##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                                 
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 0-31261


AtheroGenics, Inc.


(Exact name of Registrant as specified in its charter)


|                                                                                                                     |  |                                                                       
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------
|Georgia                                                                                                              |  | 58-2108232                                                            
|(State or other jurisdiction of
    incorporation or organization)                                                   |  | (I.R.S. Employer Identification Number)                               
|8995 Westside Parkway,
    Alpharetta, Georgia 30004(Address of principal executive offices, including zip
    code) |  | (678) 336-2500(Registrants telephone number, including area
    code)

Securities registered pursuant to Section 12(b) of the
Exchange Act:


None


Securities registered pursuant to Section 12(g) of the
Exchange Act:


Common Stock, No Par Value


Common Stock Purchase Rights





o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






Documents Incorporated by Reference:


Portions of the proxy statement filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934
with respect to the 2006 Annual Meeting of Shareholders are
incorporated herein by reference in Part III.










---



##### 










ATHEROGENICS, INC


Form 10-K


INDEX


|                                                    |  |                                                                                                                      |  |      |    | 
|--------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                    |  |                                                                                                                      |  | Page |   
|                                                    |  |                                                                                                                      |  |      |   
|PART I                                             
|Item 1.                                             |  | Business                                                                                                             |  |      | 1  | 
|Item 1A.                                            |  | Risk Factors                                                                                                         |  |      | 18 | 
|Item 1B.                                            |  | Unresolved SEC Staff Comments                                                                                        |  |      | 32 | 
|Item 2.                                             |  | Properties                                                                                                           |  |      | 32 | 
|Item 3.                                             |  | Legal Proceedings                                                                                                    |  |      | 32 | 
|Item 4.                                             |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 32 | 
|                                                   
|PART II                                            
|Item 5.                                             |  | Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities |  |      | 33 | 
|Item 6.                                             |  | Selected Financial Data                                                                                              |  |      | 34 | 
|Item 7.                                             |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 35 | 
|Item 7A.                                            |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  |      | 41 | 
|Item 8.                                             |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 43 | 
|Item 9.                                             |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 61 | 
|Item 9A.                                            |  | Controls and Procedures                                                                                              |  |      | 61 | 
|Item 9B.                                            |  | Other Information                                                                                                    |  |      | 61 | 
|                                                   
|PART III                                           
|Item 10.                                            |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 62 | 
|Item 11.                                            |  | Executive Compensation                                                                                               |  |      | 62 | 
|Item 12.                                            |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                   |  |      | 62 | 
|Item 13.                                            |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 62 | 
|Item 14.                                            |  | Principal Accountant Fees and Services                                                                               |  |      | 62 | 
|                                                   
|PART IV                                            
|Item 15.                                            |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 63 | 
|Signatures                                          |  |                                                                                                                      |  |      | 67 | 
|EX-10.34 COMMERCIAL SUPPLY AGREEMENT               
|EX-10.35 LICENSE AND COLLABORATION AGREEMENT       
|EX-10.36 CO-PROMOTION AGREEMENT                    
|EX-10.37 TRANSITION SERVICES AGREEMENT             
|EX-23.01 CONSENT OF ERNST & YOUNG LLP              
|EX-24.01 POWERS OF ATTORNEY                        
|EX-31.1 SECTION 302, CERTIFICATION OF THE CEO      
|EX-31.2 SECTION 302, CERTIFICATION OF THE CFO      
|EX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO



i



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PART I







|        |         
|------- | --------
|Item 1. | Business

Overview


® ®


®


465-patient 12-month




AGI-1067


1



---



##### Table of Contents



follow-up






® ®


® ®


2



---



##### Table of Contents



Business Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continue aggressive development program for AGI-1067. We
    intend to rapidly develop AGI-1067 for the treatment and
    prevention of atherosclerosis in patients with CHD.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Extend our
    v-protectant®
    technology platform into additional therapeutic areas that
    address unmet medical needs. We believe that our
    v-protectants®
    have the potential for treating a wide variety of other chronic
    inflammatory diseases. These indications include chronic organ
    transplant rejection, rheumatoid arthritis, asthma and other
    diseases. We have completed two Phase I clinical trials
    with positive results for AGI-1096, a
    v-protectant®
    developed for the prevention of chronic organ transplant
    rejection.
|
| |  | Expand our clinical product candidate portfolio. In
    addition to our existing discovery programs, we intend to
    acquire rights to other product candidates and technologies that
    complement our existing product candidate lines or that enable
    us to capitalize on our scientific and clinical development
    expertise. We plan to expand our product candidate portfolio by
    in-licensing or acquiring product candidates, technologies or
    companies.                                                                                                 
|
| |  | Commercialize our products. We plan to collaborate with
    large pharmaceutical companies to commercialize products that we
    develop to target patient or physician populations in broad
    markets. For example, we have entered into a license and
    collaboration agreement with AstraZeneca to commercialize
    AGI-1067 due to its applicability to broad commercial markets.                                                                                                                                                                                     



Inflammation and Disease








| |   |                                
| | - | -------------------------------
| |  | atherosclerosis, including CHD;
|
| |  | organ transplant rejection;    
|
| |  | rheumatoid arthritis; and      
|
| |  | asthma.                        

3



---



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three-to


4



---



##### Table of Contents



® ®






V-Protectant®
Technology


® V-protectant® V-protectants® ® ®


5



---



##### Table of Contents



Products




|                         |            |  |                       |                      |  |                    |                          | 
|------------------------ | ---------- |  | --------------------- | -------------------- |  | ------------------ | ------------------------ | 
|                         |            |  |                       |                      |  |                    |                         
|Therapeutic Program      |            |  | Disease/Indication    |                      |  | Development Status |                         
|                         |            |  |                       |                      |  |                    |                         
|V-PROTECTANTS®           |            |  |                       |                      |  |                    |                         
|                         | AGI-1067   |  |                       | Atherosclerosis      |  |                    | Phase III clinical trial | 
|                         | AGI-1096   |  |                       | Transplant rejection |  |                    | Phase I clinical trial   | 
|                         | AGI Series |  |                       | Chronic asthma       |  |                    | Research                 | 
|                         |            |  | Rheumatoid arthritis  |                      |  |                    |                         
|                         |            |  |                       |                      |  |                    |                         
|MEKK TECHNOLOGY PLATFORM |            |  | Inflammatory diseases |                      |  | Research           |                         
|                         |            |  |                       |                      |  |                    |                         

back-up




| |         
| | --------
| | AGI-1067

®


305-patient


465-patient 12-month


6



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##### Table of Contents





AGI-1067 AGI-1067


follow-up




AGI-1067. AGI-1067.




| |         
| | --------
| | AGI-1096





7



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##### Table of Contents



v-protectant® AGI-1096, AGI-1096 VCAM-1, AGI-1096 AGI-1096, AGI-1096 ® AGI-1096 AGI-1096 AGI-1096.




| |                                       
| | --------------------------------------
| | Other
    V-Protectant®
    Candidates

v-protectant®




v-protectants®


v-protectants® v-protectants® v-protectant®


Collaborations




| |                      
| | ---------------------
| | AstraZeneca Agreement

AGI-1067.


8



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AGI-1067,




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Development. We have an obligation to use commercially
    diligent efforts to carry out the development of AGI-1067. We
    are also responsible for the costs of conducting and managing
    clinical studies through the filing of a NDA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Regulatory Approvals. We are responsible for applying for
    and obtaining regulatory approval of
    AGI-1067 in the United
    States; however, AstraZeneca will assist us with obtaining that
    approval. AstraZeneca will have full responsibility for all
    non-U.S.
    regulatory filings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Manufacturing. AstraZeneca is responsible for all
    activities related to
    AGI-1067 manufacturing,
    packaging and labeling. We will use commercially diligent
    efforts to facilitate any necessary transfer of technology to
    AstraZeneca or a third party chosen by AstraZeneca for
    AGI-1067 manufacturing,
    packaging and labeling.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Marketing. AstraZeneca will be responsible for the
    distribution of
    AGI-1067 in all markets
    throughout the world. In addition, AstraZeneca will bear all
    costs for the marketing of AGI-1067 in all markets throughout
    the world, including pre-approval and market development
    activities. AstraZeneca will be solely responsible for setting
    pricing for AGI-1067,
    provided that the initial pricing will be approved by a
    committee consisting of our representatives and representatives
    from AstraZeneca.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Co-Promotion. We will have the right to
    co-promote AGI-1067
    in the United States. AstraZeneca will fund, for a minimum of
    three years, the formation and operation of a sales force of up
    to a total of 125 people. This sales force will focus on the
    cardiology field in the United States, and will co-promote both
    AGI-1067 and one other
    of AstraZenecas drugs (which drug will be selected by
    AstraZeneca) during that time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | License Fee. On February 1, 2006 upon receiving
    Hart-Scott Rodino regulatory approval, AstraZeneca paid us the
    nonrefundable, noncreditable payment of $50 million in
    partial consideration for the licenses and other rights granted
    in the license agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Milestone Payments. We have the right to receive payments
    based on our achievement of certain development and commercial
    milestones, which amounts have an aggregate value of up to
    $950 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Profit Sharing and Royalties. We also have the right to
    receive royalties from AstraZeneca, based on
    AGI-1067 sales in all
    markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Term and Termination. The license agreement will be in
    effect until either (1) the regulatory period of patent
    exclusivity elapses or is revoked; (2) ten years from the
    first commercial sale of
    AGI-1067; or
    (3) either party materially breaches the license agreement.
    In addition, AstraZeneca will have the right to terminate the
    license agreement: (1) upon 90 days prior written
    notice at any time during the 45 day period following the
    release of the final ARISE results; (2) at any time in the
    30 day period following receipt of a letter from the FDA
    stating either that: (a) the FDA will not approve the
    application, or (b) that it will only approve the
    application if specific conditions are met, and such conditions
    make it reasonably likely that (i) approval of
    AGI-1067 will occur
    more than 24 months following the receipt of the FDA
    letter, or (ii) development costs will exceed a specified
    amount (unless we agree to pay any amount in excess of a
    specified amount); (3) if the FDA requires information or
    data from additional studies not contemplated in the original
    license agreement, when the added cost to AstraZeneca of
    complying with the FDA requirements is reasonably likely to
    exceed a specified amount (unless we agree to pay any amounts in
    excess of a specified amount); and (4) for any reason at
    any time during the one-year period following the third
    anniversary of receipt of FDA approval, upon giving us
    365 days written notice at any time during that one-year
    period.

9



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| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Astellas Pharma Inc. (Formerly Known As Fujisawa
    Pharmaceutical Co., Ltd.) Agreement

AGI-1096


Discovery Research Program








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To discover and develop
    v-protectants®with enhanced potency and improved therapeutic
    properties. We are synthesizing novel compounds and testing
    them in a variety of biochemical and cell-based assays to
    discover and develop new, small molecule
    v-protectants®.
    We believe that these
    v-protectants®
    will have improved therapeutic properties and applicability
    across a wide range of chronic inflammatory diseases. We have
    identified several novel series of highly potent
    v-protectants®.                                                                                                                                                                                                                                                                                                                                                
|
| |  | To identify novel anti-inflammatory therapeutic targets
    utilizing functional genomics. One part of our drug
    discovery platform is a set of techniques that connects our
    knowledge of genes, to agents that modify gene activity. This
    collection of methods, called functional genomics, enables us to
    select targets efficiently. Our targets for therapy may be the
    gene, the protein, another substance in the body that links to
    the protein, or the agent that induces the change. For example,
    oxidants are agents that induce changes in gene activity. We
    believe our functional genomics program may enable us to
    identify novel genes and their protein products that are
    critical to the chronic inflammatory disease process. We may
    progress these genes and proteins, if identified, into targets
    for novel classes of drugs.
|
| |  | To develop new classes of
    v-protectant®drugs based on the new therapeutic targets identified by our
    functional genomics program. We are identifying enzymes and
    other molecular targets that either control or are controlled by
    oxidant signals. We believe these discoveries will enable our
    chemists to synthesize the next generation of
    v-protectants®.
    We intend to use these enzymes and other molecular targets for
    both internal efforts and as strategic collaboration assets.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | To develop a second broad platform for the discovery and
    development of a new class of anti-inflammatory drug
    candidates. As a result of entering into the license
    agreement with National Jewish Medical and Research Center in
    June 2001, we have expanded our research program to include the
    discovery and development of new drug candidates through the
    exploitation of the licensed technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Patents and Intellectual Property




10



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| |                             
| | ----------------------------
| | V-Protectant®
    Technology

®








®




| |                          
| | -------------------------
| | AGI-1067 Patent Portfolio

AGI-1067


11



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AGI-1067 VCAM-1 AGI-1067 VCAM-1 VCAM-1.




| |                          
| | -------------------------
| | AGI-1096 Patent Portfolio

AGI-1096 non-U.S. VCAM-1. AGI-1096 non-U.S.




| |                                      
| | -------------------------------------
| | Other
    V-Protectant®
    Compounds

non-U.S. v-protectants® v-protectants®




| |                
| | ---------------
| | MEKK Technology









12



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| |           
| | ----------
| | Trademarks

V-PROTECTANT.




