            
            (33,139,048
            )**Investing
                activities**Purchases
                of short-term investments
            
            
            (118,573,432
            )
            
            (48,912,824
            )Sales
                and maturities of short-term investments
            
            
            42,864,820
            
            
            52,550,325Purchases
                of equipment and leasehold improvements
            
            
            (1,153,735
            )
            
            (106,930
            )Net cash (used in) provided by investing activities
            
            
            (76,862,347
            )
            
            3,530,571**Financing
                activities**Proceeds
                from the issuance of 1.5% convertible notes
            
            
            193,566,977
            
            
            —Proceeds
                from the exercise of common stock options
            
            
            1,262,830
            
            
            1,681,401Payments
                on equipment loan facility
            
            
            (83,622
            )
            
            (235,127
            )Net cash provided by financing activities
            
            
            194,746,185
            
            
            1,446,274Increase
                (decrease) in cash and cash equivalents
            
            
            76,885,809
            
            
            (28,162,203
            )Cash
                and cash equivalents at beginning of period
            
            
            15,888,919
            
            
            53,058,249Cash
                and cash equivalents at end of period
            
            $
            92,774,728
            
            $
            24,896,046**Supplemental
                disclosures**Interest
                paid
            
            $
            2,252,233
            
            $
            2,417,829





*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 accounting principles generally accepted in the United States
      have been condensed or omitted from the interim financial statements as
      permitted by the rules and regulations of the Securities and Exchange
      Commission. 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, 2004, as amended by Amendment No. 1 filed on April 6, 2005
      and Amendment No. 2 filed on May 6, 2005 (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.
      Recently Issued Accounting Standards**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“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 compensation expense
      associated with stock option grants and other equity instruments to employees
      in
      the financial statements and is effective as of January 1, 2006. 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 will no longer be an alternative to
      financial statement recognition. AtheroGenics is evaluating the appropriate
      fair
      value model to be used for valuing share-based payments, the amortization method
      for compensation cost and the transition method to be used. AtheroGenics expects
      to adopt SFAS 123(R) on January 1, 2006 and that the adoption will have a
      material impact on its results of operations and net loss per
      share.





**4.
      Net Loss per Share**





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.


4


**5.** **Stock-Based
      Compensation**





AtheroGenics
      has elected to follow APB 25 in accounting for its stock-based employee
      compensation plans, rather than the alternative fair value accounting method
      provided for under SFAS 123, as SFAS 123 requires the use of option valuation
      models that were not developed for use in valuing employee stock options.
      AtheroGenics accounts 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 Emerging Issues
      Task Force (“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.* SFAS
      No.
      148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure* (“SFAS
      148”), an amendment to SFAS 123, requires disclosure in the summary of
      significant accounting policies of the effects of the fair value of stock-based
      employee compensation on reported net income (loss) and earnings (loss) per
      share in annual and interim financial statements.





The
      following table illustrates the effect on net loss and net loss per share if
      the
      fair value based method had been applied to all outstanding and unvested options
      in each period, based on the provisions of SFAS 123 and SFAS 148.





**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                loss, as reported
            
            $
            (22,205,379
            )
            $
            (16,525,159
            )
            $
            (40,836,936
            )
            $
            (33,127,859
            )Add:
                Stock based employeecompensation expense includedin reported net loss
            
            
            —
            
            
            13,372
            
            
            —
            
            
            25,407Deduct:
                Total stock-based employeecompensation expense determinedunder fair value based method forall awards
            
            
            (2,247,990
            )
            
            (1,528,996
            )
            
            (4,658,715
            )
            
            (2,719,625
            )Pro
                forma net loss
            
            $
            (24,453,369
            )
            $
            (18,040,783
            )
            $
            (45,495,651
            )
            $
            (35,822,077
            )Net
                loss per share:Basic
                and diluted, as reported
            
            $
            (0.59
            )
            $
            (0.45
            )
            $
            (1.09
            )
            $
            (0.90
            )Basic
                and diluted, pro forma
            
