3

	4

	5

4.   Stock-Based Compensation

AtheroGenics has elected to follow Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), in accounting for its stock-based employee compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. AtheroGenics accounts for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with SFAS 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Ins truments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”), an amendment to SFAS 123, requires disclosure in the summary of significant accounting policies of the effects of the fair value of stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

	6

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

	Three months ended						Six months ended
	June 30,						June 30,
		2004			2003			2004			2003
Net loss, as reported	$	(16,525,159	)	$	(12,335,978	)	$	(33,127,859	)	$	(23,830,679	)
Add: Stock-based employee compensation
expense included in reported net loss		13,372			140,767			25,407			281,560
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards		(1,528,996	)		(828,307	)		(2,719,625	)		(1,723,627	)
Pro forma net loss	$	(18,040,783	)	$	(13,023,518	)	$	(35,822,077	)	$	(25,272,746	)
Net loss per share:
Basic and diluted, as reported	$	(0.45	)	$	(0.34	)	$	(0.90	)	$	(0.68	)
Basic and diluted, pro forma	$	(0.49	)	$	(0.36	)	$	(0.97	)	$	(0.72	)

 

5.   Convertible Notes Payable

In August 2003, AtheroGenics issued $100 million in aggregate principal amount of 4.5% convertible notes due September 1, 2008 with interest payable semi-annually in March and September. Net proceeds to AtheroGenics were approximately $96.7 million, after deducting expenses and underwriter’s discounts and commissions. The issuance costs related to the notes are recorded as other assets and are being amortized to interest expense over the five-year life of the notes.

The notes may be converted at the option of the holder into shares of AtheroGenics’ common stock prior to the close of business on September 1, 2008 at a conversion rate of 65.1890 shares per $1,000 principal amount of notes, representing a conversion price of approximately $15.34, subject to adjustment. Under certain circumstances, AtheroGenics may be obligated to redeem all or part of the notes prior to their maturity at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest and liquidated damages, if any, up to but excluding the maturity date.

As of June 30, 2004, AtheroGenics had reserved 6,518,900 shares of common stock for future issuance in connection with the convertible notes. In addition, as of June 30, 2004, accrued liabilities included approximately $1.5 million of accrued interest related to the convertible notes.

6.   Bank Credit Agreements

In March 2002, AtheroGenics entered into a revolving credit facility with Silicon Valley Bank for up to a maximum amount of $5,000,000 to be used for working capital requirements. In December 2003, AtheroGenics canceled the line of credit, which was unused during the entire period.

In addition, in March 2002, AtheroGenics entered into an equipment loan facility with Silicon Valley Bank for up to a maximum amount of $2,500,000 to be used to finance existing and new equipment purchases. Amounts borrowed under the equipment loan facility are repaid in 33 equal installments of principal and interest beginning on the first business day of the month following an advance. As of June 30, 2004, there was an outstanding balance of $327,934 under the equipment loan facility and the weighted average interest rate was 7.7% per year. The borrowing period for the equipment loan facility expired in September 2003.

	7

    In connection with the revolving credit facility and the equipment loan facility, AtheroGenics has granted to Silicon Valley Bank a negative pledge on its intellectual property and on deposits with Silicon Valley Bank and its affiliates.

7.   Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or shareholders’ (deficit) equity.

8.   Subsequent Events

In July 2004, AtheroGenics signed a term sheet for a license with a contract manufacturer for AGI-1067 under which AtheroGenics has purchased a portion of its clinical drug supply requirements. The term sheet includes contingent future payments and royalties. The term sheet also calls for a definitive license and commercial manufacturing agreement to be negotiated.

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

The following should be read with the financial statements and related footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in AtheroGenics' Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The results discussed below are not necessarily indicative of the results to be expected in any future periods. The following discussion contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ from the statements made. These risks are set forth in more detail in our Annual Report on Form 10-K.

OVERVIEW

Since our operations began in 1994, we have focused on the discovery, development and commercialization of novel drugs for the treatment of chronic inflammatory diseases, including heart disease (atherosclerosis), rheumatoid arthritis and asthma. Based on our proprietary vascular protectant, or v-protectant™, technology platform, we have four drug programs in the clinic, and are pursuing a number of other preclinical programs.