Manufacturing


AGI-1067 AGI-1067 AGI-1067. AGI-1067


AGI-1067 AGI-1067 AGI-1067


v-protectant®


13



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Sales and Marketing


AGI-1067. AGI-1067. AGI-1067


Competition










| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First, our scientists and their collaborators have pioneered the
    basic discoveries and research methodologies linking oxidant
    signals to vascular cell inflammation. These discoveries and
    research methodologies form the foundation for our proprietary
    drug discovery programs relating to chronic inflammation.
|
| |  | Second, our scientific expertise, coupled with our expertise in
    clinical drug development, has enabled us to be the first
    company to conduct clinical trials of an orally-administered,
    small molecule
    v-protectant®.                                                                                              
|
| |  | Third, we believe our scientific, development and licensing
    expertise strongly positions us to acquire promising
    technologies and products discovered outside AtheroGenics.                                                                                                                                                

Governmental Regulation






14



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I clinical trials explore safety, blood levels,
    metabolism and the potential for interaction with other drugs.
    Phase I typically proceeds from healthy volunteers to
    patients with the target disease. The study population during
    Phase I can include up to approximately 200 total subjects.                                                                                                                                                                      
|
| |  | Phase II clinical trials further support safety, and they
    establish the dose(s) or strength(s) of the drug to be used in
    the more extensive clinical investigations to be conducted
    during Phase III. These Phase II clinical trials may
    include hundreds of patients who have the target disease and who
    are receiving a range of background medications. In addition,
    Phase II clinical trials often verify the mechanisms of
    action proposed preclinically.
|
| |  | Phase III clinical trials usually include at least two
    adequate and well controlled studies in the target population.
    For most chronic diseases, drug companies study a few thousand
    patients to assure a broadly applicable assessment of safety and
    efficacy.                                                                                                                                                                                                           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At the successful conclusion of Phase III, drug companies
    may submit a product license application, called an NDA in the
    United States. The FDA, or
    non-U.S.regulatory
    authorities, review the application for completeness, accuracy
    and adherence to regulations. These authorities may use
    consultants to assist in the evaluation of the data, and may
    convene an expert committee to advise on the safety,
    effectiveness and usefulness of the proposed new product
    candidate prior to final regulatory judgment. The final step to
    registration is development and approval of the prescribing
    information that is incorporated in labeling, usually referred
    to as the package insert, that accompanies the marketed drug.
    This labeling establishes conditions for the safe and effective
    use of the drug and the content of drug company promotion and
    advertising to physicians who may use the new drug. Approval of
    the NDA may be conditioned on the conduct of post-approval
    studies, or Phase IV studies.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase IV clinical trials provide additional information to
    support marketing of the drug for its approved indication.
    Phase IV clinical trials may generate data to support
    promotion of the new drug in comparison with other approved
    drugs and to support healthcare economics claims. In addition,
    every pharmaceutical company is responsible for post-marketing
    surveillance for safety in the marketplace.



15



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Good Manufacturing Practices (GMP), which govern the
    formulation, manufacture, testing, labeling, packaging, release
    and monitoring of a drug throughout its life cycle;                                                                                                                                                                                                                                                         
|
| |  | Good Laboratory Practices, which govern the use of a drug in
    animal studies to support establishment of safety or the
    disposition and metabolism of the administered drug, and
    handling of human or other biological samples for drug
    assays; and                                                                                                                                                                          
|
| |  | Good Clinical Practices, which govern the exposure of human
    subjects under our protocols. Good Clinical Practices set
    standards for the constitution and activities of institutional
    review boards that are charged with assuring that the
    appropriate person gives informed consent prior to study
    participation and protecting patients whether they receive an
    experimental drug, an approved drug or a placebo.









Research and Development


AGI-1067, AGI-1096 v-protectant®


17



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Employees




Available Information


www.atherogenics.com. 10-K, 10-Q, 8-K 1-800-SEC-0330.


Scientific Advisory Board




|                                          |  |                                                                                                        
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|R. Wayne Alexander, M.D., Ph.D., Chairman |  | Chairman, Department of Medicine, Emory University School of
    Medicine                              
|Victor J. Dzau, M.D.                      |  | Chancellor, Health Affairs, Duke University Medical Center                                             
|Erwin W. Gelfand, M.D.                    |  | Chairman, Department of Pediatrics, National Jewish Medical and
    Research Center                    
|David G. Harrison, M.D.                   |  | Professor of Medicine, Director, Division of Cardiology, Emory
    University School of Medicine       
|Gary L. Johnson, Ph.D.                    |  | Professor and Chairman, Department of Pharmacology, University
    of North Carolina School of Medicine
|Peter Libby, M.D.                         |  | Chief, Cardiovascular Division Department of Medicine, Brigham
    and Womens Hospital                
|David M. Stern, M.D.                      |  | Dean, College of Medicine, University of Cincinnati                                                    






|         |             
|-------- | ------------
|Item 1A. | Risk Factors

Forward-Looking Statements and Risks Related to Our Company
and Business


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


18



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


Risks Related to Our Financial Results and Need for
Additional Financing




| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We have a history of operating losses, and we may not
    generate revenue or achieve profitability in the future.





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | If we need additional financing and cannot obtain it, we
    may not be able to develop or market our products.





| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the scope and results of our research, preclinical and clinical
    development activities;                                                                                                              
|
| |  | the timing of, and the costs involved in, obtaining regulatory
    approvals;                                                                                                                            
|
| |  | our ability to establish and maintain collaborations, the
    financial terms of any collaborations and our ability to achieve
    pre- determined milestones in connection with such
    collaborations;
|
| |  | the cost of commercialization activities, including product
    marketing, sales and distribution;                                                                                                       
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims and other patent-related
    costs;                                                                    
|
| |  | the costs related to purported class action lawsuits filed
    against us, as described under Item 3. Legal
    Proceedings; and                                                                       
|
| |  | the extent to which we acquire or invest in businesses, products
    and technologies.                                                                                                                   



19



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##### Table of Contents



Risks Related to Development and Commercialization of Product
Candidates and Dependence on Third Parties




| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily on the success of our most advanced
    internal product candidate, AGI-1067 for atherosclerosis, which
    is in clinical development. If we are unable to commercialize
    this product candidate, or experience significant delays in
    doing so, our business will be materially harmed.





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | successful completion of clinical trials;                                                                                                        
|
| |  | receipt of marketing approvals from the FDA and similar foreign
    regulatory authorities;                                                      
|
| |  | successfully preparing for commercial manufacturing arrangements
    with third party manufacturers, including our collaborator,
    AstraZeneca;
|
| |  | commencing commercial sales of the product, in collaboration
    with AstraZeneca; and                                                           
|
| |  | acceptance of the product in the medical community and with
    third party payors.                                                              





| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We are substantially dependent on our collaboration with
    AstraZeneca for the development and commercialization of
    AGI-1067.







20



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| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | If we do not successfully develop our other product
    candidates, we will have limited ability to generate
    revenue.





| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to demonstrate adequately the safety and
    efficacy of a product candidate, we will not be able to
    commercialize that product candidate.











| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be successful in establishing collaborations
    for product candidates we may seek to commercialize, which could
    adversely affect our ability to discover, develop and
    commercialize products.



21



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to our collaboration with AstraZeneca, we
    expect to depend significantly on collaborations with third
    parties to develop and commercialize some of our product
    candidates. If a potential collaborator were to change its
    strategy or the focus of its development and commercialization
    efforts with respect to our relationship, the success of our
    product candidates and our operations could be adversely
    affected.





| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a collaborator may develop and commercialize, either alone or
    with others, products and services that are similar to or
    competitive with the products that are the subject of the
    collaboration with us;                                                                                                           
|
| |  | a collaborator may change the focus of its development and
    commercialization efforts. Pharmaceutical and biotechnology
    companies historically have re-evaluated their priorities from
    time to time, including following mergers and consolidations,
    which have been common in recent years in these industries;
|
| |  | the ability of our product candidates and products to reach
    their potential could be limited if our collaborators decrease
    or fail to increase spending relating to these products;                                                                                                                                    
|
| |  | a collaborator may terminate a collaboration in the event of a
    material breach by us; and                                                                                                                                                                                                                                  
|
| |  | a collaborator may fail to maintain or defend our intellectual
    property rights.                                                                                                                                                                                                                                            





| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third parties failure to synthesize and manufacture
    our product candidates to our specifications could delay our
    clinical trials or hinder our commercialization
    prospects.



22



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A finding that a third party did not comply with applicable
    governmental regulations. Manufacturers of pharmaceutical
    products are subject to continual review and periodic
    inspections by regulatory agencies. Our present or future
    manufacturers may not be able to comply with the FDAs
    current Good Manufacturing Practices regulations and other FDA
    regulatory requirements or similar regulatory requirements
    outside the United States. Failure of one of our third party
    manufacturers to comply with applicable regulatory requirements,
    whether or not related to our product candidates, could result
    in sanctions being imposed on us, including fines, injunctions,
    civil penalties, failure of regulatory authorities to grant
    marketing approval of our product candidates, delays, suspension
    or withdrawal of approvals, license revocation, seizures or
    recalls of product candidates or products, operating
    restrictions and criminal prosecutions, any of which could
    significantly and adversely affect supplies of our product
    candidates and products.
|
| |  | A failure to synthesize and manufacture our product
    candidates in accordance with our product specifications. We
    need to maintain a very low maximal amount of one of the
    starting materials used in the manufacture of AGI-1067. The
    starting material, probucol, was prescribed by physicians as a
    cholesterol-lowering agent until its manufacturer withdrew the
    drug from the market for efficacy reasons. We entered into a
    commercial supply agreement for production of AGI-1067 and
    Probucol with Dow and AstraZeneca is responsible for supplying
    all of the manufacturing, packaging and labeling under our joint
    licensing and collaboration agreement. A failure by AstraZeneca
    or other third party manufacturers to maintain an acceptable
    level of Probucol in the manufacture of AGI-1067 may result in
    chronic dosing of Probucol, which is associated with the
    occurrence of a rare side effect.                                                                                                                                                                          
|
| |  | A failure to deliver product candidates in sufficient
    quantities or in a timely manner. Any failure by our third
    party manufacturers to supply our requirements for clinical
    trial materials or commercial product, or to supply these
    materials in a timely manner, could jeopardize the initiation or
    completion of clinical trials or could have a material adverse
    effect on our ability to commercialize any approved products and
    thereby generate revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Termination or nonrenewal of an agreement by a third party,
    including our collaborator AstraZeneca, based on its own
    business priorities, at a time that is costly or inconvenient to
    us. Our product candidates and any products that we
    successfully develop may compete with product candidates and
    products of others for access to the third partys
    manufacturing facilities. In addition, because we do not have
    any internal manufacturing capabilities, the termination of a
    supply or manufacturing agreement could severely impair our
    ability to manufacture our products and could have a material
    adverse effect on our financial condition and operating results.                                                                                                                                                                                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The commercial success of any products that we may develop
    will depend on the degree of market acceptance by physicians,
    patients, healthcare payors and others in the medical
    community.





| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | the prevalence and severity of any side effects;                               
|
| |  | the efficacy and potential advantages over alternative
    treatments;         
|
| |  | the ability to offer our product candidates for sale at
    competitive prices;

23



---



##### Table of Contents





| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | relative convenience and ease of administration;                                                                         
|
| |  | the willingness of the target patient population to try new
    therapies and of physicians to prescribe these therapies;
|
| |  | the strength of marketing and distribution support; and                                                                  
|
| |  | sufficient third party coverage or reimbursement.                                                                        



| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our competitors develop and market products that are
    more effective, have fewer side effects or are less expensive
    than our current or future product candidates, we may have
    limited commercial opportunities.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have not previously sold, marketed or distributed any
    products and may not be able to successfully commercialize
    AGI-1067, or other drug candidates.





| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain adequate coverage and
    reimbursement from third party payors for any products that we
    may develop or acceptable prices for those products, our
    revenues and prospects for profitability will suffer.