            $
            (0.65
            )
            $
            (0.49
            )
            $
            (1.21
            )
            $
            (0.97
            )





**6.
      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, subject to adjustment.
      Under certain circumstances, AtheroGenics may be obligated to redeem all or
      part
      of the 4.5% convertible notes prior to their maturity at a redemption price
      equal to 100% of their principal amount, plus accrued and unpaid interest and
      liquidated damages, if any, up to but excluding the maturity date. As of June
      30, 2005, accrued and other liabilities included approximately $1.5 million
      of
      accrued interest related to the 4.5% convertible notes, which is due September
      1, 2005.





On
      January 12, 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




5




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, subject
      to adjustment. Under certain circumstances, AtheroGenics may be obligated to
      redeem all or part of the 1.5% convertible notes prior to their maturity at
      a
      redemption price equal to 100% of their principal amount, plus accrued and
      unpaid interest and liquidated damages, if any, up to but excluding the maturity
      date. In addition, under certain circumstances, AtheroGenics may adjust the
      conversion rate. As of June 30, 2005, accrued and other liabilities included
      approximately $1.4 million of accrued interest related to the 1.5% convertible
      notes, which is due August 1, 2005.





AtheroGenics
      has reserved a total of 14,234,953 shares of common stock for future issuance
      in
      connection with the 4.5% convertible notes and the 1.5% convertible
      notes.





**7.****Bank
      Credit Agreements**





In
      March
      2002, AtheroGenics entered into an equipment loan facility with Silicon Valley
      Bank for up to a maximum amount of $2.5 million to be used to finance existing
      and new equipment purchases. As of March 31, 2005, the equipment loan facility
      had been paid in full. In connection with the equipment loan facility,
      AtheroGenics had granted to Silicon Valley Bank a negative pledge on its
      intellectual property. This negative pledge was terminated with repayment in
      full of the equipment loan facility.





**8.
      Reclassifications**





In
      order
      to present auction rate securities with short-term interest auction features
      as
      short-term investments in accordance with SFAS No. 95, *Statement
      of Cash Flows* and SFAS
      No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* for the
      six months ended June 30, 2004, $15.4 million was reclassified from cash and
      cash equivalents to short-term investments. This reclassification was to
      properly state cash and cash equivalents and had no effect on previously
      reported net loss or shareholders’ deficit. The effect of the reclassification
      on cash flow was to increase cash used in investing activities by $15.4 million
      for the six months ended June 30, 2004.





**9.
      Commitments and Contingencies**





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





Purported
      securities class action lawsuits were filed against AtheroGenics and some of
      its
      executive officers and directors in the United States District Court for the
      Southern District of New York on January 5, 2005 and February 8, 2005 (the
      "SDNY Actions") and in the United States District Court for the Northern
      District of Georgia, Atlanta division on January 7, 2005, January 10, 2005,
      January 11, 2005 and January 25, 2005 (the "NDGA Actions"). Plaintiffs filed
      separate motions to consolidate these lawsuits in both the Southern District
      of
      New York and the Northern District of Georgia on March 7, 2005.  In
      addition, three class members simultaneously moved for
      appointment as lead plaintiffs in both districts on March 7, 2005. On
      April
      18, 2005, the Honorable Richard J. Holowell ordered the SDNY Actions
      consolidated under the caption " *In
      re
      Atherogenics Securities Litigation* "
      (the
“SDNY Action”) and appointed lead plaintiff and co-lead counsel.  On
      July 5, 2005, AtheroGenics filed a motion to transfer the SDNY Action
      to
      the Northern District of Georgia. On July 14, 2005, the plaintiffs voluntarily
      dismissed the NDGA Actions. The SDNY Action and the defendants’ motion to
      transfer that action to Georgia are still pending. The allegations in
      these
      lawsuits relate to AtheroGenics’ disclosures regarding the results of the CART-2
      clinical trial for AGI-1067. The complaint seeks unspecified damages on behalf
      of a purported class of purchasers of AtheroGenics’ securities during the period
      after these disclosures were made in September 2004 to December 31, 2004.
      AtheroGenics believes that it has meritorious defenses to the plaintiffs’
      allegations and intends to defend this matter vigorously.





