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 March 31, 2007





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 May
      7, 2007 there were 39,494,492 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 SheetsMarch
                31, 2007 and December 31, 2006
            1Condensed
                Statements of OperationsThree
                months ended March 31, 2007 and 2006
            2Condensed
                Statements of Cash FlowsThree
                months ended March 31, 2007 and 2006
            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
                1A. Risk Factors
            13Item
                6. Exhibits
            14**SIGNATURES**
            15








i


**PART
      I. - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**ATHEROGENICS,
      INC.**


**CONDENSED
      BALANCE SHEETS**


**(Unaudited)**





**March
                31,**
            
            **December
                31,****2007**
            
            **2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            81,953,789
            
            $
            87,846,079Short-term
                investments
            
            
            48,361,027
            
            
            63,964,860Accounts
                receivable
            
            
            6,582,868
            
            
            6,537,892Prepaid
                expenses
            
            
            4,212,580
            
            
            4,038,419Interest
                receivable
            
            
            377,531
            
            
            643,097Total
                current assets
            
            
            141,487,795
            
            
            163,030,347Equipment
                and leasehold improvements, net of accumulated
                depreciationand
                amortization
            
            
            10,732,127
            
            
            9,684,965Debt
                issuance costs and other assets
            
            
            5,254,071
            
            
            5,624,352Total
                assets
            
            $
            157,473,993
            
            $
            178,339,664**Liabilities
                and Shareholders' Deficit**Current
                liabilities:Accounts
                payable
            
            $
            1,881,538
            
            $
            3,183,511Accrued
                research and development
            
            
            10,155,472
            
            
            11,263,164Accrued
                compensation
            
            
            859,407
            
            
            1,465,644Accrued
                interest
            
            
            822,500
            
            
            2,540,000Accrued
                and other liabilities
            
            
            932,530
            
            
            791,661Current
                portion of deferred revenue
            
            
            20,857,750
            
            
            25,000,000Total
                current liabilities
            
            
            35,509,197
            
            
            44,243,980Convertible
                notes payable
            
            
            286,000,000
            
            
            286,000,000Long-term
                portion of deferred revenue
            
            
            —
            
            
            2,083,333Shareholders'
                deficit:Preferred
                stock, no par value: Authorized—5,000,000 shares
            
            
            —
            
            
            —Common
                stock, no par value:Authorized—100,000,000
                shares; issued and outstanding —39,494,492
                and 39,452,927 shares at March 31, 2007and
                December 31, 2006, respectively
            
            
            210,001,453
            
            
            207,388,894Warrants
            
            
            613,021
            
            
            613,021Accumulated
                deficit
            
            
            (374,649,870
            )
            
            (361,997,246
            )Accumulated
                other comprehensive gain
            
            
            192
            
            
            7,682Total
                shareholders' deficit
            
            
            (164,035,204
            )
            
            (153,987,649
            )Total
                liabilities and shareholders' deficit
            
            $
            157,473,993
            
            $
            178,339,664


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


1




**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**








**Three
                months ended****March
                31,****2007**
            
            **2006**Revenues:License fees
            
            $
            6,250,000
            
            $
            4,166,667Research and development
            
            
            5,211,252
            
            
            —Total revenues
            
            
            11,461,252
            
            
            4,166,667Operating
                expenses:Research and development
            
            
            19,964,275
            
            
            16,260,622Marketing, general and administrative
            
            
            3,945,503
            
            
            3,707,333Total operating expenses
            
            
            23,909,778
            
            
            19,967,955Operating
                loss
            
            
            (12,448,526
            )
            
            (15,801,288
            )Interest
                income
            
            
            1,883,683
            
            
            2,205,234Interest
                expense
            
            
            (2,087,781
            )
            
            (2,107,517
            )Other
                expense
            
            
            —
            
            
            (3,521,236
            )Net
                loss
            
            $
            (12,652,624
            )
            $
            (19,224,807
            )Net
                loss per share -basic and diluted
            
            $
            (0.32
            )
            $
            (0.49
            )Weighted
                average shares outstanding -basic and diluted
            
            
            39,468,054
            
            
            39,202,076





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





2


**ATHEROGENICS,
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Three
                months ended****March
                31,****2007**
            
            **2006****Operating
                activities**Net
                loss
            
            $
            (12,652,624
            )
            $
            (19,224,807
            )Adjustments
                to reconcile net loss to net cash(used in) provided by operating activities:Amortization of deferred revenue
            
            
            (6,225,583
            )
            