24



---



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| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If plaintiffs bring product liability lawsuits against us,
    we may incur substantial financial loss or 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.





| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | decreased demand for any product candidates or products that we
    may develop;
|
| |  | injury to our reputation;                                                       
|
| |  | withdrawal of clinical trial participants;                                      
|
| |  | costs to defend the related litigation;                                         
|
| |  | substantial monetary awards to trial participants or patients;                  
|
| |  | loss of revenue; and                                                            
|
| |  | the inability to commercialize any products that we may develop.                



Risks Related to Our Intellectual Property




| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to protect adequately or enforce our
    intellectual property rights or secure rights to third party
    patents could materially adversely affect our proprietary
    position in the marketplace or prevent the commercialization of
    our products.



25



---



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| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | If we infringe or are alleged to infringe intellectual
    property rights of third parties, it will adversely affect our
    business.





26



---



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| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with our obligations in our
    intellectual property licenses with third parties, we could lose
    license rights that are important to our business.

®




| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect the confidentiality of our
    proprietary information and know-how, the value of our
    technology and products could be adversely affected.



Risks Related to Regulatory Approval of Our Product
Candidates




| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we cannot predict whether or when we will obtain
    regulatory approval to commercialize our product candidates, we
    cannot predict the timing of any future revenue from these
    product candidates.



27



---



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| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We may experience delays in our clinical trials that could
    adversely affect our financial results and our commercial
    prospects.







| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Failure to obtain regulatory approval in international
    jurisdictions would prevent us from marketing our products
    abroad.





| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not comply with applicable regulatory
    requirements in the manufacture and distribution of our
    products, we may incur penalties that may inhibit our ability to
    commercialize our products and adversely affect our
    revenue.



28



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| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if the FDA approves our product candidates, the
    approval will be limited to those indications and conditions for
    which we are able to show clinical safety and efficacy.



Risks Related to Our Operations




| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to attract, retain and motivate skilled
    personnel and cultivate key academic collaborations could
    materially adversely affect our research and development
    efforts.





| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The outcome of informal inquiries by the SEC and NASD
    regarding our announcement of interim results from the CART-2
    clinical trial for AGI-1067 and related trading in our common
    stock is uncertain.





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our activities involve the use of hazardous materials,
    which subject us to regulation, related costs and delays and
    potential liabilities.



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Risks Related to our Common Stock and Indebtedness




| |                                                              
| | -------------------------------------------------------------
| | Our stock price has been and may continue to be
    volatile.





| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | results of clinical trials of our product candidates,
    particularly AGI-1067,
    and those of our competitors;                                         
|
| |  | whether we maintain our collaboration agreement with AstraZeneca;                                                                                          
|
| |  | developments concerning any research and development,
    manufacturing and marketing collaborations, including whether
    and when we achieve milestones;
|
| |  | announcements of technological innovations or new commercial
    products by our competitors or us;                                                        
|
| |  | developments concerning proprietary rights, including patents;                                                                                             
|
| |  | the addition or termination of research programs or funding
    support;                                                                                   
|
| |  | publicity regarding actual or potential results relating to
    medicinal products under development by our competitors or us;                             
|
| |  | regulatory developments in the United States and other countries;                                                                                          
|
| |  | litigation;                                                                                                                                                
|
| |  | economic and other external factors, including disasters or
    crises; and                                                                                
|
| |  | period-to-period
    fluctuations in financial results.                                                                                                    

In re Atherogenics
Securities Litigation


30



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| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our existing indebtedness and any future indebtedness we
    incur exposes us to risks that could adversely affect our
    business, operating results and financial condition.





| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing our vulnerability to adverse economic and industry
    conditions;                                                                                                                         
|
| |  | limiting our ability to obtain additional financing;                                                                                                                                                  
|
| |  | requiring the dedication of a substantial portion of our cash
    flow from operations to service our indebtedness, thereby
    reducing the amount of our cash flow available for other
    purposes;
|
| |  | limiting our flexibility in planning for, or reacting to,
    changes in our business; and                                                                                                            
|
| |  | placing us at a possible competitive disadvantage with less
    leveraged competitors and competitors that may have better
    access to capital resources.                                           





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conversion of our convertible notes will dilute the
    ownership interest of existing shareholders and could adversely
    affect the market price of our common stock.





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our shareholder rights plan and anti-takeover provisions
    in our charter documents may make an acquisition of us, which
    may benefit our shareholders, more difficult.





| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | allow our shareholders the right to acquire common stock from us
    at discounted prices in the event a person acquires 15% or more
    of our common stock or announces an attempt to do so without our
    board of directors prior consent;

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| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of blank check preferred
    stock by our board of directors without shareholder approval,
    which would increase the number of outstanding shares and could
    thwart a takeover attempt;
|
| |  | limit who may call a special meeting of shareholders;                                                                                                                                                                 
|
| |  | require shareholder action without a meeting by unanimous
    written consent;                                                                                                                                        
|
| |  | establish advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted upon at shareholder meetings;                                         
|
| |  | establish a staggered board of directors whose members can only
    be dismissed for cause;                                                                                                                           
|
| |  | adopt the fair price requirements and rules regarding business
    combinations with interested shareholders set forth in
    Article 11, Parts 2 and 3 of the Georgia Business
    Corporation Code; and             
|
| |  | require approval by the holders of at least 75% of the
    outstanding common stock to amend any of the foregoing
    provisions.                                                                                     






|         |                              
|-------- | -----------------------------
|Item 1B. | Unresolved SEC Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties










|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In re
Atherogenics Securities Litigation







|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



32



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PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities

Common Stock Information




|                             |                |              |   |       |     |  |   |       | 
|---------------------------- | -------------- | ------------ | - | ----- | --- |  | - | ----- | 
|                             |                | Common Stock |  
|                             |                |              |  
|                             |                | High         |   |       | Low | 
|                             |                |              |   |       |     | 
|Year ended December 31, 2005 |                |              |   |       |     |  |   |      
|                             | First quarter  |              | $ | 20.61 |     |  | $ | 13.00 | 
|                             | Second quarter |              |   | 16.87 |     |  |   | 10.66 | 
|                             | Third quarter  |              |   | 18.25 |     |  |   | 15.76 | 
|                             | Fourth quarter |              |   | 21.14 |     |  |   | 14.42 | 
|Year ended December 31, 2004 |                |              |   |       |     |  |   |      
|                             | First quarter  |              | $ | 23.00 |     |  | $ | 14.60 | 
|                             | Second quarter |              |   | 25.91 |     |  |   | 18.41 | 
|                             | Third quarter  |              |   | 38.00 |     |  |   | 13.50 | 
|                             | Fourth quarter |              |   | 36.73 |     |  |   | 23.24 | 



Dividend Policy




33



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |             |            |            |   |             |            |            | 
|------------------------------------------------------------- | -------------------------- | ------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                              |                            | Year Ended December 31,  |            
|                                                              |                            |                          |            
|                                                              |                            | 2005                     |             |            | 2004       |   |             | 2003       |            |   | 2002        |            |            | 2001 |            
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|Statement of Operations Data:                                 |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |             |            |            |   |             |           
|Revenues:                                                     |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |             |            |            |   |             |           
|                                                              | License fees               |                          | $           |           |            |   | $           |           |            |   | $           |           |            |      | $           |           |            |   | $           | 1,111,111  |           
|                                                              | Research and development   |                          |             |           |            |   |             |           |            |   |             |           |            |      |             |           |            |   |             | 2,398,429  |           
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|                                                              |                            | Total revenues           |             |            |           |   |             |            |           |   |             |            |           |      |             |            |           |   |             |            | 3,509,540  | 
|Operating expenses:                                           |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |             |            |            |   |             |           
|                                                              | Research and development   |                          |             | 71,278,945 |            |   |             | 59,235,833 |            |   |             | 46,660,960 |            |      |             | 23,746,127 |            |   |             | 17,824,080 |           
|                                                              | General and administrative |                          |             | 9,050,290  |            |   |             | 6,607,506  |            |   |             | 5,930,675  |            |      |             | 5,139,000  |            |   |             | 5,691,791  |           
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|                                                              |                            | Total operating expenses |             |            | 80,329,235 |   |             |            | 65,843,339 |   |             |            | 52,591,635 |      |             |            | 28,885,127 |   |             |            | 23,515,871 | 
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|Operating loss                                                |                            |                          | (80,329,235 | )          |            |   | (65,843,339 | )          |            |   | (52,591,635 | )          |            |      | (28,885,127 | )          |            |   | (20,006,331 | )         
|Interest and other income                                     |                            |                          | 6,691,965   |            |            |   | 1,447,001   |            |            |   | 1,258,216   |            |            |      | 962,040     |            |            |   | 2,366,748   |           
|Interest expense                                              |                            |                          | (8,917,057  | )          |            |   | (5,192,894  | )          |            |   | (1,954,402  | )          |            |      | (42,420     | )          |            |   |            |           
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|Net loss                                                      |                            | $                        | (82,554,327 | )          |            | $ | (69,589,232 | )          |            | $ | (53,287,821 | )          |            | $    | (27,965,507 | )          |            | $ | (17,639,583 | )         
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|Basic and diluted net loss per share                          |                            | $                        | (2.19       | )          |            | $ | (1.88       | )          |            | $ | (1.49       | )          |            | $    | (1.00       | )          |            | $ | (0.68       | )         
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            
|Shares used in computing basic and diluted net loss per share |                            |                          | 37,774,203  |            |            |   | 37,070,235  |            |            |   | 35,770,994  |            |            |      | 27,978,705  |            |            |   | 26,010,347  |           
|                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            |      |            



|                                                  |  |      |              |   |      |   |              |      |  |   |              |   |  |      |             |   |  |   |             |  
|------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | ---- |  | - | ------------ | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                                  |  | 2005 |              |   | 2004 |   |              | 2003 |  |   | 2002         |   |  | 2001 |            
|                                                  |  |      |              |   |      |   |              |      |  |   |              |   |  |      |            
|Balance Sheet Data:                               |  |      |              |   |      |   |              |      |  |   |              |   |  |      |             |   |  |   |             |  
|Cash, cash equivalents and short-term investments |  | $    | 182,504,523  |   |      | $ | 66,924,015   |      |  | $ | 131,583,928  |   |  | $    | 34,671,131  |   |  | $ | 58,439,995  |  
|Working capital                                   |  |      | 173,164,668  |   |      |   | 59,719,811   |      |  |   | 124,848,687  |   |  |      | 30,009,013  |   |  |   | 55,056,263  |  
|Total assets                                      |  |      | 197,497,527  |   |      |   | 74,462,327   |      |  |   | 138,836,746  |   |  |      | 37,952,044  |   |  |   | 62,255,278  |  
|Long-term obligations                             |  |      | 300,053,796  |   |      |   | 100,000,000  |      |  |   | 100,083,622  |   |  |      | 572,492     |   |  |   |            |  
|Accumulated deficit                               |  |      | (294,674,874 | ) |      |   | (212,120,547 | )    |  |   | (142,531,315 | ) |  |      | (89,243,494 | ) |  |   | (61,277,987 | )
|Total shareholders (deficit) equity              |  |      | (115,436,216 | ) |      |   | (35,942,382  | )    |  |   | 30,377,006   |   |  |      | 32,493,713  |   |  |   | 58,294,812  |  

34



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion should be read in conjunction with
our financial statements and related notes included in this
annual report. In this report, AtheroGenics,
we, us and our refer to
AtheroGenics, Inc.


This annual report contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are subject to
certain factors, risks and uncertainties that may cause actual
results, events and performances to differ materially from those
referred to in such statements. These risks include statements
which address operating performance, events or developments that
we expect or anticipate will occur in the future, such as
projections about our future results of operations or financial
condition, research, development and commercialization of our
product candidates, anticipated trends in our business, and
other risks that could cause actual results to differ
materially. You should carefully consider these risks, which are
discussed in this annual report, including, without limitation,
in the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in
AtheroGenics SEC filings.


