----

**FORM      10-Q**

**ATHEROGENICS,      INC.**

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

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

**(678)      336-2500**

----

**ATHEROGENICS,      INC.**

**FORM      10-Q**

**INDEX**

| **PART                I.  FINANCIAL INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Page                No.** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| Item                1.  Condensed Financial Statements (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
|      Condensed                Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                        |
|           September                30, 2007 and December 31,                2006                                                                                                                                | 1                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
|      Condensed                Statements of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                        |
|           Three                and nine months ended September 30, 2007 and                2006                                                                                                                 | 2                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
|      Condensed                Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                        |
|           Nine                months ended September 30, 2007 and                2006                                                                                                                           | 3                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
|      Notes                to Condensed Financial                Statements                                                                                                                                                               | 4                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| Item                2.  Management’s Discussion and Analysis of Financial                Condition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                        |
|              and                Results of                Operations                                                                                                                             | 8                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| Item                3.  Quantitative and Qualitative Disclosures About Market                Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 14                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| Item                4.  Controls and                Procedures                                                                                                                                                                                          | 15                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| **PART                II.  OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
|  Item              1A.  Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  15                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| Item                6.  Exhibits                                                                                                                                                                                                                        | 15                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |
| **SIGNATURES                                                                                                                **                                                                                                                                    | 16                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        |

----

**PART      I. – FINANCIAL INFORMATION**

**Item      1.  Financial Statements**

**ATHEROGENICS,      INC.**

**CONDENSED      BALANCE SHEETS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **September                30,**  | **December                31,**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------|---------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **2007**                               |                                  | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |
| **Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                   |                                  |   |   |
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                   |                                  |   |   |
| Cash                and cash                equivalents                                                                                                                    | $                                      | 82,214,256                            |   | $ | 87,846,079 |   |
| Short-term                investments                                                                                                                                      |                                   | 19,201,522                            |   |   | 63,964,860 |   |
| Accounts                receivable                                                                                                                                         |                                   | 7,482,973                             |   |   | 6,537,892 |   |
| Prepaid                expenses                                                                                                                                            |                                   | 3,434,112                             |   |   | 4,038,419 |   |
| Interest                receivable                                                                                                                                         |                                   | 232,671                               |   |   | 643,097 |   |
| Total                current                assets                                                                                                                                                            |                                   | 112,565,534                           |   |   | 163,030,347 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |
| Equipment                and leasehold improvements, net of accumulated                depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                   |                                  |   |   |   |   |
| and                amortization                                                                                                                                            |                                   | 2,563,729                             |   |   | 9,684,965 |   |
| Debt                issuance costs and other                assets                                                                                          |                                   | 4,286,145                             |   |   | 5,624,352 |   |
| Total                assets                                                                                                                                                                                   | $                                      | 119,415,408                           |   | $ | 178,339,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |
| **Liabilities                and Shareholders' Deficit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                   |                                  |   |   |   |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                   |                                  |   |   |   |   |
| Accounts                payable                                                                                                                                            | $                                      | 5,069,085                             |   | $ | 3,183,511 |   |
| Accrued                research and                development                                                                                                             |                                   | 3,503,704                             |   |   | 11,263,164 |   |
| Accrued                interest                                                                                                                                            |                                   | 906,538                               |   |   | 2,540,000 |   |
| Accrued                compensation                                                                                                                                        |                                   | 1,525,287                             |   |   | 1,465,644 |   |
| Accrued                and other                liabilities                                                                                                                |                                   | 607,632                               |   |   | 791,661 |   |
| Current                portion of deferred                revenue                                                                                                          |                                   | 1,554,369                             |   |   | 25,000,000 |   |
| Current                portion of convertible notes                payable                                                                                                                                                                                                                                                                                                                                                                                                             |                                   | 48,000,000                            |   |   | — |   |
| Total                current                liabilities                                                                                                                                                       |                                   | 61,166,615                            |   |   | 44,243,980 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |
| Convertible                notes payable, net of current                portion                                                                                                                                                                                                                                                                                                                                                                     |                                   | 238,980,424                           |   |   | 286,000,000 |   |
| Long-term                portion of deferred                revenue                                                                                         |                                   | —                               |   |   | 2,083,333 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |
| Shareholders'                deficit:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                   |                                  |   |   |   |   |
| Preferred                stock, no par value:  Authorized—5,000,000                shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                   | —                               |   |   | — |   |
| Common                stock, no par value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                   |                                  |   |   |   |   |
| Authorized—100,000,000                shares; issued and outstanding —                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                   |                                  |   |   |   |   |
| 39,518,492                and 39,452,927 shares at September 30, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                   |                                  |   |   |   |   |
| and                December 31, 2006,                respectively                                                                                                                                                                           |                                   | 214,108,950                           |   |   | 207,388,894 |   |
| Warrants                                                                                                                                                                   |                                   | 613,021                               |   |   | 613,021 |   |
| Accumulated                deficit                                                                                                                                         |                                   | (395,464,018                          | ) |   | (361,997,246 | ) |
| Accumulated                other comprehensive                gain                                                                                                         |                                   | 10,416                                |   |   | 7,682 |   |
| Total                shareholders'                deficit                                                                                                                                                     |                                   | (180,731,631                          | ) |   | (153,987,649 | ) |
| Total                liabilities and shareholders'                deficit                                                                                                                                     | $                                      | 119,415,408                           |   | $ | 178,339,664 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   |                                  |   |   |   |   |