6


In
      March
      2005, AtheroGenics committed to purchase approximately $3.5 million of
      commercial manufacturing equipment for AGI-1067, to be delivered in 2006. As
      of
      June 30, 2005, AtheroGenics has recorded $1.1 million related to the purchase
      of
      this equipment.





**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, 2004, as amended by Amendment No. 1 filed on April
      6,
      2005 and Amendment No. 2 filed on May 6, 2005 (the “Annual Report on Form
      10-K”). 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 Annual Report on Form 10-K.*





**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
      November 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.





Based
      on
      the results of an End of Phase II meeting with the U.S. Food and Drug
      Administration, or 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 in March 2003.
      A Special Protocol Assessment is written confirmation from the FDA that the
      protocol is adequately designed to support a New Drug Application 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




7
 receiving
        other appropriate heart disease medications, including statins and other
        cholesterol-lowering therapies, high blood pressure medications and
        anti-clotting agents.





We
      originally planned to enroll in ARISE 4,000 patients who would be followed
      for
      an average of 18 months or until a minimum of 1,160 primary events,
      or
      outcome measures, had occurred. In February 2005, we announced that
      the FDA
      approved our proposed amendment to the ARISE Phase III clinical trial protocol.
      The changes to the ARISE protocol are intended to enhance the trial as well
      as
      to accelerate its pace without affecting the Special Protocol Assessment with
      the FDA. The changes approved by the FDA include our plan to increase the number
      of patients in the study to a target of 6,000, eliminate the minimum 12-month
      follow-up period for patients and decrease the minimum number of primary events
      to approximately 990. In July 2005, we closed patient recruitment for ARISE
      and
      have reached our 6,000-patient target. We expect to complete enrollment with
      approximately 6,100 patients in the study. We expect to complete the ARISE
      trial
      by approximately the end of the first quarter of 2006, although the actual
      end
      of the trial will be determined by the accumulation of requisite primary events.
      We plan to file a New Drug Application with the FDA as soon as possible after
      we
      complete the trial and analyze the results.





Our
      second v-protectant ® candidate, AGI-1096, is a novel antioxidant and selective anti-inflammatory
      agent which is being developed to address the accelerated inflammation of
      grafted blood vessels, known as transplant arteritis, common in chronic organ
      transplant rejection. AGI-1096 inhibits the expression of certain inflammatory
      proteins, including VCAM-1, in endothelial cells lining the inside surfaces
      of
      blood vessel walls. We have completed a Phase I clinical trial of AGI-1096
      in
      healthy volunteers that demonstrated AGI-1096 was well-tolerated over the
      escalating single oral doses studied. Adverse events were generally mild and
      not
      considered clinically significant. Subjects reached targeted blood levels for
      AGI-1096 that were equivalent to those seen in successful preclinical models
      of
      organ transplant rejection. In 2004, we announced a collaboration with Astellas
      Pharma Inc. (formerly Fujisawa Pharmaceutical Co., Ltd.) to conduct preclinical
      and early-stage clinical trials, with Astellas funding all development costs
      during the term of the initial agreement. Astellas will also receive an option
      to negotiate for late stage development and commercial right to AGI-1096. In
      March 2005, we extended the collaboration with Astellas until September 30,
      2005
      to conduct additional studies.





We
      have
      also identified additional potential v-protectant ® candidates to treat other chronic inflammatory diseases, including asthma.
      We
      are evaluating these v-protectants ® to
      determine lead drug candidates for clinical development. We plan to develop
      these v-protectants ® rapidly
      and may seek regulatory fast track status, if available, to expedite development
      and commercialization. We will continue to expand upon our
      v-protectant ® technology platform using functional genomics to identify novel therapeutic
      gene
      targets. Functional genomics is the process by which one uses scientific models
      and techniques to discover and modify genes, measure the consequences of the
      modifications, and reliably determine the function of those genes.