Overview


v-protectant® v-protectant®


AGI-1067, v-protectant® AGI-1067 AGI-1067 AGI-1067.


AGI-1096, AGI-1096


AGIX-4207, v-protectant® AGIX-4207 v-protectants®


v-protectant® v-protectants®


35



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|                                     |           |                                |            |            |            |  |            |            |            |  |            |            |            | 
|------------------------------------ | --------- | ------------------------------ | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | 
|                                     |           | Year Ended December 31,        |           
|                                     |           |                                |           
|                                     |           | 2005                           |            |            | 2004       |  |            | 2003       |           
|                                     |           |                                |            |            |            |  |            |            |           
|Direct external costs:               |           |                                |            |            |            |  |            |            |            |  |            |           
|                                     | AGI-1067  |                                | $          | 51,117,191 |            |  | $          | 36,181,651 |            |  | $          | 22,395,195 |           
|                                     | AGIX-4207 |                                |            | 124,224    |            |  |            | 3,236,505  |            |  |            | 3,737,038  |           
|Unallocated costs and other programs |           |                                | 20,037,530 |            |            |  | 19,817,677 |            |            |  | 20,528,727 |           
|                                     |           |                                |            |            |            |  |            |            |           
|                                     |           | Total research and development |            | $          | 71,278,945 |  |            | $          | 59,235,833 |  |            | $          | 46,660,960 | 
|                                     |           |                                |            |            |            |  |            |            |           

AGI-1067 AGI-1067 AGI-1067 non-U.S. AGI-1096 AGIX-4207.


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




36



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| |                                 
| | --------------------------------
| | Research and Development Accrual





| |                    
| | -------------------
| | Revenue Recognition

Revenue Recognition in Financial Statements, Revenue
Recognition,






| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation Accounting for Equity Instruments that Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Accounting for
Stock-Based Compensation  Transition and Disclosure


Share-Based Payment


37



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Results of Operations


Comparison of Years Ended December 31, 2005 and 2004




| |         
| | --------
| | Revenues





| |         
| | --------
| | Expenses

Research and Development.


AGI-1067


General and Administrative. AGI-1067




| |                          
| | -------------------------
| | Interest and Other Income





| |                 
| | ----------------
| | Interest Expense





| |             
| | ------------
| | Income Taxes



38



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Comparison of Years Ended December 31, 2004 and 2003




| |         
| | --------
| | Revenues





| |         
| | --------
| | Expenses

Research and Development. AGI-1067


General and Administrative.




| |                          
| | -------------------------
| | Interest and Other Income





| |                 
| | ----------------
| | Interest Expense





| |             
| | ------------
| | Income Taxes



Liquidity and Capital Resources




39



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AGI-1067,












AGI-1067


40



---



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|                        |                  |                               |   |             |             |  |   |           |           |  |           |             |             |            |   |         |         |  |   |             |             | 
|----------------------- | ---------------- | ----------------------------- | - | ----------- | ----------- |  | - | --------- | --------- |  | --------- | ----------- | ----------- | ---------- | - | ------- | ------- |  | - | ----------- | ----------- | 
|                        |                  | Payments Due by Period        |  
|                        |                  |                               |  
|                        |                  | Total                         |   |             | 2006        |  |   | 2007-2008 |           |  | 2009-2010 |             |             | Thereafter |  
|                        |                  |                               |   |             |             |  |   |           |           |  |           |             |             |            |  
|Contractual obligations |                  |                               |   |             |             |  |   |           |           |  |           |             |             |            |   |         |         |  |   |            
|                        | Operating leases |                               | $ | 4,135,496   |             |  | $ | 1,369,315 |           |  | $         | 2,562,505   |             |            | $ | 203,676 |         |  | $ |            |            
|                        | Long-term debt   |                               |   | 300,087,580 |             |  |   | 33,784    |           |  |           | 100,053,796 |             |            |   |        |         |  |   | 200,000,000 |            
|                        |                  |                               |   |             |             |  |   |           |           |  |           |             |             |            |  
|                        |                  | Total contractual obligations |   | $           | 304,223,076 |  |   | $         | 1,403,099 |  |           | $           | 102,616,301 |            |   | $       | 203,676 |  |   | $           | 200,000,000 | 
|                        |                  |                               |   |             |             |  |   |           |           |  |           |             |             |            |  

Risk
Factors




| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | the scope and results of our research, preclinical and clinical
    development activities;                                          
|
| |  | the timing of, and the costs involved in, obtaining regulatory
    approvals;                                                        
|
| |  | the timing, receipt and amount of sales and royalties, if any,
    from our potential product candidates;                            
|
| |  | the timing, receipt and amount of milestone and other payments,
    if any;                                                          
|
| |  | our ability to maintain our collaborations with AstraZeneca and
    Astellas and the financial terms of our collaborations;          
|
| |  | the costs involved in preparing, filing, prosecuting,
    maintaining and enforcing patent claims and other patent-related
    costs;
|
| |  | the costs related to purported class action lawsuits filed
    against us; and                                                       
|
| |  | the extent to which we acquire or invest in businesses, products
    and technologies.                                               








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk



41



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|                            |                                |      |   |        |           |  |   |             |   |              |       |             |   |      |   |             |  |  |   |             | 
|--------------------------- | ------------------------------ | ---- | - | ------ | --------- |  | - | ----------- | - | ------------ | ----- | ----------- | - | ---- | - | ----------- |  |  | - | ----------- | 
|                            |                                |      |   |        |           |  |   |             |   | Value as of  |      
|                            |                                |      |   |        |           |  |   |             |   | December 31, |      
|                            |                                | 2006 |   |        | 2007-2009 |  |   | 2010-2012   |   |              | Total |             |   | 2005 |  
|                            |                                |      |   |        |           |  |   |             |   |              |       |             |   |      |  
|Long-term debt  fixed rate |                                |      |   |        |           |  |   |             |   |              |       |             |   |      |   |             |  |  |   |            
|                            | Maturity                       |      | $ | 33,784 |           |  | $ | 100,053,796 |   |              | $     | 200,000,000 |   |      | $ | 300,087,580 |  |  | $ | 343,587,580 | 
|                            | Weighted average interest rate |      |   | 4.8    | %         |  |   | 4.5         | % |              |       | 1.5         | % |      |   |             |  |  |   |             | 

42



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

ATHEROGENICS, INC.


INDEX TO FINANCIAL STATEMENTS


|                                                                                    |  |  |    | 
|----------------------------------------------------------------------------------- |  |  | -- | 
|Contents                                                                            |  |  |    | 
|Managements Annual Report on Internal
    Control Over Financial Reporting         |  |  | 44 | 
|Report of Independent Registered Public
    Accounting Firm on Internal Control     |  |  | 45 | 
|Report of Independent Registered Public
    Accounting Firm on Financial Statements |  |  | 46 | 
|Balance Sheets                                                                      |  |  | 47 | 
|Statements of Operations                                                            |  |  | 48 | 
|Statements of Shareholders (Deficit)
    Equity                                    |  |  | 49 | 
|Statements of Cash Flows                                                            |  |  | 50 | 
|Notes to Financial Statements                                                       |  |  | 51 | 

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MANAGEMENTS ANNUAL REPORT ON


INTERNAL CONTROL OVER FINANCIAL REPORTING


13a-15(f) 15d-15(f)




| |   |                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of AtheroGenics;                                                                                                                                                                                              
|
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with U.S. generally accepted accounting
    principles, and that receipts and expenditures of AtheroGenics
    are being made only in accordance with authorizations of
    management and directors of AtheroGenics; and
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of
    AtheroGenics assets that could have a material effect on
    the financial statements.                                                                                                                                              









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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL


















| |                          
| | -------------------------
| | /s/ Ernst &
    Young LLP





45



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON FINANCIAL STATEMENTS














| |                          
| | -------------------------
| | /s/ Ernst &
    Young LLP





46



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ATHEROGENICS, INC.





BALANCE SHEETS


|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |             |             |              |             |             | 
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------ | ------------ | ----------- | ----------- | ------------ | ----------- | ----------- | 
|                                                                                           |                                                                  | December 31,                                                  |                                                                                 
|                                                                                           |                                                                  |                                                               |                                                                                 
|                                                                                           |                                                                  | 2005                                                          |                                                                                  |              | 2004         |            
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|ASSETS                                                                                    
|Current assets:                                                                            |                                                                  |                                                               |                                                                                  |              |              |             |             |             
|                                                                                           | Cash and cash equivalents                                        |                                                               | $                                                                                | 82,831,679   |              |             | $           | 15,888,919   |            
|                                                                                           | Short-term investments                                           |                                                               |                                                                                  | 99,672,844   |              |             |             | 51,035,096   |            
|                                                                                           | Prepaid expenses                                                 |                                                               |                                                                                  | 2,639,900    |              |             |             | 2,634,297    |            
|                                                                                           | Interest receivable and other current assets                     |                                                               |                                                                                  | 900,192      |              |             |             | 566,208      |            
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                           |                                                                  | Total current assets                                          |                                                                                  |              | 186,044,615  |             |             |              | 70,124,520  |            
|Equipment and leasehold improvements, net of accumulated
    depreciation and amortization |                                                                  |                                                               | 4,108,462                                                                        |              |              |             | 1,940,011   |             
|Debt issuance costs and other assets                                                       |                                                                  |                                                               | 7,344,450                                                                        |              |              |             | 2,397,796   |             
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                           |                                                                  | Total assets                                                  |                                                                                  | $            | 197,497,527  |             |             | $            | 74,462,327  |            
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                          
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                     
|Current liabilities:                                                                       |                                                                  |                                                               |                                                                                  |              |              |             |             |             
|                                                                                           | Accounts payable                                                 |                                                               | $                                                                                | 2,188,461    |              |             | $           | 2,838,053    |            
|                                                                                           | Accrued research and development                                 |                                                               |                                                                                  | 3,946,970    |              |             |             | 4,083,894    |            
|                                                                                           | Accrued interest                                                 |                                                               |                                                                                  | 2,750,000    |              |             |             | 1,500,000    |            
|                                                                                           | Accrued compensation                                             |                                                               |                                                                                  | 2,649,640    |              |             |             | 1,239,247    |            
|                                                                                           | Accrued and other liabilities                                    |                                                               |                                                                                  | 1,344,876    |              |             |             | 743,515      |            
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                           |                                                                  | Total current liabilities                                     |                                                                                  |              | 12,879,947   |             |             |              | 10,404,709  |            
|Convertible notes payable and equipment loan, net of current
    portion                   |                                                                  |                                                               | 300,053,796                                                                      |              |              |             | 100,000,000 |             
|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  |                                                                                  |              |              |             |             |              |             |            
|                                                                                           |                                                                  |                                                               | 38,143,678 and 37,368,658 shares at December 31, 2005
    and 2004, respectively |              |              | 178,830,421 |             |              |             | 175,713,265 | 
|                                                                                           | Warrants                                                         |                                                               |                                                                                  | 620,223      |              |             |             | 828,804      |            
|                                                                                           | Deferred stock compensation                                      |                                                               |                                                                                  | (59,045      | )            |             |             | (324,607     | )          
|                                                                                           | Accumulated deficit                                              |                                                               |                                                                                  | (294,674,874 | )            |             |             | (212,120,547 | )          
|                                                                                           | Accumulated other comprehensive loss                             |                                                               |                                                                                  | (152,941     | )            |             |             | (39,297      | )          
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                           |                                                                  | Total shareholders deficit                                   |                                                                                  |              | (115,436,216 | )           |             |              | (35,942,382 | )          
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            
|                                                                                           |                                                                  | Total liabilities and shareholders deficit                   |                                                                                  | $            | 197,497,527  |             |             | $            | 74,462,327  |            
|                                                                                           |                                                                  |                                                               |                                                                                  |              |              |            



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ATHEROGENICS, INC.