            (4,166,667
            )Stock-based compensation
            
            
            2,597,004
            
            
            2,039,090Loss on debt conversion
            
            
            —
            
            
            3,524,236Amortization of debt issuance costs
            
            
            370,281
            
            
            373,253Depreciation and amortization
            
            
            265,233
            
            
            221,393Changes in operating assets and liabilities:Accounts receivable
            
            
            (44,976
            )
            
            (1,719,998
            )Prepaid expenses
            
            
            (174,161
            )
            
            (1,068,692
            )Interest receivable
            
            
            265,566
            
            
            (301,706
            )Accounts payable
            
            
            (1,301,973
            )
            
            1,290,829Accrued research and development
            
            
            (2,256,073
            )
            
            (910,747
            )Accrued interest
            
            
            (1,717,500
            )
            
            (1,704,750
            )Accrued compensation
            
            
            (606,237
            )
            
            (2,115,850
            )Accrued and other liabilities
            
            
            140,869
            
            
            23,211Deferred revenue
            
            
            —
            
            
            50,000,000Net cash (used in) provided by operating activities
            
            
            (21,340,174
            )
            
            26,258,795**Investing
                activities**Sales
                and maturities of
                short-term investments
            
            
            34,408,824
            
            
            2,231,513Purchases
                of short-term investments
            
            
            (18,812,481
            )
            
            (30,087,721
            )Purchases
                of equipment and leasehold improvements
            
            
            (164,014
            )
            
            (518,031
            )Net
                cash provided by (used in) investing activities
            
            
            15,432,329
            
            
            (28,374,239
            )**Financing
                activities**Proceeds
                from the exercise of common stock options
            
            
            15,555
            
            
            1,226,809Payments
                on equipment loan facility
            
            
            —
            
            
            (8,296
            )Net
                cash provided by financing activities
            
            
            15,555
            
            
            1,218,513Decrease
                in cash and cash equivalents
            
            
            (5,892,290
            )
            
            (896,931
            )Cash
                and cash equivalents at beginning of period
            
            
            87,846,079
            
            
            82,831,679Cash
                and cash equivalents at end of period
            
            $
            81,953,789
            
            $
            81,934,748**Supplemental
                disclosures**Interest
                paid
            
            $
            3,435,000
            
            $
            3,435,000





*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, 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, 2006, filed with the SEC on March 8, 2007 (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 March 31, 2007, accounts receivable was $3,179,409 and unbilled receivables
      were $3,403,459.





**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 nonrefundable license
      payment is being recognized on a straight-line basis over the 24-month period
      that AtheroGenics estimated it was obligated to provide services to the
      licensee. In April 2007, AstraZeneca announced that it was ending the license
      and collaboration agreements. The remaining balance of approximately $20.9
      million in deferred revenue at March 31, 2007 related to the license fee will
      be
      recognized as revenue in the second quarter of 2007.





During
      the third quarter of 2006, 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. AtheroGenics and AstraZeneca have agreed that they intend
      to commence closing FOCUS. Activities currently in progress will be billed
      to
      AstraZeneca in accordance with the agreement.





**5.
      Income Tax**




AtheroGenics
      files a U.S. federal and Georgia income tax return on an annual basis.
      AtheroGenics is no longer subject to U.S. federal income or state tax return
      examinations by tax authorities for years before 2002. However, since
      AtheroGenics has substantial tax net operating losses originating in years
      before 2002, the tax authorities may review the amount of the pre-2002 net
      operating losses. AtheroGenics is not currently under examination by any tax
      authority.




AtheroGenics
      adopted the provisions of the Financial Accounting Standards Board
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ("FIN 48") effective January 1, 2007. No cumulative adjustment was
      required or recorded as a result of the implementation of FIN 48. As of
      January 1, 2007, AtheroGenics had no unrecognized tax benefits.
      AtheroGenics will recognize accrued interest and penalties related to
      unrecognized tax benefits in income tax expense when and if incurred.
      AtheroGenics had no interest or penalties related to unrecognized tax benefits
      accrued as of January 1, 2007.




AtheroGenics
      does not anticipate that unrecognized benefits will be incurred within the
      next
      12 months.




**6.
      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.





**7.** **Stock-Based
      Compensation**





For
      the
      three months ended March 31, 2007, AtheroGenics recorded approximately $2.6
      million of stock-based compensation expense of which $1.3 million was related
      to
      research and development expenses and $1.3 million was related to marketing,
      general and administrative expenses. For the three months ended March 31, 2006,
      AtheroGenics recorded approximately $2.0 million of stock-based compensation
      expense of which $1.0 million was related to research and development expenses
      and $935,000 was related to marketing, general and administrative expenses.
      AtheroGenics’ net loss per share was increased by $(0.07) and $(0.05) for
      stock-based compensation related to stock options for the three months ended
      March 31, 2007 and 2006, respectively. As of March 31, 2007 and 2006,
      AtheroGenics has a net operating loss carryforward and therefore no excess
      tax
      benefits for tax deductions related to the stock options were recognized.





