UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q








X___
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the quarterly period ended
December 31, 2008.





_____
            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


0-50481





AEOLUS
      PHARMACEUTICALS, INC.


(Exact
      Name of Registrant as Specified in Its
Charter)











Delaware
            
            56-1953785(State
      or Other Jurisdiction of Incorporation or
    Organization)
            
            (I.R.S. Employer Identification No.)26361
      Crown Valley Parkway, Suite 150
              Mission Viejo,California
            
            92691(Address
      of Principal Executive Offices)
            
            (Zip Code)(Registrant’s
      Telephone Number, Including Area Code)
              949-481-9825





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act:




Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
[X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).YES [ ] NO
[X]





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
              Outstanding
      as of
                February 5,
      2009Common
      Stock, par value $.01 per share
              32,030,874shares











AEOLUS
PHARMACEUTICALS, INC.


FORM
10-Q


For the
Quarter Ended December 31, 2008


Table of
Contents





PagePART
      I.                                FINANCIAL
      INFORMATIONItem 1.
              Financial
      StatementsStatement Regarding Financial
      Information
              3Condensed Consolidated Balance
      Sheets as ofDecember 31, 2008
                (unaudited)
      and September 30, 2008
              4Condensed Consolidated Statements
      of Operations for the ThreeMonthsendedDecember 31, 2008and 2007(unaudited)
              5Condensed Consolidated Statements
      of Cash Flows for theThreeMonths endedDecember 31, 2008and 2007(unaudited)
              6Notes to Condensed Consolidated
      Financial Statements
              7Item 2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              13Item 3.
              Quantitative and Qualitative
      Disclosures About Market Risk
              15Item 4.
              Controls and
      Procedures
              15PART
      II.                                OTHER
      INFORMATIONItem 1.
              Legal
      Proceedings
              15Item 1A.
              Risk
    Factors
              16Item 2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              16Item 3.
              Defaults
      Upon Senior Securities
              16Item 4.
              Submission of Matters to a Vote
      of Security Holders
              16Item
    5.
              Other
      Information
              16Item 6.
              Exhibits
              16SIGNATURES
              16











AEOLUS
PHARMACEUTICALS, INC.










PART
I - FINANCIAL INFORMATION





ITEM
1.                      Financial
Statements.





Statement
Regarding Financial Information





The
condensed consolidated financial statements of Aeolus Pharmaceuticals, Inc. and
its wholly-owned subsidiary, Aeolus Sciences, Inc. (collectively the “Company”),
included herein have been prepared by management, without audit (except for the
Consolidated Balance Sheet as of September 30, 2008), pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”). Certain
information normally included in the consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States
has been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The Company recommends that you read the consolidated
financial statements included herein in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2008, filed
with the SEC on December 12, 2008.




















AEOLUS
      PHARMACEUTICALS, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETS(In
      thousands, except shares and per share data)December
      31,
                          
                          September
      30,2008
                          
                          2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          169
                          
                          
                          $
                          399Prepaids
      and other current assets
                          
                          
                          113
                          
                          
                          
                          156Total
      current assets
                          
                          
                          282
                          
                          
                          
                          555Marketable
      Investments  (Note D)
                          
                          
                          525
                          
                          
                          
                          440Investments
                          
                          
                          125
                          
                          
                          
                          125Total
      assets
                          
                          $
                          932
                          
                          
                          $
                          1,120LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
                          
                          $
                          669
                          
                          
                          $
                          991Margin
      loan (Note E)
                          
                          
                          367
                          
                          
                          
                          366Current
      maturity of long-term note payable (Note E)
                          
                          
                          548
                          
                          
                          
                          534Total
      current liabilities
                          
                          
                          1,584
                          
                          
                          
                          1,891Senior
      convertible notes to related parties, net (redemption value of
      $1,000,000 and $625,000 as of December 31, 2008 and September 30, 2008,
      respectively (Note E))
                          
                          
                          396
                          
                          
                          
                          266Total
      liabilities
                          
                          
                          1,980
                          
                          
                          
                          2,157Commitments
      and contingences (Note B and H)Stockholders'
      equity:Preferred
      stock, $.01 par value per share, 10,000,000 shares
      authorized:Series
      B nonredeemable convertible preferred stock, 600,000
      sharesauthorized;
      475,087 shares issued and outstanding at December
31,2008
      and September 30, 2008
                          
                          
                          5
                          
                          
                          
                          5Common
      stock, $.01 par value per share, 150,000,000 shares
      authorized;32,030,874 shares issued and outstanding at December 31, 2008
      and31,952,749
      shares issued and outstanding at September 30, 2008
                          
                          
                          320
                          
                          
                          
                          320Additional
      paid-in capital
                          
                          
                          157,986
                          
                          
                          
                          157,573Unrealized
      losses on investments, available for sale
                          
                          
                          -
                          
                          
                          
                          (36
                          )Accumulated
      deficit
                          
                          
                          (159,359
                          )
                          
                          
                          (158,899
                          )Total
      stockholders' deficit
                          
                          
                          (1,048
                          )
                          
                          
                          (1,037
                          )Total
      liabilities and stockholders' deficit
                          
                          $
                          932
                          
                          
                          $
                          1,120The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial
statements.