STATEMENTS OF OPERATIONS


|                                                        |                            |                          |             |            |            |   |             |            |            |   |             |            |            | 
|------------------------------------------------------- | -------------------------- | ------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                        |                            | Year Ended December 31,  |            
|                                                        |                            |                          |            
|                                                        |                            | 2005                     |             |            | 2004       |   |             | 2003       |           
|                                                        |                            |                          |             |            |            |   |             |            |           
|Revenues                                                |                            | $                        |            |            |            | $ |            |            |            | $ |            |           
|Operating expenses:                                     |                            |                          |             |            |            |   |             |            |            |   |             |           
|                                                        | Research and development   |                          |             | 71,278,945 |            |   |             | 59,235,833 |            |   |             | 46,660,960 |           
|                                                        | General and administrative |                          |             | 9,050,290  |            |   |             | 6,607,506  |            |   |             | 5,930,675  |           
|                                                        |                            |                          |             |            |            |   |             |            |           
|                                                        |                            | Total operating expenses |             |            | 80,329,235 |   |             |            | 65,843,339 |   |             |            | 52,591,635 | 
|                                                        |                            |                          |             |            |            |   |             |            |           
|Operating loss                                          |                            |                          | (80,329,235 | )          |            |   | (65,843,339 | )          |            |   | (52,591,635 | )         
|Interest and other income                               |                            |                          | 6,691,965   |            |            |   | 1,447,001   |            |            |   | 1,258,216   |           
|Interest expense                                        |                            |                          | (8,917,057  | )          |            |   | (5,192,894  | )          |            |   | (1,954,402  | )         
|                                                        |                            |                          |             |            |            |   |             |            |           
|Net loss                                                |                            | $                        | (82,554,327 | )          |            | $ | (69,589,232 | )          |            | $ | (53,287,821 | )         
|                                                        |                            |                          |             |            |            |   |             |            |           
|Net loss per share  basic and diluted                  |                            | $                        | (2.19       | )          |            | $ | (1.88       | )          |            | $ | (1.49       | )         
|                                                        |                            |                          |             |            |            |   |             |            |           
|Weighted average shares outstanding  basic and diluted |                            |                          | 37,774,203  |            |            |   | 37,070,235  |            |            |   | 35,770,994  |           
|                                                        |                            |                          |             |            |            |   |             |            |           



48



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ATHEROGENICS, INC.





STATEMENTS OF SHAREHOLDERS (DEFICIT) EQUITY


|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  |  |   |          |   |  |   |              |  
|----------------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ------ | - | ----------- | -------- |  | ----------- | ------------ | ------------- | ------ | ------- | ---------- | ------------- | ------ | - | ------------ | ---------------- |  | - | -------- | - |  | - | ------------ | -
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              | Accumulated   |        |         |           
|                                                                                                |  |              |            |  |        |   |             |          |  | Other       |              |               |       
|                                                                                                |  | Common Stock |            |  |        |   | Deferred    |          |  |             |              | Comprehensive |        |         | Total      |              
|                                                                                                |  |              |            |  |        |   | Stock       |          |  | Accumulated |              |               | (Loss) |         |            | Shareholders |       
|                                                                                                |  | Shares       |            |  | Amount |   |             | Warrants |  |             | Compensation |               |        | Deficit |            |               | Income |   |              | (Deficit) Equity | 
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Balance at January 1, 2003                                                                      |  |              | 28,133,560 |  |        | $ | 122,182,607 |          |  | $           | 798,076      |               |        | $       | (1,243,786 | )             |        | $ | (89,243,494  | )                |  | $ | 310      |   |  | $ | 32,493,713   |  
|Issuance of common stock for exercise of stock options at $.30
    to $8.25 per share           |  |              | 340,395    |  |        |   | 1,382,972   |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   |         |   |  |   | 1,382,972    |  
|Issuance of common stock for exercise of warrants                                               |  |              | 9,452      |  |        |   | 150,400     |          |  |             | (150,400     | )             |        |         |           |               |        |   |             |                  |  |   |         |   |  |   |             |  
|Issuance of common stock, net of issuance cost of $3,264,905                                    |  |              | 8,280,000  |  |        |   | 48,411,649  |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   |         |   |  |   | 48,411,649   |  
|Adjustments to market value for variable stock options and
    warrants issued to non-employees |  |              |           |  |        |   | 324,908     |          |  |             | 302,912      |               |        |         | (627,820   | )             |        |   |             |                  |  |   |         |   |  |   |             |  
|Amortization of deferred stock compensation                                                     |  |              |           |  |        |   |            |          |  |             |             |               |        |         | 1,365,898  |               |        |   |             |                  |  |   |         |   |  |   | 1,365,898    |  
|Net loss                                                                                        |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   | (53,287,821  | )                |  |   |         |   |  |   | (53,287,821  | )
|Unrealized gain on available-for-sale securities                                                |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   | 10,595   |   |  |   | 10,595       |  
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Comprehensive loss                                                                              |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  |  |   |          |   |  |   | (53,277,226  | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Balance at December 31, 2003                                                                    |  |              | 36,763,407 |  |        |   | 172,452,536 |          |  |             | 950,588      |               |        |         | (505,708   | )             |        |   | (142,531,315 | )                |  |   | 10,905   |   |  |   | 30,377,006   |  
|Issuance of common stock for exercise of stock options at $.30
    to $16.52 per share          |  |              | 495,265    |  |        |   | 2,783,894   |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   |         |   |  |   | 2,783,894    |  
|Issuance of common stock for exercise of warrants                                               |  |              | 109,986    |  |        |   | 289,540     |          |  |             | (289,540     | )             |        |         |           |               |        |   |             |                  |  |   |         |   |  |   |             |  
|Adjustments to market value for variable stock options and
    warrants issued to non-employees |  |              |           |  |        |   | 145,663     |          |  |             | 167,756      |               |        |         | (313,419   | )             |        |   |             |                  |  |   |         |   |  |   |             |  
|Amortization of deferred stock compensation                                                     |  |              |           |  |        |   | 41,632      |          |  |             |             |               |        |         | 494,520    |               |        |   |             |                  |  |   |         |   |  |   | 536,152      |  
|Net loss                                                                                        |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   | (69,589,232  | )                |  |   |         |   |  |   | (69,589,232  | )
|Unrealized loss on available-for-sale securities                                                |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   | (50,202  | ) |  |   | (50,202      | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Comprehensive loss                                                                              |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  |  |   |          |   |  |   | (69,639,434  | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Balance at December 31, 2004                                                                    |  |              | 37,368,658 |  |        |   | 175,713,265 |          |  |             | 828,804      |               |        |         | (324,607   | )             |        |   | (212,120,547 | )                |  |   | (39,297  | ) |  |   | (35,942,382  | )
|Issuance of common stock for exercise of stock options at $.10
    to $14.86 per share          |  |              | 727,178    |  |        |   | 2,989,844   |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   |         |   |  |   | 2,989,844    |  
|Issuance of common stock for exercise of warrants                                               |  |              | 47,842     |  |        |   | 154,768     |          |  |             | (154,768     | )             |        |         |           |               |        |   |             |                  |  |   |         |   |  |   |             |  
|Adjustments to market value for variable stock options and
    warrants issued to non-employees |  |              |           |  |        |   | (27,456     | )        |  |             | (53,813      | )             |        |         | 81,269     |               |        |   |             |                  |  |   |         |   |  |   |             |  
|Amortization of deferred stock compensation                                                     |  |              |           |  |        |   |            |          |  |             |             |               |        |         | 184,293    |               |        |   |             |                  |  |   |         |   |  |   | 184,293      |  
|Net loss                                                                                        |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   | (82,554,327  | )                |  |   |         |   |  |   | (82,554,327  | )
|Unrealized loss on available-for-sale securities                                                |  |              |           |  |        |   |            |          |  |             |             |               |        |         |           |               |        |   |             |                  |  |   | (113,644 | ) |  |   | (113,644     | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Comprehensive loss                                                                              |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  |  |   |          |   |  |   | (82,667,971  | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 
|Balance at December 31, 2005                                                                    |  |              | 38,143,678 |  |        | $ | 178,830,421 |          |  | $           | 620,223      |               |        | $       | (59,045    | )             |        | $ | (294,674,874 | )                |  | $ | (152,941 | ) |  | $ | (115,436,216 | )
|                                                                                                |  |              |            |  |        |   |             |          |  |             |              |               |        |         |            |               |        |   |              |                  | 



49



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ATHEROGENICS, INC.





STATEMENTS OF CASH FLOWS


|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |           |           |             |  
|-------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------ | --------------------------------------------------- | --------- | --------- | ----------- | ----------- | ------- | ---------- | ----------- | ------------ | --------- | --------- | ----------- | -
|                                                                                                                                       |                                              | Year Ended December 31,              |                                                    
|                                                                                                                                       |                                              |                                      |                                                    
|                                                                                                                                       |                                              | 2005                                 |                                                     |           | 2004      |             |             | 2003    |           
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|Operating activities                                                                                                                   |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |          
|Net loss                                                                                                                               |                                              | $                                    | (82,554,327                                         | )         |           | $           | (69,589,232 | )       |            | $           | (53,287,821  | )        
|Adjustments to reconcile net loss to net cash used in operating
    activities:                                                        |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |          
|                                                                                                                                       | Depreciation and amortization                |                                      |                                                     | 808,599   |           |             |             | 883,312 |            |             |              | 839,503   |          
|                                                                                                                                       | Amortization of debt issuance costs          |                                      |                                                     | 1,504,172 |           |             |             | 652,981 |            |             |              | 217,660   |          
|                                                                                                                                       | Amortization of deferred stock compensation  |                                      |                                                     | 184,293   |           |             |             | 536,152 |            |             |              | 1,365,898 |          
|                                                                                                                                       | Changes in operating assets and liabilities: |                                      |                                                     |           |           |             |             |         |            |             |              |           |          
|                                                                                                                                       |                                              | Prepaid expenses                     |                                                     |           | (5,603    | )           |             |         | (1,490,291 | )           |              |           | (977,011  | )          
|                                                                                                                                       |                                              | Interest receivable and other assets |                                                     |           | (351,787  | )           |             |         | (28,963    | )           |              |           | (252,126  | )          
|                                                                                                                                       |                                              | Accounts payable                     |                                                     |           | (649,592  | )           |             |         | 1,059,866  |             |              |           | (181,108  | )          
|                                                                                                                                       |                                              | Accrued research and development     |                                                     |           | (136,924  | )           |             |         | 1,122,809  |             |              |           | 2,015,579 |            
|                                                                                                                                       |                                              | Accrued interest                     |                                                     |           | 1,250,000 |             |             |         | (162,500   | )           |              |           | 1,662,500 |            
|                                                                                                                                       |                                              | Accrued compensation                 |                                                     |           | 1,410,393 |             |             |         | 200,340    |             |              |           | 81,851    |            
|                                                                                                                                       |                                              | Accrued and other liabilities        |                                                     |           | 755,076   |             |             |         | 203,893    |             |              |           | (133,345  | )          
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|                                                                                                                                       |                                              |                                      | Net cash used in operating activities               |           |           | (77,785,700 | )           |         |            | (66,611,633 | )            |           |           | (48,648,420 | )
|Investing activities                                                                                                                   |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |          
|Purchases of short-term investments                                                                                                    |                                              |                                      | (200,633,447                                        | )         |           |             | (76,544,056 | )       |            |             | (128,913,764 | )        
|Sales and maturities of short-term investments                                                                                         |                                              |                                      | 151,882,055                                         |           |           |             | 103,984,437 |         |            |             | 61,337,482   |          
|Purchases of equipment and leasehold improvements                                                                                      |                                              |                                      | (2,977,050                                          | )         |           |             | (302,533    | )       |            |             | (535,026     | )        
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|                                                                                                                                       |                                              |                                      | Net cash (used in) provided by investing activities |           |           | (51,728,442 | )           |         |            | 27,137,848  |              |           |           | (68,111,308 | )
|Financing activities                                                                                                                   |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |          
|Proceeds from the convertible notes                                                                                                    |                                              |                                      | 193,566,977                                         |           |           |             |            |         |            |             | 96,735,095   |          
|Proceeds from the exercise of common stock options                                                                                     |                                              |                                      | 2,989,844                                           |           |           |             | 2,783,894   |         |            |             | 1,382,972    |          
|Payments on equipment loan                                                                                                             |                                              |                                      | (99,919                                             | )         |           |             | (479,439    | )       |            |             | (444,068     | )        
|Proceeds from the issuance of common stock                                                                                             |                                              |                                      |                                                    |           |           |             |            |         |            |             | 48,411,649   |          
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|                                                                                                                                       |                                              |                                      | Net cash provided by financing activities           |           |           | 196,456,902 |             |         |            | 2,304,455   |              |           |           | 146,085,648 |  
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|Increase (decrease) in cash and cash equivalents                                                                                       |                                              |                                      | 66,942,760                                          |           |           |             | (37,169,330 | )       |            |             | 29,325,920   |          
|Cash and cash equivalents at beginning of year                                                                                         |                                              |                                      | 15,888,919                                          |           |           |             | 53,058,249  |         |            |             | 23,732,329   |          
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|Cash and cash equivalents at end of year                                                                                               |                                              | $                                    | 82,831,679                                          |           |           | $           | 15,888,919  |         |            | $           | 53,058,249   |          
|                                                                                                                                       |                                              |                                      |                                                     |           |           |             |             |         |           
|Supplemental disclosures of cash flow information                                                                                      |                                              |                                      |                                                     |           |           |             |             |         |            |             |              |          
|Interest paid                                                                                                                          |                                              | $                                    | 6,162,886                                           |           |           | $           | 4,676,472   |         |            | $           | 61,844       |          
|Re-measurement adjustment for variable options and warrants
    issued for technology license agreements and consulting
    agreements |                                              | $                                    | (81,269                                             | )         |           | $           | 313,419     |         |            | $           | 627,820      |          