AGI-1067 is our v-protectant™ candidate that is most advanced in clinical development, and is designed to benefit patients with heart disease. AGI-1067 is currently in a Phase III clinical trial, referred to as ARISE, or Aggressive Reduction of Inflammation Stops Events, to evaluate the impact of AGI-1067 on important outcome measures such as death due to heart disease, myocardial infarction, stroke, coronary revascularization and unstable angina in patients who have coronary heart disease. ARISE will enroll 4,000 patients who will be followed for an average of 18 months and until a minimum of 1,160 primary events, or outcome measures, have occurred . We are currently conducting a Phase IIb clinical trial called CART-2, which is approximately a 500-patient study that examines the effect of 12 months of AGI-1067 therapy on atherosclerosis and post-angioplasty restenosis. We completed the treatment phase in July 2004, and we are now proceeding with data analysis, prior to disclosure of the results.

Our second v-protectant™, AGIX-4207, is a novel oral agent being developed for the treatment of the signs and symptoms of rheumatoid arthritis. We have completed a Phase II clinical trial that evaluated safety, tolerability and the effect of orally administered AGIX-4207 on biological markers of inflammation in rheumatoid arthritis patients. Data from the trial demonstrated that treatment with AGIX-4207 was safe and well-tolerated by patients and also inhibited an increase in an inflammatory biomarker known as the erythrocyte sedimentation rate, or ESR, by more than 90 percent. We have completed the treatment phase of a 275 patient Phase II trial of AGIX-4207, called OSCAR, or Oral Suppression of Cellular Inflammation Attenuates Rheumatoid Arthritis. OSCAR will evaluate the impact of various doses of AGIX-4207 versus placebo on clinical efficacy, biomarkers and safety in patients with rheumatoid arthritis.

	8

    AGIX-4207 I.V., our third v-protectant™ candidate, is an intravenous drug designed to treat rheumatoid arthritis patients in whom the rapid attainment of target drug levels in the blood is desirable. We have completed a Phase I clinical trial that assessed the safety and tolerability of AGIX-4207 I.V. in healthy volunteers. The results from this trial demonstrated that single infusions of AGIX-4207 I.V. were well tolerated and adverse events were generally mild and not considered clinically significant.

Our fourth v-protectant™ candidate, AGI-1096, is a novel antioxidant and selective anti-inflammatory agent that is being developed to address the accelerated inflammation of grafted blood vessels common in chronic organ transplant rejection and known as transplant arteritis. We have completed a Phase I clinical trial that assessed safety and tolerability of AGI-1096 in healthy volunteers. The results of AGI-1096 clinical trial data demonstrated the drug was well tolerated at all oral doses, with no drug-related adverse events. We are currently in collaboration with Fujisawa Pharmaceutical Co., Ltd to further develop AGI-1096.

To date, we have devoted substantially all of our resources to research and development. We have not received any commercial revenues from product sales. We expect to incur significant losses in most years prior to deriving any product revenue as we continue to increase research and development costs. We have incurred significant losses since we began operations in 1994 and as of June 30, 2004, we had an accumulated deficit of $175.7 million. We cannot assure you that we will become profitable. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. Our ability to achieve profitability depends upon a variety of factors, including our ability, alone or with others, to complete the successful development of our product candidates, to obtain required regulatory clearances, and to manufacture and market our future products.

CRITICAL ACCOUNTING POLICIES

AtheroGenics considers certain accounting policies related to use of estimates, research and development accruals, revenue recognition and stock-based compensation to be critical policies. There have been no material changes in the critical accounting policies from what was previously disclosed in AtheroGenics’ Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004.

RESULTS OF OPERATIONS

Comparison of the Three and Six Month Periods Ended June 30, 2004 and 2003

Revenues

There were no revenues during the three and six months ended June 30, 2004 and 2003.

Expenses

Research and Development. Research and development expenses increased 24% to $13.8 million for the three months ended June 30, 2004 from $11.2 million for the comparable period in 2003, and 29% to $27.8 million for the six months ended June 30, 2004 from $21.6 million in the comparable period in 2003. The increase in research and development expenses for the three and six months ended June 30, 2004 was primarily due to expenditures related to ongoing patient recruitment for the AGI-1067 ARISE clinical trial. In addition, there were increased expenditures for the final stages of the AGI-1067 CART-2 Phase IIb clinical trial and the AGIX-4207 OSCAR Phase II clinical trial.