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





**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Direct
                external costs:AGI-1067
            
            $
            15,018,838
            
            $
            8,082,706
            
            $
            27,993,582
            
            $
            16,031,978AGIX-4207*
            
            
            6,064
            
            
            761,481
            
            
            27,959
            
            
            2,836,809AGI-1096
            
            
            —
            
            
            41,861
            
            
            —
            
            
            44,861Unallocated costs and other programs
            
            
            4,355,966
            
            
            4,950,400
            
            
            7,514,397
            
            
            8,933,545Total research and development
            
            $
            19,380,868
            
            $
            13,836,448
            
            $
            35,535,938
            
            $
            27,847,193





*
      In
      2004, we discontinued clinical development of AGIX-4207.





From
      inception, we have devoted the large majority of our research and development
      efforts and financial resources to support the development of the AGI-1067
      product candidate. Spending for the AGI-1096 program in both periods presented
      was funded by our collaborative development partner, Astellas.





8


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 the risk factors included in
      our
      Annual Report on Form 10-K for the year ended December 31, 2004, under the
      headings *Risks
      Related to Development of Our Product Candidates* and *Risks
      Related to Regulatory Approval of Our Product Candidates* .





We
      have
      not received any commercial revenues from product sales. We expect to incur
      significant losses in most years prior to deriving any product revenue as we
      continue to increase research and development costs. We have incurred
      significant losses since we began operations in 1994 and as of June 30, 2005,
      we
      had an accumulated deficit of $253.0 million. We cannot assure you that we
      will
      become profitable. We expect that losses will fluctuate from quarter to quarter
      and that these fluctuations may be substantial. Our ability to achieve
      profitability depends upon a variety of factors, including 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**





AtheroGenics
      considers certain accounting policies related to use of estimates, research
      and
      development accruals and stock-based compensation to be critical policies.
      There
      have been no material changes in the critical accounting policies from what
      was
      previously disclosed in our Annual Report on Form 10-K.





**RESULTS
      OF OPERATIONS**





**Comparison
      of the Three and Six Month Periods Ended June 30, 2005 and
      2004**





*Revenues*




There
      were no
      revenues during the three and six months ended June 30, 2005 and
      2004.





*Expenses*





*Research
      and Development.* Research
      and development expenses increased 40% to $19.4 million for the three months
      ended June 30, 2005 from $13.8 million for the comparable period in 2004, and
      28% to $35.5 million for the six months ended June 30, 2005 from $27.8 million
      in the comparable period in 2004. The increase in research and development
      expenses for the three and six months ended June 30, 2005 was primarily due
      to
      clinical trial expenditures related to AGI-1067, principally the ARISE clinical
      trial, partially offset by reduced spending in the completed CART-2 clinical
      trial and the discontinued AGIX-4207 program.





*General
      and Administrative.* General
      and administrative expenses increased 27% to $2.2 million for the three months
      ended June 30, 2005 from $1.8 million for the comparable period in 2004, and
      18%
      to $4.1 million for the six months ended June 30, 2005 from $3.4 million in
      the
      comparable period in 2004. The increase in general and administrative expenses
      for the three and six months ended June 30, 2005 was primarily due to market
      development and pre-commercialization costs associated with AGI-1067, higher
      compensation costs and legal fees.





*Interest
      and Other Income*





Interest
      income was $1.7 million and $375,095 for the three months ended June 30, 2005
      and 2004, respectively, and $3.1 million and $746,083 for the six months ended
      June 30, 2005 and 2004, respectively. The increase in interest income in the
      three and six months ended June 30, 2005 is due to interest earned on the funds
      received from our $200.0 million convertible debt offering in January 2005
      and
      higher interest rates.