50



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##### Table of Contents






NOTES TO FINANCIAL STATEMENTS




|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Description of Business and Significant Accounting
    Policies



| |                        
| | -----------------------
| | Description of Business





| |                 
| | ----------------
| | Use of Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                       
| | ----------------------
| | Short-Term Investments







| |                                                                         
| | ------------------------------------------------------------------------
| | Fair Value of Financial Instruments and Concentration of
    Credit Risk





| |                                     
| | ------------------------------------
| | Equipment and Leasehold Improvements





| |                                 
| | --------------------------------
| | Research and Development Accrual



51



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NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                                          
| | -----------------------------------------
| | Research and Development and Patent Costs





| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for Stock Issued to
Employees Accounting for Stock-Based
Compensation 96-18, Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Accounting for
Stock-Based Compensation  Transition and
Disclosure




|                                                                                                                    |                                |      |             |       |      |   |             |       |   |   |             |       |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---- | ----------- | ----- | ---- | - | ----------- | ----- | - | - | ----------- | ----- | -
|                                                                                                                    |                                | 2005 |             |       | 2004 |   |             | 2003  |  
|                                                                                                                    |                                |      |             |       |      |   |             |       |  
|Net loss, as reported                                                                                               |                                | $    | (82,554,327 | )     |      | $ | (69,589,232 | )     |   | $ | (53,287,821 | )    
|Add: Stock-based employee compensation expense included in
    reported net loss                                    |                                |      |            |       |      |   | 57,511      |       |   |   | 553,309     |      
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards |                                |      | (8,764,619  | )     |      |   | (6,125,770  | )     |   |   | (3,375,253  | )    
|                                                                                                                    |                                |      |             |       |      |   |             |       |  
|Pro forma net loss                                                                                                  |                                | $    | (91,318,946 | )     |      | $ | (75,657,491 | )     |   | $ | (56,109,765 | )    
|                                                                                                                    |                                |      |             |       |      |   |             |       |  
|Net loss per share:                                                                                                 |                                |      |             |       |      |   |             |       |   |   |             |      
|                                                                                                                    | Basic and diluted, as reported |      | $           | (2.19 | )    |   | $           | (1.88 | ) |   | $           | (1.49 | )
|                                                                                                                    |                                |      |             |       |      |   |             |       |  
|                                                                                                                    | Basic and diluted, pro forma   |      | $           | (2.42 | )    |   | $           | (2.04 | ) |   | $           | (1.57 | )
|                                                                                                                    |                                |      |             |       |      |   |             |       |  



|                        |  |      |         |  |      |   |         |      |  |   |         | 
|----------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                        |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                        |  |      |         |  |      |   |         |      | 
|Expected life           |  |      | 5 years |  |      |   | 5 years |      |  |   | 5 years | 
|Risk free interest rate |  |      | 4.21%   |  |      |   | 4.25%   |      |  |   | 3.91%   | 
|Volatility              |  |      | 77.75%  |  |      |   | 78.67%  |      |  |   | 81.10%  | 
|Fair value of grants    |  | $    | 8.80    |  |      | $ | 15.27   |      |  | $ | 9.64    | 

52



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NOTES TO FINANCIAL STATEMENTS  (Continued)




| |             
| | ------------
| | Income Taxes





| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Reporting Comprehensive Income




| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

Share-Based Payment




|   |                       
|-- | ----------------------
|2. | Short-Term Investments



53



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NOTES TO FINANCIAL STATEMENTS  (Continued)




|                        |  |              |            |  |      |   |            | 
|----------------------- |  | ------------ | ---------- |  | ---- | - | ---------- | 
|                        |  | December 31, |           
|                        |  |              |           
|                        |  | 2005         |            |  | 2004 |  
|                        |  |              |            |  |      |  
|Corporate notes         |  | $            | 46,246,424 |  |      | $ | 10,751,955 | 
|Government agency notes |  |              | 37,216,713 |  |      |   | 19,803,045 | 
|Commercial paper        |  |              | 14,708,628 |  |      |   | 9,939,363  | 
|Auction rate securities |  |              |           |  |      |   | 10,500,000 | 
|Certificate of deposit  |  |              | 1,501,079  |  |      |   | 40,733     | 
|                        |  |              |            |  |      |  
|Total                   |  | $            | 99,672,844 |  |      | $ | 51,035,096 | 
|                        |  |              |            |  |      |  





|   |                                     
|-- | ------------------------------------
|3. | Equipment and Leasehold Improvements



|                                          |  |              |            |   |      |   |            |  
|----------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                          |  | December 31, |           
|                                          |  |              |           
|                                          |  | 2005         |            |   | 2004 |  
|                                          |  |              |            |   |      |  
|Laboratory equipment                      |  | $            | 2,564,319  |   |      | $ | 2,538,760  |  
|Leasehold improvements                    |  |              | 1,959,129  |   |      |   | 1,563,084  |  
|Construction-in-progress                  |  |              | 1,877,596  |   |      |   |           |  
|Computer and office equipment             |  |              | 1,757,905  |   |      |   | 1,479,392  |  
|                                          |  |              |            |   |      |  
|                                          |  |              | 8,158,949  |   |      |   | 5,581,236  |  
|Accumulated depreciation and amortization |  |              | (4,050,487 | ) |      |   | (3,641,225 | )
|                                          |  |              |            |   |      |  
|Net equipment and leasehold improvements  |  | $            | 4,108,462  |   |      | $ | 1,940,011  |  
|                                          |  |              |            |   |      |  

AGI-1067, construction-in




|   |                                              
|-- | ---------------------------------------------
|4. | Convertible Notes Payable and Equipment Loans







54



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NOTES TO FINANCIAL STATEMENTS  (Continued)














|     |  |   |             | 
|---- |  | - | ----------- | 
|2007 |  | $ | 35,435      | 
|2008 |  |   | 100,018,361 | 
|2012 |  |   | 200,000,000 | 
|     |  |   |            
|     |  | $ | 300,053,796 | 
|     |  |   |            



|   |                   
|-- | ------------------
|5. | Net Loss Per Share

Earnings per Share,




55



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                             |  |                         |            |  |      |   |            |      |  |   |            | 
|---------------------------------------------------------------------------- |  | ----------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                                                             |  | Year Ended December 31, |           
|                                                                             |  |                         |           
|                                                                             |  | 2005                    |            |  | 2004 |   |            | 2003 | 
|                                                                             |  |                         |            |  |      |   |            |      | 
|Shares underlying convertible notes                                          |  |                         | 14,234,953 |  |      |   | 6,518,904  |      |  |   | 6,518,904  | 
|Options                                                                      |  |                         | 4,375,632  |  |      |   | 4,955,801  |      |  |   | 4,403,179  | 
|Warrants                                                                     |  |                         | 82,436     |  |      |   | 142,310    |      |  |   | 267,622    | 
|                                                                             |  |                         |            |  |      |   |            |      | 
|Total                                                                        |  |                         | 18,693,021 |  |      |   | 11,617,015 |      |  |   | 11,189,705 | 
|                                                                             |  |                         |            |  |      |   |            |      | 
|Weighted average conversion price of shares underlying
    convertible notes |  | $                       | 22.39      |  |      | $ | 15.34      |      |  | $ | 15.34      | 
|                                                                             |  |                         |            |  |      |   |            |      | 
|Weighted average exercise price of options                                   |  | $                       | 11.17      |  |      | $ | 10.20      |      |  | $ | 6.27       | 
|                                                                             |  |                         |            |  |      |   |            |      | 
|Weighted average exercise price of warrants                                  |  | $                       | 5.64       |  |      | $ | 4.78       |      |  | $ | 4.32       | 
|                                                                             |  |                         |            |  |      |   |            |      | 





|   |             
|-- | ------------
|6. | Common Stock









|   |                           
|-- | --------------------------
|7. | Stock Options and Warrants



56



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NOTES TO FINANCIAL STATEMENTS  (Continued)












57



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NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                 |  |           |           |   |             |          |               |       |  |   |       | 
|-------------------------------- |  | --------- | --------- | - | ----------- | -------- | ------------- | ----- |  | - | ----- | 
|                                 |  |           |           |   |             | Weighted |              
|                                 |  | Number of |           |   |             |          | Average       |      
|                                 |  | Shares    |           |   | Price Range |          |               | Price | 
|                                 |  |           |           |   |             |          |               |       | 
|Outstanding at January 1, 2003   |  |           | 3,895,420 |   |             | $        | .10  $9.88   |       |  | $ | 4.06  | 
|Granted                          |  |           | 986,983   |   |             |          | 7.55  16.65  |       |  |   | 14.40 | 
|Exercised                        |  |           | (340,395  | ) |             |          | .30  8.25    |       |  |   | 4.06  | 
|Canceled                         |  |           | (138,829  | ) |             |          | .31  14.51   |       |  |   | 7.68  | 
|                                 |  |           |           |   |             |          |               |       | 
|Outstanding at December 31, 2003 |  |           | 4,403,179 |   |             |          | .10  16.65   |       |  |   | 6.27  | 
|Granted                          |  |           | 1,166,125 |   |             |          | 14.38  32.95 |       |  |   | 23.16 | 
|Exercised                        |  |           | (496,908  | ) |             |          | .30  16.52   |       |  |   | 5.72  | 
|Canceled                         |  |           | (116,595  | ) |             |          | 4.53  14.93  |       |  |   | 10.23 | 
|                                 |  |           |           |   |             |          |               |       | 
|Outstanding at December 31, 2004 |  |           | 4,955,801 |   |             |          | .10  32.95   |       |  |   | 10.20 | 
|Granted                          |  |           | 317,900   |   |             |          | 10.74  18.55 |       |  |   | 13.46 | 
|Exercised                        |  |           | (727,178  | ) |             |          | .10  14.86   |       |  |   | 4.11  | 
|Canceled                         |  |           | (170,891  | ) |             |          | 6.05  25.30  |       |  |   | 17.49 | 
|                                 |  |           |           |   |             |          |               |       | 
|Outstanding at December 31, 2005 |  |           | 4,375,632 |   |             |          | .30  32.95   |       |  |   | 11.17 | 
|                                 |  |           |           |   |             |          |               |       | 



|               |  |                     |           |  |                     |  |      |                  |  |   |             |  |  |                  |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- |  | ------------------- |  | ---- | ---------------- |  | - | ----------- |  |  | ---------------- | --------- |  |  | - | ----- | 
|               |  | Options Outstanding |           |  | Options Exercisable | 
|               |  |                     |           |  |                     | 
|               |  | Number              |           |  | Weighted Average    |  |      | Weighted Average |  |   | Number      |  |  | Weighted Average |          
|Exercise Price |  | Outstanding         |           |  | Remaining Years     |  |      | Exercise Price   |  |   | Exercisable |  |  | Exercise Price   |          
|               |  |                     |           |  |                     |  |      |                  |  |   |             |  |  |                  |          
|$  .30  $5.00 |  |                     | 1,174,466 |  |                     |  | 3.97 |                  |  | $ | 1.01        |  |  |                  | 1,174,466 |  |  | $ | 1.01  | 
|5.75  10.74   |  |                     | 1,106,296 |  |                     |  | 6.53 |                  |  |   | 7.12        |  |  |                  | 898,378   |  |  |   | 6.96  | 
|11.16  19.20  |  |                     | 1,162,912 |  |                     |  | 8.34 |                  |  |   | 15.11       |  |  |                  | 521,640   |  |  |   | 14.76 | 
|22.87  32.95  |  |                     | 931,958   |  |                     |  | 8.91 |                  |  |   | 23.86       |  |  |                  | 319,881   |  |  |   | 24.22 | 
|               |  |                     |           |  |                     |  |      |                  |  |   |             |  |  |                  |          
|.30  32.95    |  |                     | 4,375,632 |  |                     |  | 6.83 |                  |  |   | 11.17       |  |  |                  | 2,914,365 |  |  |   | 7.85  | 
|               |  |                     |           |  |                     |  |      |                  |  |   |             |  |  |                  |          