AEOLUS
      PHARMACEUTICALS, INC.
                    
                    CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (Unaudited)
                    (In
      thousands, except per share data)Three
      Months EndedDecember
      31,2008
                  
                  
                  2007RevenueGrant
      income
                  
                  $
                  -
                  
                  
                  $
                  -Costs
      and expenses:Research
      and development
                  
                  
                  125
                  
                  
                  
                  254General
      and administrative
                  
                  
                  283
                  
                  
                  
                  395Total
      costs and expenses
                  
                  
                  408
                  
                  
                  
                  649Loss
      from operations
                  
                  
                  (408
                  )
                  
                  
                  (649
                  )Change
      in fair value of trading securities, net (Note D)
                  
                  
                  49
                  
                  
                  
                  --Interest
      income (expense), net
                  
                  
                  (100
                  )
                  
                  
                  8Net
      loss
                  
                  $
                  (459
                  )
                  
                  $
                  (641
                  )Net
      loss per weighted share attributable to common
    stockholders:Basic
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )Weighted
      average common shares outstanding:Basic
                  
                  
                  31,988
                  
                  
                  
                  31,953Diluted
                  
                  
                  34,472
                  
                  
                  
                  31,953


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








AEOLUS
      PHARMACEUTICALS, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In
      thousands)Three
      Months EndedDecember
      31,2008
                          
                          
                          2007Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (459
                          )
                          
                          $
                          (641
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Noncash
      compensation
                          
                          
                          65
                          
                          
                          
                          147Change
      in fair value of trading securities
                          
                          
                          (49
                          )
                          
                          
                          -Noncash
      consulting expense
                          
                          
                          25
                          
                          
                          
                          -Noncash
      interest and financing costs
                          
                          
                          100
                          
                          
                          
                          13Change
      in assets and liabilities:Accounts
      receivable, prepaids and other assets
                          
                          
                          34
                          
                          
                          
                          38Accounts
      payable and accrued expenses
                          
                          
                          (322
                          )
                          
                          
                          (157
                          )Net
      cash used in operating activities
                          
                          
                          (606
                          )
                          
                          
                          (600
                          )Cash
      flows from financing activities:Draws
      on UBS margin loan
                          
                          
                          3
                          
                          
                          
                          -Payments
      on UBS margin loan
                          
                          
                          (2
                          )
                          
                          
                          -Proceeds
      from issuance of Senior Convertible Notes
                          
                          
                          375
                          
                          
                          
                          -Net
      cash provided by financing activities
                          
                          
                          376
                          
                          
                          
                          -Net
      decrease in cash and cash equivalents
                          
                          
                          (230
                          )
                          
                          
                          (600
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          399
                          
                          
                          
                          1,727Cash
      and cash equivalents at end of period
                          
                          $
                          169
                          
                          
                          $
                          1,127Supplemental
      disclosure of cash flow information:Cash
      payments of interest
                          
                          $
                          2
                          
                          
                          $
                          -The
      accompanying notes are integral part of these unaudited condensed
      consolidated financial statements.








AEOLUS
PHARMACEUTICALS, INC.





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





A.         Organization
and Business and Basis of Presentation





Aeolus
Pharmaceuticals, Inc. is a biopharmaceutical company that is developing a new
class of catalytic antioxidant compounds for diseases and disorders of the
central nervous system, respiratory system, autoimmune system and
oncology.  The Company’s initial target indications are as a
protective agent against the effects of mustard gas exposure, as a protective
agent against radiation exposure, cancer radiation therapy, as a protective
agent against the effects of chlorine gas exposure and amyotrophic lateral
sclerosis, also known as “ALS” or “Lou Gehrig’s
disease.”





The
“Company” or “Aeolus” refers collectively to Aeolus Pharmaceuticals, Inc., a
Delaware corporation (“Aeolus”), and its wholly owned subsidiary, Aeolus
Sciences, Inc., a Delaware corporation. As of December 31, 2008, Aeolus also
owned a 35.0% interest in CPEC LLC, a Delaware limited liability company
(“CPEC”). The Company’s primary operations are located in Mission Viejo,
California.




All
significant intercompany activity has been eliminated in the preparation of the
condensed consolidated financial statements. The unaudited condensed
consolidated financial statements have been prepared in accordance with the
requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Some information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. In the opinion of management,
the accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. The consolidated balance sheet at September 30, 2008
was derived from the Company’s audited financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2008. The unaudited condensed consolidated financial statements included herein
should be read in conjunction with the audited consolidated financial statements
and the notes thereto included in that Annual Report on Form 10-K and in the
Company’s other SEC filings. Results for the interim period are not necessarily
indicative of the results for any other period.