For
      the
      three months ended March 31, 2007 and 2006, **** AtheroGenics
      calculated a 5.16% and a 5.90% forfeiture rate, respectively, 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. There were no stock options
      granted during the three months ended March 31, 2007. For stock options granted
      during the three months ended March 31, 2006 the following weighted average
      assumptions were used:


5




Expected
                volatility
            70.70%Expected
                term
            5
                yearsRisk
                free interest rate
            4.59%Fair
                value of grants
            $ 
                9.78





**8.
      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
      March 31, 2007, 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 March 31, 2007, there was
      approximately $322,500 of accrued interest expense related to the 4.5% notes,
      which is due September 1, 2007 and $500,000 of accrued interest expense related
      to the 1.5% convertible notes, which is due August 1, 2007.





**9.
      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
      2006, AtheroGenics and AstraZeneca agreed to purchase certain commercial
      manufacturing equipment. The costs are shared equally between AtheroGenics
      and
      AstraZeneca subject to a limit on AtheroGenics’ portion as part of the
      collaboration agreements that were signed in December 2005. AtheroGenics expects
      that 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. As of March 31, 2007, AtheroGenics has recorded
      $6.6 million as equipment and leasehold improvements related to its portion
      of
      the cost of the equipment and construction which has occurred to
      date.


6


**10.
      Subsequent Event**





On
      April
      20, 2007, AstraZeneca notified AtheroGenics that it was ending their
      collaboration to develop and commercialize AGI-1067. The notice indicated that
      the termination date is to be effective 90 days from the notification date.
      During this period AtheroGenics and AstraZeneca will be finalizing transition
      matters with respect to AGI-1067 in accordance with the provisions of the
      License and Collaboration Agreement, the Co-promotion Agreement and the
      Transition Services Agreement previously entered into on December 22, 2005.
      Due
      to the termination of the collaboration, t he
      remaining balance of approximately $20.9 million in deferred revenue at March
      31, 2007 related to the $50.0 million upfront, nonrefundable license fee will
      be
      recognized as revenue in the second quarter of 2007.





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





*The
      following should be read with the financial statements and related footnotes
      and
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations included in AtheroGenics' Annual Report on Form 10-K for the fiscal
      year ended December 31, 2006. The results discussed below are not necessarily
      indicative of the results to be expected in any future periods. The following
      discussion contains forward-looking statements that are subject to risks and
      uncertainties which could cause actual results to differ from the statements
      made. These risks are set forth in more detail in our Form 10-K for the fiscal
      year ended December 31, 2006 under the headings “Risk Factors” and “ Forward
      -Looking Statements” below. 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 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
      2003,
      we initiated a Phase III trial, referred to as ARISE (Aggressive Reduction
      of
      Inflammation Stops Events), which was being conducted in cardiac centers in
      the
      United States, Canada, the United Kingdom and South Africa. ARISE evaluated
      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 assessed 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,
      received other appropriate heart disease medications, including statins and
      other cholesterol-lowering therapies, high blood pressure medications and
      anti-clotting agents.





We
      completed patient enrollment with more than 6100 patients in the study. The
      ARISE trial was completed in December 2006 and the results, reported in March
      2007, showed that while AGI-1067 did not show a difference from placebo in
      the
      composite primary endpoint, the study did achieve a number of other important
      predefined endpoints. These endpoints included a reduction in the composite
      of
“hard” atherosclerotic clinical endpoints, composed of cardiovascular death,
      resuscitated cardiac arrest, myocardial infarction (heart attack) and stroke.
      In
      a measure of these hard endpoints, AGI-1067 achieved a significant reduction
      of
      19%. A subgroup analysis indicated that this result was consistent across
      important sub-populations such as: patients with and without diabetes, and
      men
      and women. There were also improvements in the key diabetes parameters of new
      onset diabetes and glycemic control. Patients taking AGI-1067 were 64% less
      likely to develop new onset diabetes. Our analysis of the safty data indicated
      that the most common adverse event was diarrhea-related; however, it did not
      frequently result in patient discontinuation.  There was also an observed
      increase in abnormal liver function tests in a small number of patients compared
      to those on standard of care. Based
      on
      our review to date of the ARISE results, we intend to continue to pursue
      development of the compound.  7







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 non-refundable license fee
      of
      $50 million. On April 20, 2007, AstraZeneca notified us that pursuant to the
      terms of the agreement, it was ending the collaboration. The termination date
      is
      effective 90 days from the notification and during this period we will be
      finalizing transition matters with respect to AGI-1067 in accordance with the
      terms of the license and collaboration agreements and other associated
      agreements. We currently believe that the termination of the collaboration
      will
      not have a material impact on the carrying value of any associated
      assets.