General and Administrative. General and administrative expenses increased 31% to $1.8 million for the three months ended June 30, 2004 from $1.3 million for the comparable period in 2003, and 30% to $3.4 million for the six months ended June 30, 2004 from $2.6 million in the comparable period in 2003. The increase in general and administrative expenses for the three and six months ended June 30, 2004 was primarily due to higher directors and officers’ insurance premiums and expenses related to a change in leadership in the business development area.

	9

Interest Income

Interest income was $375,095 for the three months ended June 30, 2004 and $222,980 for the comparable period in 2003, and $746,083 for the six months ended June 30, 2004 and $419,272 for the comparable period in 2003. The increase in interest income in the three and six month periods ended June 30, 2004 is due to the increased amount of invested funds received from the $100.0 million convertible debt offering in August 2003.

Interest Expense

Interest expense was $1.3 million for the three months ended June 30, 2004 and $16,544 for the comparable period in 2003, and $2.6 million for the six months ended June 30, 2004 and $35,175 for the comparable period in 2003. The increase in interest expense is due to our $100.0 million convertible debt.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through sales of equity securities and convertible notes. At June 30, 2004, we had cash, cash equivalents and short-term investments of $99.7 million, compared with $131.6 million at December 31, 2003. Working capital at June 30, 2004 was $94.2 million, compared to $124.8 million at December 31, 2003. The decrease in cash, cash equivalents, short-term investments and working capital is primarily due to use of funds for operating purposes.

Net cash used in operating activities was $33.1 million for the six months ended June 30, 2004, compared to $21.6 million for the comparable period in 2003. The increase in the use of cash in operating activities is principally due to funding a net loss of $33.1 million. The increase in cash to fund the net loss is primarily attributable to expenditures for our AGI-1067 compound and other ongoing research and development activities. As enrollment for ARISE continues to increase, so will the associated costs. Once full enrollment is reached, these increases should moderate. Prepaid expenses will continue to fluctuate as pre-payments are made to contractors for the ARISE clinical trial and are then expensed as services are performed. We anticipate net cash usage in 2004 for ARISE and our other ongoing clinical programs, as well as our other operating activities, to be in a range of $63. 0 million to $67.0 million, subject to the impact of a potential corporate partnering arrangement for AGI-1067.

Net cash used in investing activities was $44,429 for the six months ended June 30, 2004, compared to $20.3 million for the comparable period in 2003. Net cash used in investing activities during the six months ended June 30, 2004 consisted primarily of purchases of equipment and leasehold improvements. Net cash used in investing activities for the comparable period in 2003 consisted primarily of the purchases of available-for-sale securities and equipment and leasehold improvements.

Net cash provided by financing activities was $1.4 million for the six months ended June 30, 2004, and $48.5 million for the comparable period in 2003. Net cash provided by financing activities in the six months ended June 30, 2004 consisted primarily of proceeds from the exercise of common stock options. Net cash provided by financing activities for the comparable period in 2003 was primarily from the follow-on public offering of 8.3 million shares of our common stock. This was partially offset by payments on our equipment loan facility.

In March 2002, we entered into an equipment loan facility, as modified in June 2003, with Silicon Valley Bank for up to a maximum amount of $2.5 million to be used to finance existing and new equipment purchases. The borrowing period under the equipment loan facility, as modified, expired on September 30, 2003. At June 30, 2004, there was an outstanding balance of approximately $327,934 on the equipment loan facility and the weighted average interest rate was 7.7% per year.

In August 2003, we issued $100 million in aggregate principal amount of 4.5% convertible notes due in 2008 through a Rule 144A private placement to qualified institutional buyers. These notes initially are convertible into our common stock at a conversion rate of 65.1890 shares per $1,000 principal amount of notes, or approximately $15.34 per share. Net proceeds were approximately $96.7 million. We are using the net proceeds from the sale of the notes for research and development activities, including clinical trials, process development and manufacturing support, and for general corporate purposes, including working capital. Pending these uses, the net proceeds have been invested in interest-bearing, investment grade securities.

	10

    The following table summarizes our long-term contractual obligations as of June 30, 2004.