9


*Interest
      Expense*





Interest
      expense was $2.3 million and $1.3 million for the three months ended June 30,
      2005 and 2004, respectively, and $4.4 million and $2.6 million for the six
      months ended June 30, 2005 and 2004, respectively. The increase in interest
      expense for the three and six months ended June 30, 2005 is due to our $200.0
      million convertible debt offering in January 2005.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Since
      inception, we have financed our operations primarily through sales of equity
      securities and convertible notes. At June 30, 2005, we had cash, cash
      equivalents and short-term investments of $219.4 million, compared to $66.9
      million at December 31, 2004. Working capital at June 30, 2005 was $212.9
      million, compared to $59.7 million at December 31, 2004. The increase in cash,
      cash equivalents, short-term investments and working capital is primarily due
      to
      the issuance of our 1.5% convertible notes in January 2005 that raised net
      proceeds of approximately $193.6 million, partially offset by the use of funds
      for operating purposes and capital equipment purchases.





Net
      cash
      used in operating activities was $41.1 million for the six months ended June
      30,
      2005, compared to $33.1 million for the comparable period in 2004. The increase
      in the use of cash in operating activities is principally due to funding a
      net
      loss of $40.8 million. The increase in cash used to fund the net loss is
      primarily attributable to expenditures for our AGI-1067 compound including
      the
      ARISE clinical trial and other ongoing research and development activities.
      We
      anticipate net cash usage in 2005 and 2006 for ARISE to be an aggregate of
      approximately $57.0 million. We anticipate total net cash usage in 2005 for
      ARISE and our other ongoing clinical programs, as well as our other operating
      activities, to be in a range of $85.0 million to $89.0 million.





Net
      cash
      used in investing activities was $76.9 million for the six months ended June
      30,
      2005, compared to $3.5 million provided by investing activities for the
      comparable period in 2004. The increase in net cash used in investing activities
      during the six months ended June 30, 2005 is due to purchasing short-term,
      available-for-sale securities using a portion of the funds received from the
      issuance of our 1.5% convertible notes. The net cash provided by investing
      activities in the six months ended June 30, 2004 was primarily due to sales
      of
      short-term investments.





Net
      cash
      provided by financing activities was $194.9 million for the six months ended
      June 30, 2005, and $1.4 million for the comparable period in 2004. The increase
      in net cash provided by financing activities in the six months ended June 30,
      2005 consisted primarily of net proceeds of approximately $193.6 million from
      the issuance of our 1.5% convertible notes. Net cash provided by financing
      activities for the comparable period in 2004 consisted primarily of proceeds
      from the exercise of common stock options.





In
      March
      2002, we entered into an equipment loan facility, as modified in June 2003,
      with
      Silicon Valley Bank for up to a maximum amount of $2.5 million to be used to
      finance existing and new equipment purchases. In March 2005, the equipment
      loan
      facility had been paid in full.





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.
      As of June 30, 2005, there was $1.5 million of accrued interest related to
      the
      notes, which is due September 1, 2005.





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 initially 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. The net proceeds from the sale
      of
      the notes are being used to fund the ongoing costs of the ARISE Phase III
      clinical trial for AGI-1067 and other research and development activities,
      including clinical trials, process development and manufacturing support, and
      for general corporate purposes, including working capital. Pending these uses,
      the net proceeds have been invested in




10


interest-bearing,
      investment grade securities. As of June 30, 2005, there was $1.4 million of
      accrued interest related to these notes, which is due August 1,
      2005.





In
      March
      2005, we committed to purchase approximately $3.5 million of commercial
      manufacturing equipment for AGI-1067, to be delivered in 2006. As of June 30,
      2005, we have recorded $1.1 million related to the purchase of this
      equipment.





The
      following table summarizes our long-term contractual obligations as of June
      30,
      2005.