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. Subsequent to March 31, 2007, AtheroGenics and AstraZeneca have
      agreed that they intend to commence closing the FOCUS clinical
      trial.





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 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.





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





**Three
                months ended****March
                31,****2007**
            
            **2006**Direct
                external AGI-1067 costs
            
            $
            11,701,833
            
            $
            10,298,230Unallocated
                internal costs and other programs
            
            
            8,262,442
            
            
            5,962,392Total
                research and development
            
            $
            19,964,275
            
            $
            16,620,622





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. Spending for the AGI-1096 program in 2007 and 2006 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


8


ended
      December 31, 2006, 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* ” *as
      well as the risks described in Part II, Item 1A. “Risk Factors” in this
      quarterly report on Form 10-Q.*





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 March 31,
      2007,
      had an accumulated deficit of $374.6 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 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. 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 Months Ended March 31, 2007 and 2006**





*Revenues*





Total
      revenues were $11.5 million and $4.2 million for the three months ended March
      31, 2007 and 2006, respectively. The license fee revenues of $6.3 million and
      $4.2 million for the three months ended March 31, 2007 and 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. Subsequent to March 31, 2007, AstraZeneca
      ended the collaboration agreement; therefore, the remaining balance of approximately $20.9 million in deferred revenue at March
      31, 2007 related to the license fee will be recognized as revenue in the second
      quarter of 2007. The
      research and development revenues of $5.2 million are for services performed
      for
      AstraZeneca related to the FOCUS clinical trial. The trial began in August
      2006
      and there were no research and development revenues for the three months ended
      March 31, 2006.





*Expenses*





*Research
      and Development.* Research
      and development expenses increased 23% to $20.0 million for the three months
      ended March 31, 2007 from $16.3 million for the comparable period in 2006.
      The
      increase in research and development expenses for the three months ended March
      31, 2007 is primarily due to costs of FOCUS, that began in the third quarter
      of
      2006, higher regulatory consulting fees and additional personnel to assist
      in
      closing out the ARISE study.





*Marketing,
      General and Administrative.* Marketing,
      general and administrative expenses increased 6% to $3.9 million for the three
      months ended March 31, 2007 from $3.7 million for the comparable period in
      2006.
      The increase is primarily due to slightly higher non-cash stock-based
      compensation expense and costs incurred for marketing activities. These expenses
      were largely offset by a decrease in consulting fees from those incurred for
      our
      licensing agreement with AstraZeneca for the three months ended March 31,
      2006.





9


*Interest
      Income*





Interest
      income is primarily comprised of income earned on our cash and short-term
      investments. Interest income decreased 15% to $1.9 million for the three months
      March 31, 2007 from $2.2 million for the comparable period in 2006. The decrease
      for the three months ended March 31, 2007 is due to the lower balance of cash
      and short-term investment funds than in the comparable period in
      2006.





*Interest
      Expense*





Interest
      expense is primarily comprised of interest expense related to the 4.5%
      convertible notes and the 1.5% convertible notes. Interest expense was $2.1
      million for the three months ended March 31, 2007 and 2006.




*Other
      Expense*




Other
      expense
      was $3.5 million for the three months ended March 31, 2006 which reflected
      non-cash expense related to the exchange of $14.0 million of AtheroGenics’ 4.5%
      convertible notes for common stock in January 2006.




**Liquidity
      and Capital Resources**




Since
      inception, we have financed our operations primarily through sales of equity
      securities and convertible notes. At March 31, 2007, we had cash, cash
      equivalents and short-term investments of $130.3 million, compared with $151.8
      million at December 31, 2006. Working capital at March 31, 2007 was $105.0
      million, compared to $118.8 million at December 31, 2006. The decrease in cash,
      cash equivalents and short-term investments and working capital for the three
      months ended March 31, 2007 is due to the use of funds for operating purposes
      and capital equipment purchases.