58



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NOTES TO FINANCIAL STATEMENTS  (Continued)








|   |                      
|-- | ---------------------
|8. | Employee Benefit Plan





|   |             
|-- | ------------
|9. | Income Taxes



|                                 |                           |              |              |             |      |   |             |            | 
|-------------------------------- | ------------------------- | ------------ | ------------ | ----------- | ---- | - | ----------- | ---------- | 
|                                 |                           | December 31, |             
|                                 |                           |              |             
|                                 |                           | 2005         |              |             | 2004 |  
|                                 |                           |              |              |             |      |  
|Net operating loss carryforwards |                           | $            | 113,542,150  |             |      | $ | 78,154,551  |           
|Research credits                 |                           |              | 9,360,213    |             |      |   | 6,366,269   |           
|Deferred stock compensation      |                           |              | 501,775      |             |      |   | 3,075,991   |           
|Other                            |                           |              | 396,948      |             |      |   | 194,803     |           
|                                 |                           |              |              |             |      |  
|                                 | Total deferred tax assets |              |              | 123,801,086 |      |   |             | 87,791,614 | 
|Valuation allowance              |                           |              | (123,801,086 | )           |      |   | (87,791,614 | )         
|                                 |                           |              |              |             |      |  
|Net deferred tax assets          |                           | $            |             |             |      | $ |            |           
|                                 |                           |              |              |             |      |  





59



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NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies

12-month




|           |  |   |           | 
|---------- |  | - | --------- | 
|2006       |  | $ | 1,369,315 | 
|2007       |  |   | 1,349,238 | 
|2008       |  |   | 1,213,267 | 
|2009       |  |   | 203,676   | 
|Thereafter |  |   |          | 
|           |  |   |          
|           |  | $ | 4,135,496 | 
|           |  |   |          









|    |                           
|--- | --------------------------
|11. | Related Party Transactions





|    |                 
|--- | ----------------
|12. | Subsequent Event

Induced Conversion of
Convertible Debt,


AGI-1067.


60



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NOTES TO FINANCIAL STATEMENTS  (Continued)


10-K.




|    |                                            
|--- | -------------------------------------------
|13. | Quarterly Results of Operations (Unaudited)



|                         |                   |                              |             |       |             |   |             |             |   |   |             |       |   |   |             |       |  
|------------------------ | ----------------- | ---------------------------- | ----------- | ----- | ----------- | - | ----------- | ----------- | - | - | ----------- | ----- | - | - | ----------- | ----- | -
|                         |                   | Year Ended December 31, 2005 |            
|                         |                   |                              |            
|                         |                   | 1st Quarter                  |             |       | 2nd Quarter |   |             | 3rd Quarter |   |   | 4th Quarter |      
|                         |                   |                              |             |       |             |   |             |             |   |   |             |      
|Operating loss           |                   | $                            | (17,975,888 | )     |             | $ | (21,612,599 | )           |   | $ | (22,541,263 | )     |   | $ | (18,199,485 | )    
|Net loss                 |                   |                              | (18,631,557 | )     |             |   | (22,205,379 | )           |   |   | (23,057,352 | )     |   |   | (18,660,039 | )    
|Net loss per share data: |                   |                              |             |       |             |   |             |             |   |   |             |       |   |   |             |      
|                         | Basic and diluted |                              |             | (0.50 | )           |   |             | (0.59       | ) |   |             | (0.61 | ) |   |             | (0.49 | )

|                         |                   |                              |             |       |             |   |             |             |   |   |             |       |   |   |             |       |  
|------------------------ | ----------------- | ---------------------------- | ----------- | ----- | ----------- | - | ----------- | ----------- | - | - | ----------- | ----- | - | - | ----------- | ----- | -
|                         |                   | Year Ended December 31, 2004 |            
|                         |                   |                              |            
|                         |                   | 1st Quarter                  |             |       | 2nd Quarter |   |             | 3rd Quarter |   |   | 4th Quarter |      
|                         |                   |                              |             |       |             |   |             |             |   |   |             |      
|Operating loss           |                   | $                            | (15,680,847 | )     |             | $ | (15,597,955 | )           |   | $ | (18,046,883 | )     |   | $ | (16,517,654 | )    
|Net loss                 |                   |                              | (16,602,700 | )     |             |   | (16,525,159 | )           |   |   | (19,003,116 | )     |   |   | (17,458,257 | )    
|Net loss per share data: |                   |                              |             |       |             |   |             |             |   |   |             |       |   |   |             |      
|                         | Basic and diluted |                              |             | (0.45 | )           |   |             | (0.45       | ) |   |             | (0.51 | ) |   |             | (0.47 | )








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Managements annual report on internal control over
financial reporting. 10-K 10-K


Evaluation of disclosure controls and procedures. 13a-15(e) 15d-15(e))


Changes in internal control over financial reporting.


61



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)







|         |                  
|-------- | -----------------
|Item 9B. | Other Information



62



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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

10-K.


Code of Ethics






| |                                     
| | ------------------------------------
| | AtheroGenics, Inc.                  
| | Attention: Investor Relations       
| | 8995 Westside Parkway               
| | Alpharetta, Georgia 30004           
| | (678) 336-2500                      
| | http://www.investor@atherogenics.com






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

10-K.







|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management

10-K.







|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

10-K.







|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

10-K.


63



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules



| |     |                                                   
| | --- | --------------------------------------------------
| | (1) | Financial Statements, filed as part of this report

















| |                                  
| | ---------------------------------
| | (2) Financial Statement Schedules





| |                        
| | -----------------------
| | (3) Listing of Exhibits

|            |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | -- | --- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  | Description
|            |    |     |  |            
|            | 3  | .01 |  |            |  | Fourth Amended and Restated Articles of Incorporation of
    AtheroGenics, Inc. (filed as Exhibit 3.01 to Amendment
    No. 1 to AtheroGenics Annual Report on Form 10-K
    for the year ended December 31, 2004 on April 6, 2005
    and incorporated herein by reference).                                                                                                                                                                                                           
|            | 3  | .02 |  |            |  | Third Amended and Restated Bylaws of AtheroGenics, Inc., as
    amended (filed as Exhibit 3.02 to AtheroGenics Annual
    Report on Form 10-K for the year ended December 31,
    2001 and incorporated herein by reference).                                                                                                                                                                                                                                                           
|            | 4  | .01 |  |            |  | Form of Common Stock Certificate (filed as Exhibit 4.01 to
    Amendment No. 4 to AtheroGenics Registration
    Statement on Form S-1, Registration No. 333-31140, on
    August 4, 2000 and incorporated herein by reference).                                                                                                                                                                                                                                                         
|            | 4  | .02 |  |            |  | Rights Agreement dated as of November 9, 2001 between
    AtheroGenics, Inc. and American Stock Transfer & Trust
    Company, as Rights Agent (filed as Exhibit 4.4 of
    AtheroGenics Form 8-K on November 19, 2001 and
    incorporated herein by reference).                                                                                                                                                                                                                        
|            | 4  | .03 |  |            |  | Indenture dated August 19, 2003 between AtheroGenics, Inc.
    and The Bank of New York Trust Company of Florida N.A., as
    Trustee (filed as Exhibit 4.1 to AtheroGenics
    Registration Statement on Form S-3, Registration
    No. 333-110160, on October 31, 2003, and incorporated
    herein by reference).                                                                                                                                                                    
|            | 4  | .04 |  |            |  | Global
    41/2% Convertible
    Note Due 2008 (filed as Exhibit 4.04 to Amendment
    No. 1 to AtheroGenics Annual Report on Form 10-K
    for the year ended December 31, 2004 on April 6, 2005
    and incorporated herein by reference).                                                                                                                                                                                                                                            
|            | 4  | .05 |  |            |  | Indenture dated January 12, 2005 between AtheroGenics, Inc.
    and The Bank of New York Trust Company of Florida N.A., as
    Trustee, including the form of Global 1.50% Convertible
    Note Due 2012 filed as Appendix A thereto (filed as
    Exhibit 4.5 to AtheroGenics Registration Statement on
    Form S-3, Registration No. 333-123895, on
    April 6, 2005 and incorporated herein by reference).                                                                         
|            | 10 | .01 |  |            |  | Amended and Restated Master Rights Agreement dated
    October 31, 1995, as amended by First Amendment dated
    November 1, 1995; Second Amendment dated July 30,
    1996; Third Amendment dated April 13, 1999; Fourth
    Amendment dated May 11, 1999; and Fifth Amendment dated
    August 30, 1999 (filed as Exhibit 4.02 to
    AtheroGenics Registration Statement on Form S-1,
    Registration No. 333-31140, on February 25, 2000 and
    incorporated herein by reference).