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

----

**ATHEROGENICS,      INC.**

**CONDENSED      STATEMENTS OF OPERATIONS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **Three                months ended** |        |   | **Nine                months ended** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,**      |        |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2007**                              |        |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |
| Revenues:                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |        |   |                                 |   |   |   |   |   |   |   |
|    License                fees                                                                                                 |   | $                                     | —     |   |                                 | $      | 6,250,000 |   |   | $ | 27,083,333 |   |   | $ | 16,666,667 |   |
|    Research                and                development                                                                      |   |                                  | 7,438,867   |   |                                 |   | 4,042,683 |   |   |   | 22,075,490 |   |   |   | 4,042,683 |   |
|       Total                revenues                                                                             |   |                                  | 7,438,867   |   |                                 |   | 10,292,683 |   |   |   | 49,158,823 |   |   |   | 20,709,350 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating                expenses:                                                                                                                                                                                                                                                                                                                                                                           |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|    Research                and                development                                                                      |   |                                  | 16,818,119  |   |                                 |   | 21,806,971 |   |   |   | 59,112,592 |   |   |   | 54,514,773 |   |
|    Marketing,                general and administrative                                                                                                                                                                                                                                                                                                                                       |   |                                  | 3,086,868   |   |                                 |   | 3,111,042 |   |   |   | 10,619,566 |   |   |   | 9,990,244 |   |
|    Restructuring                and impairment costs                                                                                                                                                                                                                                                                                                                                          |   |                                  | —     |   |                                 |   | — |   |   |   | 9,996,332 |   |   |   | — |   |
|       Total                operating                expenses                                                    |   |                                  | 19,904,987  |   |                                 |   | 24,918,013 |   |   |   | 79,728,490 |   |   |   | 64,505,017 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating                loss                                                                                                                 |   |                                  | (12,466,120 | )      |                                 |   | (14,625,330 | ) |   |   | (30,569,667 | ) |   |   | (43,795,667 | ) |
| Interest                income                                                                                                                |   |                                  | 1,310,322   |   |                                 |   | 2,391,460 |   |   |   | 4,798,125 |   |   |   | 6,998,118 |   |
| Interest                expense                                                                                                               |   |                                  | (3,519,669  | )      |                                 |   | (2,139,450 | ) |   |   | (7,695,230 | ) |   |   | (6,335,565 | ) |
| Other                expense                                                                                                                  |   |                                  | —     |   |                                 |   | — |   |   |   | — |   |   |   | (3,521,236 | ) |
| Net                loss                                                                                                                       |   | $                                     | (14,675,467 | )      |                                 | $      | (14,373,320 | ) |   | $ | (33,466,772 | ) |   | $ | (46,654,350 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                loss per share –                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|    basic                and                diluted                                                                             |   | $                                     | (0.37       | )      |                                 | $      | (0.36 | ) |   | $ | (0.85 | ) |   | $ | (1.19 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares                                                                                                                                                                                                                                                                                                                                                                       |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|    outstanding                – basic and diluted                                                                                                                                                                                                                                                                                                                                       |   |                                  | 39,515,014  |   |                                 |   | 39,451,933 |   |   |   | 39,493,974 |   |   |   | 39,359,938 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |

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

----

**ATHEROGENICS,      INC.**

**CONDENSED      STATEMENTS OF CASH FLOWS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **Nine                months ended** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **September                30,**     |        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2007**                             |        |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |        |   |   |   |
| **Operating                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                 |        |   |   |   |
| Net                loss                                                                                                                                                                                                   |   | $                                    | (33,466,772 | ) |   | $ | (46,654,350 | ) |
| Adjustments                to reconcile net loss to net cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                 |        |   |   |   |   |   |
|    used                in operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 |        |   |   |   |   |   |
|        Asset                impairment                costs                                                                                                                            |   |                                 | 9,005,153   |   |   |   | — |   |
|        Amortization                of deferred                revenue                                                                                                                  |   |                                 | (27,083,333 | ) |   |   | (16,666,667 | ) |
|        Stock-based                compensation                                                                                                                                         |   |                                 | 6,696,982   |   |   |   | 6,724,633 |   |
|        Amortization                of debt issuance                costs                                                                                                               |   |                                 | 1,338,207   |   |   |   | 1,112,888 |   |
|        Amortization                of discount on 4.5% convertible notes due 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 | 980,424     |   |   |   | — |   |
|        Depreciation                and                amortization                                                                                                                     |   |                                 | 710,357     |   |   |   | 688,295 |   |
|        Loss                on debt                conversion                                                                                                                           |   |                                 | —     |   |   |   | 3,521,236 |   |
|        Changes                in operating assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |        |   |   |   |   |   |
|          Accounts                receivable                                                                                                                                  |   |                                 | (945,081    | ) |   |   | (6,795,305 | ) |
|          Prepaid                expenses                                                                                                                                     |   |                                 | 604,307     |   |   |   | (2,579,841 | ) |
|          Interest                receivable                                                                                                                                  |   |                                 | 410,426     |   |   |   | 171,989 |   |
|          Accounts                payable                                                                                                                                     |   |                                 | 1,885,574   |   |   |   | 1,072,796 |   |
|          Accrued                research and                development                                                                                                      |   |                                 | (7,759,460  | ) |   |   | 3,191,959 |   |
|          Accrued                interest                                                                                                                                     |   |                                 | (1,633,462  | ) |   |   | (1,649,250 | ) |
|          Accrued                compensation                                                                                                                                 |   |                                 | 59,643      |   |   |   | (1,372,127 | ) |
|          Accrued                and other                liabilities                                                                                                         |   |                                 | (184,029    | ) |   |   | (570,750 | ) |
|          Deferred                revenue                                                                                                                                     |   |                                 | 1,554,369   |   |   |   | 50,000,000 |   |
|             Net                cash used in operating                activities                                                                               |   |                                 | (47,826,695 | ) |   |   | (9,804,494 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |        |   |   |   |   |   |
| **Investing                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                 |        |   |   |   |   |   |
| Sales                and maturities of short-term                investments                                                                                                                                              |   |                                 | 104,729,736 |   |   |   | 105,425,992 |   |
| Purchases                of short-term                investments                                                                                                                                                         |   |                                 | (59,963,664 | ) |   |   | (76,895,985 | ) |
| Purchases                of equipment and leasehold improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (2,594,274  | ) |   |   | (2,502,930 | ) |
|             Net                cash provided by investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | 42,171,798  |   |   |   | 26,027,077 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |        |   |   |   |   |   |
| **Financing                activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                 |        |   |   |   |   |   |
| Proceeds                from the exercise of common stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                 | 23,074      |   |   |   | 1,762,357 |   |
| Payments                on equipment loan                facility                                                                                                                                                         |   |                                 | —     |   |   |   | (87,580 | ) |
|             Net                cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | 23,074      |   |   |   | 1,674,777 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |        |   |   |   |   |   |
| (Decrease)                increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                 | (5,631,823  | ) |   |   | 17,897,360 |   |
| Cash                and cash equivalents at beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                 | 87,846,079  |   |   |   | 82,831,679 |   |
| Cash                and cash equivalents at end of                period                                                                                                                                                  |   | $                                    | 82,214,256  |   |   | $ | 100,729,039 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |        |   |   |   |   |   |
| **Supplemental                disclosures**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                 |        |   |   |   |   |   |
| Interest                paid                                                                                                                                                                                              |   | $                                    | 7,010,062   |   |   | $ | 6,871,927 |   |