Net
      cash
      used in operating activities was $21.3 million for the three months ended March
      31, 2007 compared to net cash provided by operating activities of $26.3 million
      for the three months ended March 31, 2006. The net cash used in operating
      activities for the three months ended March 31, 2007 is principally due to
      cash
      used to fund our operating activities, including the expenditures for the
      closeout of ARISE, the ongoing FOCUS clinical trial and our other ongoing
      product development programs. The net cash provided by operating activities
      for
      the three months ended March 31, 2006 was principally due to the $50.0 million
      license fee received from AstraZeneca, partially offset by cash used to fund
      our
      operating activities including the ARISE Phase III clinical trial and our other
      ongoing product development programs.





Net
      cash
      provided by investing activities was $15.4 million for the three months ended
      March 31, 2007 compared to net cash used in investing activities of $28.4
      million for the three months ended March 31, 2006. Net cash provided by
      investing activities for the three months ended March 31, 2007 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 three months ended March 31, 2006 consisted
      primarily of net purchases of available-for-sale securities.





Net
      cash
      provided by financing activities was $15,555 for the three months ended March
      31, 2007 compared to $1.2 million for the three months ended March 31, 2006.
      Net
      cash provided by financing activities for the three months ended March 31,
      2007
      and 2006 consisted primarily of the proceeds received upon exercise of common
      stock options.





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


10


may
      enter
      into additional exchange offers and/or purchases of these notes. As of March
      31,
      2007, we have recorded $322,500 of accrued interest expense related to the
      4.5%
      notes, which is due September 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. As of March 31, 2007, we have recorded
      $500,000 of accrued interest expense related to the 1.5% notes, which is due
      August 1, 2007.





In
      March
      2006, AtheroGenics and AstraZeneca agreed to purchase certain commercial
      manufacturing equipment. The costs are shared equally between AtheroGenics
      and
      AstraZeneca subject to a limit on our portion as part of the collaboration
      agreements that were signed in December 2005. We expect that 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. As of March 31, 2007, we had recorded $6.6 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;





·
            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 Astellas and the financial
                terms of our collaboration;





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





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


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:





·
            our
                inability to commercialize AGI-1067 following the release of the
                ARISE
                Phase III clinical trial;·
            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 distributionof
                our products to avoid incurring penalties that my inhibit our ability
                to
                commercialize our product;·
            our
                ability to protect adequately or enforce our intellectual property
                rights
                or secure rights to 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·
            our
                ability to repay $86 million principal amount on the 4.5% convertible
                notes due September 1, 2008;and·
            the
                conversion of our convertible notes would dilute the ownership interest
                of
                existing 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
      as well as under the heading “Risk Factors” 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
      1A. Risk Factors**





The
      risk
      factors presented below update, and should be considered in addition to, the
      risk factors previously disclosed by us in Part I, Item 1A of our Annual Report
      on Form 10-K for the fiscal year ended December 31, 2006.




***Because
      AGI-1067 did not show a difference from placebo in its composite primary
      endpoint in our ARISE Phase III clinical trial, we may not be able to
      commercialize this product candidate.***





On
      March
      19, 2007, we announced that our ARISE Phase III clinical study of AGI-1067
      did
      not show a difference from placebo in its composite primary endpoint. The
      failure to meet the primary endpoint in our ARISE Phase III clinical study
      could
      have a material adverse effect on our ability to commercialize AGI-1067,
      generate revenue or become profitable.   In addition, the ARISE trial
      indicated that AGI-1067 produced side effects, including diarrhea, and changes
      in lipids and liver function tests.  It may not be possible to design and
      implement another Phase III clinical trial that would provide results sufficient
      to obtain FDA approval for AGI-1067. If we are not successful in commercializing
      AGI-1067, or are significantly delayed or limited in doing so, our financial
      results and our commercial prospects will be materially and adversely
      affected.





***The
      termination of our collaboration with AstraZeneca for the development and
      commercialization of AGI-1067 could result in a loss of a significant source
      of
      funding and could materially adversely affect our financial results and our
      commercial prospects.***




On
      April
      20, 2007, AstraZeneca notified us that it was ending its collaboration to
      develop and commercialize AGI-1067. The notice indicated that the termination
      date is to be effective 90 days from the notification date. This will require
      greater financial resources to develop AGI-1067 and may cause a delay in
      commercializing AGI-1067. We will be required to build our own commercial
      operation or seek alternative collaborative commercial partners. We may not
      be
      able to negotiate alternative collaboration agreements on acceptable terms,
      if
      at all. We may not have the funds or capability to independently undertake
      product development, manufacturing and commercialization, which could materially
      adversely affect our financial results and our commercial
      prospects.











13


**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.





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:
                May 10, 2007
            /s/MARK
              P. COLONNESEMark
                P. ColonneseExecutive
                Vice President, Commercial Operations andChief
                Financial Officer











15