64



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##### Table of Contents



|            |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -- | ----- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |       |  | Description
|            |    |       |  |            
|            | 10 | .02+  |  |            |  | Exclusive License Agreement dated July 17, 1998 between The
    Regents of the University of California and AtheroGenics, Inc.
    (filed as Exhibit 10.02 to Amendment No. 4 to
    AtheroGenics Registration Statement on Form S-1,
    Registration No. 333-31140, on August 4, 2000 and
    incorporated herein by reference).                                                                                            
|            | 10 | .03+  |  |            |  | License Agreement dated January 11, 1995 between Emory
    University and AtheroGenics, Inc. (filed as Exhibit 10.03
    to Amendment No. 2 to AtheroGenics Registration
    Statement on Form S-1, Registration No. 333-31140, on
    July 13, 2000 and incorporated herein by reference).                                                                                                                                   
|            | 10 | .04+  |  |            |  | Patent Purchase Agreement dated April 26, 1995 between
    AtheroGenics, Inc. and Sampath Parthasarathy, together with
    Services Agreement dated April 26, 1995 between
    AtheroGenics, Inc. and Sampath Parthasarathy (filed as
    Exhibit 10.04 to Amendment No. 2 to AtheroGenics
    Registration Statement on Form S-1, Registration
    No. 333-31140, on July 13, 2000 and incorporated
    herein by reference).
|            | 10 | .05+  |  |            |  | Sponsored Research Agreement dated October 14, 1996 between
    Emory University and AtheroGenics, Inc. (filed as
    Exhibit 10.05 to Amendment No. 2 to AtheroGenics
    Registration Statement on Form S-1, Registration
    No. 333-31140, on July 13, 2000 and incorporated
    herein by reference).                                                                                                                    
|            | 10 | .06#  |  |            |  | AtheroGenics, Inc. 1995 Stock Option Plan, together with form of
    nonqualified stock option agreement (filed as Exhibit 10.07
    to AtheroGenics Registration Statement on Form S-1,
    Registration No. 333-31140, on February 25, 2000 and
    incorporated herein by reference).                                                                                                                                      
|            | 10 | .07#  |  |            |  | AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by
    Amendment No. 1 and Amendment No. 2 (filed as
    Exhibit 10.08 to Amendment No. 2 to AtheroGenics
    Registration Statement on Form S-1, Registration
    No. 333-31140, on July 13, 2000 and incorporated
    herein by reference).                                                                                                                       
|            | 10 | .08   |  |            |  | Preferred Shares Purchase Warrant dated August 24, 1998
    between AtheroGenics, Inc. and certain Lenders named therein
    (filed as Exhibit 10.09 to AtheroGenics Registration
    Statement on Form S-1, Registration No. 333-31140, on
    February 25, 2000 and incorporated herein by reference).                                                                                                                      
|            | 10 | .09   |  |            |  | Series C Convertible Preferred Stock Purchase Warrants of
    AtheroGenics, Inc. (filed as Exhibit 10.10 to
    AtheroGenics Registration Statement on Form S-1,
    Registration No. 333-31140, on February 25, 2000 and
    incorporated herein by reference).                                                                                                                                                              
|            | 10 | .10   |  |            |  | Promissory Note dated April 1, 1999 between Inhibitex, Inc.
    and AtheroGenics, Inc. (filed as Exhibit 10.11 to
    AtheroGenics Registration Statement on Form S-1,
    Registration No. 333-31140, on February 25, 2000 and
    incorporated herein by reference).                                                                                                                                                        
|            | 10 | .11++ |  |            |  | Lease Agreement dated June 19, 1998 between Cousins
    Properties, Inc. and AtheroGenics, Inc. (filed as
    Exhibit 10.12 to AtheroGenics Registration Statement
    on Form S-1, Registration No. 333-31140, on
    February 25, 2000 and incorporated herein by reference).                                                                                                                                               
|            | 10 | .12#  |  |            |  | Employment Agreement dated March 1, 2001 between
    AtheroGenics, Inc. and Russell M. Medford (filed as
    Exhibit 10.14 to AtheroGenics Annual Report on
    Form 10-K for the year ended December 31, 2000, and
    incorporated herein by reference).                                                                                                                                                                    
|            | 10 | .13   |  |            |  | Amendment dated January 1, 2001 to Promissory Note dated
    April 1, 1999 between Inhibitex, Inc. and AtheroGenics,
    Inc. (filed as Exhibit 10.15 to AtheroGenics Annual
    Report on Form 10-K for the year ended December 31,
    2000, and incorporated herein by reference).                                                                                                                                         
|            | 10 | .14+  |  |            |  | Exclusive License Agreement dated as of June 29, 2001
    between AtheroGenics, Inc. and National Jewish Medical and
    Research Center (filed as Exhibit 10.17 to Amendment
    No. 1 to AtheroGenics Registration Statement on
    Form S-1, Registration No. 333-64228, on July 23,
    2001 and incorporated herein by reference).                                                                                       
|            | 10 | .15#  |  |            |  | AtheroGenics, Inc. 2001 Equity Ownership Plan (filed as
    Appendix B to the proxy statement on Schedule 14A for
    AtheroGenics 2001 Annual Shareholders Meeting as
    filed on March 22, 2001 and incorporated herein by
    reference).                                                                                                                                                                                

65



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|            |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                
|----------- | -- | ---- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      |  | Description
|            |    |      |  |            
|            | 10 | .16  |  |            |  | Equipment Term Note dated March 6, 2002 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.20(b) to AtheroGenics Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2002 and
    incorporated herein by reference).                                                                               
|            | 10 | .17  |  |            |  | Loan and Security Agreement dated March 6, 2002 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.20(c) to AtheroGenics Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2002 and
    incorporated herein by reference).                                                                       
|            | 10 | .18  |  |            |  | First Loan Modification dated June 20, 2003 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.23 to AtheroGenics Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2003 and
    incorporated herein by reference).                                                                               
|            | 10 | .19  |  |            |  | Second Loan Modification dated August 13, 2003 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.25 to AtheroGenics Annual Report on
    Form 10-K for the year ended December 31, 2003 and
    incorporated herein by reference).                                                                              
|            | 10 | .20  |  |            |  | Third Loan Modification dated December 29, 2003 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.26 to AtheroGenics Annual Report on
    Form 10-K for the year ended December 31, 2003 and
    incorporated herein by reference).                                                                             
|            | 10 | .21  |  |            |  | Negative Pledge Agreement dated December 29, 2003 between
    AtheroGenics, Inc. and Silicon Valley Bank (filed as
    Exhibit 10.27 to AtheroGenics Annual Report on
    Form 10-K for the year ended December 31, 2003 and
    incorporated herein by reference).                                                                           
|            | 10 | .22# |  |            |  | Employment Agreement dated December 22, 2004 between
    AtheroGenics, Inc. and Mark P. Colonnese (filed as
    Exhibit 10.28 to AtheroGenics Form 8-K on
    December 22, 2004 and incorporated herein by reference).                                                                                                                        
|            | 10 | .23# |  |            |  | Employment Agreement dated December 22, 2004 between
    AtheroGenics, Inc. and Martin A. Wasserman (filed as
    Exhibit 10.29 to AtheroGenics Form 8-K on
    December 22, 2004 and incorporated herein by reference).                                                                                                                      
|            | 10 | .24# |  |            |  | Employment Agreement dated December 22, 2004 between
    AtheroGenics, Inc. and Robert A. D. Scott (filed as
    Exhibit 10.30 to AtheroGenics Form 8-K on
    December 22, 2004 and incorporated herein by reference).                                                                                                                       
|            | 10 | .25# |  |            |  | Employment Agreement dated December 22, 2004 between
    AtheroGenics, Inc. and W. Charles Montgomery (filed as
    Exhibit 10.31 to AtheroGenics Form 8-K on
    December 22, 2004 and incorporated herein by reference).                                                                                                                    
|            | 10 | .26# |  |            |  | AtheroGenics, Inc. 2004 Equity Ownership Plan (filed as
    Appendix B to the proxy statement on Schedule 14A for
    AtheroGenics 2004 Annual Shareholders Meeting as
    filed on March 26, 2004 and incorporated herein by
    reference).                                                                                                
|            | 10 | .27# |  |            |  | AtheroGenics, Inc. 2004 Equity Ownership Plan form of incentive
    equity ownership agreement and form of directors
    nonqualified equity ownership agreement (filed as
    Exhibit 10.33 to AtheroGenics Annual Report on
    Form 10-K for the year ended December 31, 2004 on
    March 16, 2005 and incorporated herein by reference).
|            | 10 | .28# |  |            |  | Summary of non-employee director compensation (filed as the
    first paragraph under the caption Director
    Compensation in the proxy statement on Schedule 14A
    for AtheroGenics 2005 Annual Meeting of Shareholders as
    filed with the SEC on March 28, 2005 and incorporated
    herein by reference).                          
|            | 10 | .29# |  |            |  | Summary of non-employee directors compensation and 2005
    executive officers target cash incentive (filed under
    Item 1.01 of AtheroGenics, Inc. Form 8-K on
    April 29, 2005 and incorporated herein by reference).                                                                                                                    
|            | 10 | .30# |  |            |  | Employment Agreement dated May 31, 2005 between
    AtheroGenics, Inc. and Joseph M. Gaynor, Jr. (filed as
    Exhibit 10.1 to AtheroGenics Current on Form 8-K
    on June 30, 2005 and incorporated herein by reference).                                                                                                                   
|            | 10 | .31# |  |            |  | Transition Agreement dated June 22, 2005 between
    AtheroGenics, Inc. and Martin A. Wasserman (filed as
    Exhibit 10.1 to AtheroGenics Current Report on
    Form 8-K on July 22, 2005 and incorporated herein by
    reference).                                                                                                         

66



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|            |     |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --- | ----- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |       |  | Description
|            |     |       |  |            
|            | 10  | .32+  |  |            |  | First Amendment dated August 3, 2005 to License Agreement
    dated January 11, 1995 between AtheroGenics, Inc. and Emory
    University (filed as Exhibit 10.1 to AtheroGenics
    Current Report on Form 10-Q on November 2, 2005 and
    incorporated herein by reference).                                                                                                       
|            | 10  | .33   |  |            |  | Registration Rights Agreement dated January 12, 2005 among
    AtheroGenics, Inc., as Issuer, and Morgan Stanley & Co.
    Incorporated, Lehman Brothers, Inc., JPMorgan Securities, Inc.
    and Lazard Freres & Co., as Initial Purchasers (filed
    as Exhibit 99.1 to AtheroGenics Current Report on
    Form 8-K on January 12, 2005 and incorporated herein
    by reference).
|            | 10  | .34*+ |  |            |  | Commercial Supply Agreement for Production of AGI-1067 and
    Probucol between The Dow Chemical Company and AtheroGenics,
    Inc., dated October 6, 2005.                                                                                                                                                                                                                           
|            | 10  | .35*+ |  |            |  | License and Collaboration Agreement between AtheroGenics, Inc
    and IPR Pharmaceuticals, LP, dated December 22, 2005.                                                                                                                                                                                                                                                               
|            | 10  | .36*+ |  |            |  | Co-Promotion Agreement by and between AstraZeneca
    Pharmaceuticals LP and AtheroGenics, Inc., dated as of
    December 22, 2005                                                                                                                                                                                                                                                    
|            | 10  | .37*+ |  |            |  | Transition Services Agreement, by and between IPR
    Pharmaceuticals, LP and AtheroGenics, Inc., dated
    December 22, 2005.                                                                                                                                                                                                                                                        
|            | 10  | .38#  |  |            |  | AtheroGenics, Inc. 2004 Equity Ownership Plan form of
    nonqualified equity ownership agreement (filed as
    Exhibit 10.02 to AtheroGenics Current Report on
    Form 8-K on March 10, 2006 and incorporated herein by
    reference).                                                                                                                                            
|            | 23  | .01*  |  |            |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                         
|            | 24  | .01*  |  |            |  | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                   
|            | 31  | .1*   |  |            |  | Certifications of Chief Executive Officer under
    Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                   
|            | 31  | .2*   |  |            |  | Certifications of Chief Financial Officer under
    Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                   
|            | 32* |       |  |            |  | Certifications of Chief Executive Officer and Chief Financial
    Officer under Section 1350.                                                                                                                                                                                                                                                                                         






| |   |                
| | - | ---------------
| | * | Filed herewith.



| |    |                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | Filed as the exhibit of the same number with AtheroGenics
    registration statement on
    Form S-1,
    Registration
    No. 333-31140,
    declared effective by the SEC on August 8, 2000, and
    incorporated herein by reference.



| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | + | Certain confidential information contained in this document has
    been omitted and filed separately with the Commission pursuant
    to a request for confidential treatment under Rule 406 of
    the Securities Act of 1933, as amended.



|   |                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|++ | We agree to furnish supplementally to the Commission a copy of
    any omitted schedule or exhibit to this agreement upon request
    by the Commission.



| |   |                                                         
| | - | --------------------------------------------------------
| | # | Management contract or compensatory plan or arrangement.

67



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##### Table of Contents






SIGNATURES






| |                   
| | ------------------
| | ATHEROGENICS, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ RUSSELL M. MEDFORD

| |                                      
| | -------------------------------------
| |                                      
| | Russell M. Medford, M.D., Ph.D.      
| | President and Chief Executive Officer



|                                                      |  |                                                                                     |  |                |  | 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                                  |  | Title                                                                               |  | Date          
|                                                      |  |                                                                                     |  |               
|                                                     
|Principal Executive Officer:                          |  |                                                                                     |  |               
|                                                     
|                                                     
|/s/ RUSSELL M. MEDFORDRussell M. Medford              |  | President and Chief Executive Officer, Director                                     |  | March 10, 2006
|                                                     
|Principal Financial and Principal Accounting Officer: |  |                                                                                     |  |               
|                                                     
|/s/ MARK P. COLONNESEMark P. Colonnese                |  | Senior Vice President of Finance and Administration and Chief
    Financial Officer |  | March 10, 2006
|                                                     
|*Michael A. Henos                                     |  | Director                                                                            |  | March 10, 2006
|                                                     
|*R. Wayne Alexander                                   |  | Director                                                                            |  | March 10, 2006
|                                                     
|*David Bearman                                        |  | Director                                                                            |  | March 10, 2006
|                                                     
|*Vaughn D. Bryson                                     |  | Director                                                                            |  | March 10, 2006
|                                                     
|*T. Forcht Dagi                                       |  | Director                                                                            |  | March 10, 2006
|                                                     
|*Arthur M. Pappas                                     |  | Director                                                                            |  | March 10, 2006
|                                                     
|*William A. Scott                                     |  | Director                                                                            |  | March 10, 2006
|                                                     
|*By:                                                  |  | /s/ JOSEPH M. GAYNORJoseph M. Gaynor, Jr.
    Attorney-in-Fact                      |  |                |  | 

68