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

----

**ATHEROGENICS,      INC.**

**NOTES      TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.   Organization      and Nature of Operations**

**2.   Basis      of Presentation**

**3.   Accounts      Receivable**

**4.   Revenue      Recognition**

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

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

----

**5.   Restructuring      and Impairment Costs**

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

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

**6.   Income      Tax**

*Accounting for Uncertainty in Income Taxes*

**7.   Net      Loss per Share**

*Earnings per Share,*

----

**8.   Stock-Based      Compensation**

*Share-Based Payment.  *

** **

|                                                                                                                                                                                                                                                                                                                                                                                      | **Three                months ended**                |   | **Nine                months ended** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|--------|--------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                      | **September                30,**                     |   | **September                30,**     |
|                                                                                                                                                                                                                                                                                                                                                                                      | **2007**                                             |   | **2006**                             |   | **2007** |   | **2006** |
|                                                                                                                                                                                                                                                                                                                                                                                      |                                                 |   |                                 |   |   |   |   |
| Expected                volatility                                                                          |     76.45%                       |   | 66.37%                               |   |     82.86% |   | 69.62% |
| Expected                term                                                                                |      5                years |   |  5                years         |   |   3.5                years |   |  5                years |
| Risk                free interest                rate                                                       |       4.54%            |   |   4.67%                    |   |       4.91% |   |   4.70% |
| Fair                value of                grants                                                          |        $1.10      |   |    $7.98              |   |        $1.41 |   |    $9.26 |

**9.   Convertible      Notes Payable**

*Induced Conversion of      Convertible Debt*

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

----

| 2008                Notes                                                                                                                                                    | $    48,000,000 |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                |    |
| 2011                Notes                                                                                                                                                    | 60,410,000                          |    |
| 2012                Notes                                                                                                                                                    | 200,000,000                         |    |
|    Face                value of convertible                notes                                                                                              | 260,410,000                         |    |
| Discount                on the 2011                Notes                                                                                                                     | (21,429,576                         |  ) |
|    Total                2011 Notes and 2012                Notes                                                                                              | $  238,980,424            |    |

----

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

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

**Overview**

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|                                                                              |   | **Three                months ended** |       |   | **Nine                  months ended** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------|----------------------------------------|--------|
|                                                                              |   | **September                30,**      |       |   | **September                30,**       |   |
|                                                                              |   | **2007**                              |       |   | **2006**                               |   |   | **2007** |   |   | **2006** |   |
|                                                                              |   |                                  |       |   |                                   |   |   |   |   |   |   |   |
|    Direct                external AGI-1067 costs                   |   | $                                     | 14,106,187 |   |                                   | $      | 12,256,126 |   |   | $ | 44,351,188 |   |   | $ | 31,930,434 |   |
|    Unallocated                internal costs and other programs    |   |                                  | 2,711,932  |   |                                   |   | 9,550,845 |   |   |   | 14,761,404 |   |   |   | 22,584,339 |   |
|       Total                research and development |   | $                                     | 16,818,119 |   |                                   | $      | 21,806,971 |   |   | $ | 59,112,592 |   |   | $ | 54,514,773 |   |

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

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

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

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

*Risks Related to Development and Commercialization of      Our Product Candidates*
*and Dependence on Third Parties” *
*Risks Related to Regulatory Approval of Our Product Candidates*

**Critical      Accounting Policies and Use of Estimates**

**Results      of Operations**

**Comparison      of the Three and Nine Months Ended September 30, 2007 and      2006**

*Revenues*

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*Expenses*

*Research      and      Development.  *

*Marketing,      General and      Administrative.  *

*Restructuring      and Impairment      Costs.*

*Interest      Income*

*Interest      Expense*

*Other      Expense*

**Liquidity      and Capital Resources**

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|                                                                                                                                                                                                                                                                                                                             |   | **Payments                Due by Period** |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|
|                                                                                                                                                                                                                                                                                                                             |   | **Total**                                 |        |   | **2007** |   |   | ** ** | **2008-2009** |   |   | ** ** | **2010-2011** |   |   | **Thereafter** |   |
| Contractual                obligations                                                                                                                                                                                                                                                                                           |   |                                      |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   Operating                leases                                                |   | $                                         | 1,790,093   |   |   | $ | 341,837 |   |   | $ | 1,446,501 |   |   | $ | 1,755 |   |   | $ | — |   |
|   Convertible                notes                                               |   |                                      | 308,410,000 |   |   |   | — |   |   |   | 48,000,000 |   |   |   | 60,410,000 |   |   |   | 200,000,000 |   |
|   Interest                on convertible notes                                                                                                                                                                                                                                                                         |   |                                      | 25,174,175  |   |   |   | — |   |   |   | 13,596,900 |   |   |   | 10,077,675 |   |   |   | 1,500,000 |   |
|     Total                contractual obligations                                                                                                                                                                                                                                                             |   | $                                         | 335,374,668 |   |   | $ | 341,837 |   |   | $ | 63,043,401 |   |   | $ | 70,489,430 |   |   | $ | 201,500,000 |   |