**Total**
            
            **Remainder
                of**
              **2005**
            
            **2006-2007**
            
            **2008-2009**
            
            **Thereafter**Contractual
                obligations:Operating
                leases, net of subleaseincome
            
            $
            4,582,048
            
            $
            557,131
            
            $
            2,652,292
            
            $
            1,372,625
            
            $
            —Long-term
                debt
            
            
            300,103,877
            
            
            16,297
            
            
            69,219
            
            
            100,018,361
            
            
            200,000,000Total
                contractual obligations
            
            $
            304,685,925
            
            $
            573,428
            
            $
            2,721,511
            
            $
            101,390,986
            
            $
            200,000,000





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





•  the
      timing of, and the costs involved in, obtaining regulatory approvals;





•  our
      ability to establish and maintain collaborations and the financial terms of
      any
      collaborations;





•  the
      cost
      of commercialization activities, including product marketing, sales and
      distribution;




•  the
      costs
      involved in preparing, filing, prosecuting, maintaining and enforcing patent
      claims and


other
      patent-related costs;





•  the
      costs
      related to purported class action lawsuits filed against us; 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. We cannot
      estimate the timing of material net cash inflows from our product candidates,
      since they are dependent upon regulatory approvals and subsequent market
      acceptance.





**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




11


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;**-**
            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;**-**
            our
                need to comply with applicable regulatory requirements in the manufacture
                and distribution ofour
                products to avoid incurring penalties that may inhibit our ability
                to
                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;**-**
            if
                plaintiffs bring product liability lawsuits against us, we may incur
                substantial financial loss or 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**-**
            conversion
                of our $100 million principal amount, 4.5% convertible notes and
                our $200
                millionprincipal
                amount, 1.5% convertible notes will 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 Annual
      Report on Form 10-K and is not an exhaustive list.





12


**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.





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





See *Note
      9.*  *Commitments
      and Contingencies* in the
      Notes to Condensed Financial Statements for a description of the pending legal
      proceedings, which description is incorporated herein by reference.





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





Our
      annual meeting of shareholders was held on April 27, 2005. At the annual
      meeting, the shareholders of AtheroGenics (1) elected two Class II directors
      to
      serve until the 2008 Annual Meeting of Shareholders and (2) ratified the
      appointment of Ernst & Young LLP as our independent registered public
      accounting firm for the fiscal year ending December 31, 2005.





We
      had
      37,667,946 shares of common stock outstanding as of March 1, 2005, the record
      date of the annual meeting. At the annual meeting, we had 30,981,922 shares
      of
      common stock present in person or represented by proxy for the two proposals
      indicated above. The following sets forth detailed information regarding the
      results of the voting at the annual meeting.





Proposal
      1.  Election
      of two Class II directors





**Name
                of Nominee**
            **No.
                of Votes For**
            **No.
                of Votes Withheld**R.
                Wayne Alexander
            26,706,948
            4,274,974William
                A. Scott
            30,320,971
            660,951





Proposal
      2.  Ratification
      of the appointment of independent registered public accounting firm





**No.
                of Votes For**
            **No.
                of Votes Against**
            **Abstention**30,956,489
            22,557
            2,876


13


**Item
      6. Exhibits**





Exhibits





Exhibit
                10.1#
            -
            Transition
                Agreement dated July 20, 2005 between AtheroGenics, Inc. and Martin
                A.
                Wasserman (filed as Exhibit 10.1 to AtheroGenics’ Current Report on Form
                8-K on July 22, 2005 and incorporated herein by
                reference).Exhibit
                10.2#
            -
            Employment
                Agreement dated May 31, 2005 between AtheroGenics, Inc. and Joseph
                M.
                Gaynor, Jr. (filed as Exhibit 10.1 to AtheroGenics’ Current Report on Form
                8-K on July 7, 2005 and incorporated herein by
                reference).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.





#
      Management contract or compensatory plan or arrangement.


14
 
   **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:
                July 28, 2005
            /s/MARK
              P. COLONNESEMark
                P. ColonneseSenior
                Vice President of Finance andAdministration
                and Chief Financial Officer





15