		Payments Due by Period
		Total			Remainder of 2004			2005-2006			2007-2008			Thereafter
Contractual obligations
Operating leases, net of sublease income		$	5,202,603		$	543,167		$	2,152,011		$	2,314,723		$	192,702
Long-term debt			100,327,934			244,312			83,622			100,000,000			—
Total contractual obligations		$	105,530,537		$	787,479		$	2,235,633		$	102,314,723		$	192,702

In July 2004, we signed a term sheet for a license with a contract manufacturer for AGI-1067 under which we purchased a portion of our clinical drug supply requirements. The term sheet includes contingent future payments and royalties. The term sheet also calls for a definitive license and commercial manufacturing agreement to be negotiated.

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

-	the status of product development;
-	the time and cost involved in conducting clinical trials and obtaining regulatory approvals;
-	the costs of filing, prosecuting and enforcing patent and other intellectual property claims;
-	competing technological and market developments; and
-	our ability to establish new licensing and partnering agreements.

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

FORWARD-LOOKING STATEMENTS

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

	11

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

-	AGI-1067, AGIX-4207, AGIX-4207 I.V. and AGI-1096 may fail in clinical trials;
-	our ability to generate positive cash flow in light of our history of operating losses;
-	our inability to obtain additional financing on satisfactory terms, which could preclude us from developing
	or marketing our products;
-	our ability to successfully develop our other product candidates;
-	our ability to commercialize our product candidates if we fail to demonstrate adequately their safety and efficacy;
-	possible delays in our clinical trials;
-	our inability to predict whether or when we will obtain regulatory approval to commercialize our product
	candidates or the timing of any future revenue from these product candidates;
-	our need to comply with applicable regulatory requirements in the manufacture and distribution of our
	products to avoid incurring penalties that may inhibit our ability to commercialize our products;
-	our ability to protect adequately or enforce our intellectual property rights or secure rights to third party patents;
-	the ability of our competitors to develop and market anti-inflammatory products that are more effective, have
	fewer side effects or are less expensive than our current or future product candidates;
-	third parties' failure to synthesize and manufacture our product candidates, which could delay our clicial trials
	or hinder our comercialization prospects;
-	our ability to create sales, marketing and distribution capabilities or enter into agreements with third parties to
	perform these functions;
-	our ability to attract, retain and motivate skilled personnel and cultivate key academic collaborations;
-	our ability to obtain an adequate level of reimbursement or acceptable prices for our products;
-	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; and
-	conversion of our $100 million principal amount, 4.5% convertible notes will dilute the ownership interest of
	existing shareholders and could adversely affect the market price of our common stock.

The foregoing list of important factors is discussed in more detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and is not exclusive.

	12

Item 3.   Quantitative And Qualitative Disclosures About Market Risk

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

Item 4.   Controls and Procedures

Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for AtheroGenics. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings.

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

	13

PART II - OTHER INFORMATION

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

Our annual meeting of shareholders was held on April 28, 2004. At the annual meeting, the shareholders of AtheroGenics (1) elected three Class I directors to serve until the 2007 Annual Meeting of Shareholders, (2) ratified the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2004 and (3) approved the AtheroGenics 2004 Equity Ownership Plan.

We had 36,972,248 shares of common stock outstanding as of March 1, 2004, the record date of the annual meeting. At the annual meeting, we had 32,708,000 shares of common stock present in person or represented by proxy for the three proposals indicated above. The following sets forth detailed information regarding the results of the voting at the annual meeting.

Proposal 1.   Election of three Class I directors

Name of Nominee	No. of Votes For	No. of Votes Withheld
David Bearman	32,529,643	178,357
Vaughn D. Bryson	23,299,183	9,408,817
T. Forcht Dagi, M.D.	32,476,157	231,843

Proposal 2.   Ratification of the appointment of independent auditors

No. of Votes For	No. of Votes Against	Abstention
32,519,519	174,928	13,553

Proposal 3.   Approval of the AtheroGenics 2004 Equity Ownership Plan

No. of Votes For	No. of Votes Against	Abstention	Broker Non-Votes
12,576,654	12,202,043	584,155	7,345,148

	14

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits

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

(b) Reports on Form 8-K

On April 22, 2004, we furnished a Current Report on Form 8-K under Item 12, reporting the issuance of our press release announcing our financial results for the quarter ended March 31, 2004.

	15

SIGNATURES

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

	ATHEROGENICS, INC.
Date: August 9, 2004	/s/ MARK P. COLONNESE
	Mark P. Colonnese
	Senior Vice President of Finance and
	Administration and Chief Financial Officer

	16