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

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

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

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

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

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

**FORWARD-LOOKING      STATEMENTS**

| · | our                inability to successfully develop and commercialize                AGI-1067;                                                                                                                                                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | the                actual results of clinical studies of AGI-1067 to treat diabetes                and                related regulatory judgments concerning AGI-1067 for use in diabetes                management;                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | if                our common stock is no longer traded on a national securities exchange                or                system of automated quotations, the holders of our convertible notes                have                the right to require us to immediately repay amounts outstanding                under                such notes, together with accrued interest up to such                date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to generate positive cash flow in light of our history of                operating losses;                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                inability to obtain additional financing on satisfactory terms, which                could preclude us from                                                                                                                                                                                                                                                                                    |
|   | developing                or marketing our products;                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | generally                evolving regulatory requirements for drug product approval and                marketing;                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to successfully develop AGI-1096 or our other product                candidates;                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | our                ability to commercialize our product candidates if we fail to demonstrate                adequately their safety                                                                                                                                                                                                                                                                               |
|   | and                efficacy;                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | possible                delays in our clinical trials;                                                                                                                                                                                                                                                                                                                                                            |

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|   |                                                                                                                                                          |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | our                inability to predict whether or when we will obtain regulatory approval                to                commercialize our                 |
|   | product                candidates or the timing of any future revenue from these product                candidates;                                           |
|   |                                                                                                                                                          |
| · | our                need to comply with applicable regulatory requirements in the manufacture                and distribution                                  |
|   | of                our products to avoid incurring penalties that my inhibit our ability                to                commercialize our product;           |
|   |                                                                                                                                                          |
| · | regulatory                authorities may require that we conduct additional clinical trials                or                modify existing clinical trials |
|   |                                                                                                                                                          |
| · | our                ability to protect adequately or enforce our intellectual property                rights                or secure rights to third          |
|   | party                patents;                                                                                                                                 |
|   |                                                                                                                                                          |
| · | the                ability of our competitors to develop and market anti-inflammatory                products that are more                                   |
|   | effective,                have fewer side effects or are less expensive than our current or                future                product candidates;          |
|   |                                                                                                                                                          |
| · | third                parties' failure to synthesize and manufacture our product candidates,                which could delay our                              |
|   | clinical                trials or hinder our commercialization prospects;                                                                                     |
|   |                                                                                                                                                          |
| · | our                ability to create sales, marketing and distribution capabilities                or enter                into agreements with third         |
|   | parties                to perform these functions;                                                                                                            |
|   |                                                                                                                                                          |
| · | our                ability to attract, retain and motivate skilled personnel and cultivate                key academic collaborations;                        |
|   |                                                                                                                                                          |
| · | our                ability to obtain an adequate level of reimbursement or acceptable                prices                for our products;                  |
|   |                                                                                                                                                          |
| · | we                may face product liability lawsuits which may cause us to incur                substantial financial loss or we may                         |
|   | be                unable to obtain future product liability insurance at reasonable                prices,                if at all, either of which          |
|   | could                diminish our ability to commercialize our future products;                and                                                            |
|   |                                                                                                                                                          |
| · | our                ability to repay $48 million principal amount on the 4.5% convertible                notes due September 1, 2008;                          |
|   | and                our other notes as they become due; and                                                                                                    |
|   |                                                                                                                                                          |
| · | the                conversion of our convertible notes would dilute the ownership interest                of                existing shareholders             |
|   | and                could adversely affect the market price of our common                stock.                                                                |

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

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**Item      4.  Controls and Procedures**

*Evaluation      of disclosure controls      and procedures.*

*Changes      in internal control over      financial reporting.*

**PART      II - OTHER INFORMATION**

**Item      1A.  Risk Factors**

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

**Item      6.  Exhibits**

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

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**SIGNATURES**

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

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