New
Accounting Pronouncements





In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS
160”).  FAS 160 is an amendment of Accounting Research Bulletin
(“ARB”) No. 51 and was issued to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements.  This Statement applies to all
entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries.  FAS 160
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and that a parent company must recognize a
gain or loss in net income when a subsidiary is deconsolidated.  FAS
160 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited.  The Company does not expect the application
of FAS 160 to have a material effect on the financial statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS
141R”), which establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. FAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. The Company
must adopt SFAS 141R on October 1, 2009, the beginning of its fiscal year
2010.  The Company does not expect the application of FAS 141R to have
a material effect on the financial statements.





B.         Liquidity





The
Company has incurred significant losses from operations of $408,000 and
$2,517,000, and cash outflows from operations of $606,000 and $1,813,000, for
the three months ended December 31, 2008 and for the fiscal year ended September
30, 2008, respectively. The Company expects to incur additional losses and
negative cash flow from operations during the remainder of fiscal year 2009 and
for several more years.





Management
believes the Company has adequate financial resources to conduct operations into
the third quarter of fiscal year 2009. This raises substantial doubt about our
ability to continue as a going concern, which will be dependent on our ability
to generate sufficient cash flows to meet our obligations on a timely basis, to
obtain additional financing and, ultimately, to achieve operating
profits.








The
Company intends to explore strategic and financial alternatives, including a
merger or acquisition with or by another company, the sale of shares of stock
and/or convertible debentures, the establishment of new collaborations for
current research programs that include initial cash payments and on-going
research support and the out-licensing of our compounds for development by a
third party. The Company believes that without additional investment capital it
will not have sufficient cash to fund its activities in the near future, and
will not be able to continue operating. As such, the Company’s continuation as a
going concern is dependent upon its ability to raise additional financing. The
Company is actively pursuing additional equity and/or debt financing to provide
the necessary funds for working capital and other planned
activities.





If the
Company is unable to obtain additional financing to fund operations beyond the
third quarter of fiscal year 2009, it will need to eliminate some or all of its
activities, merge with another company, sell some or all of its assets to
another company, or cease operations entirely. There can be no assurance that
the Company will be able to obtain additional financing on favorable terms or at
all, or that the Company will be able to merge with another Company or sell any
or all of its assets.





C.         Net Loss
Per Common Share





The
Company computes basic net loss per weighted average share attributable to
common stockholders using the weighted average number of shares of common stock
outstanding during the period. The Company computes diluted net loss per
weighted average share attributable to common stockholders using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares consist of stock options,
convertible debt, warrants and convertible preferred stock using the treasury
stock method and are excluded if their effect is
anti-dilutive.  Diluted weighted average common shares included
incremental shares issuable upon conversion of the Senior Convertible
Notes.  Diluted weighted average common shares excluded incremental
shares of approximately 20,954,000 as of December 31, 2008 issuable upon the
exercise or conversion of stock options to purchase common stock, convertible
preferred stock and warrants to purchase common stock. These shares were
excluded due to their antidilutive effect as a result of the Company’s net
losses. Diluted weighted average common shares excluded incremental shares
of approximately 18,381,000 as of December 31, 2007 issuable upon the exercise
or conversion of stock options to purchase common stock, convertible preferred
stock and warrants to purchase common stock. These shares were excluded due to
their antidilutive effect as a result of the Company’s net losses.





D.           Investments





The
Company has invested in auction-rate securities with a par value of
$525,000.  The auction-rate securities are debt obligations secured by
student loans, which loans are generally guaranteed by the U.S. Government under
the Federal Family Education Loan Program (FFELP).  In addition to the
U.S. Government guarantee on such student loans, many of the securities also
have separate insurance policies guaranteeing both the principal and accrued
interest.  Liquidity for these securities has historically been
provided by an auction process that resets the applicable interest rate at
pre-determined intervals for up to 35 days.  In the past, the auction
process has generally allowed investors to obtain immediate liquidity if so
desired by selling the securities at their face amounts.  However, as
has been reported in the financial press, the current disruptions in the credit
markets have adversely affected the auction market for these types of
securities.  From February 26, 2008 to December 31, 2008, all auctions
scheduled with respect to the Company’s auction-rate securities failed to
close.  The final maturity dates of the auction-rate securities which
the Company owns is between 2029 and 2038.  The Company’s auction-rate
securities had an estimated fair value of approximately $395,000 as of December
31, 2008.





In June
2008, the Company filed an arbitration claim against UBS Financial Services,
Inc. (“UBS”) seeking recession of the purchase transactions of its four
auction-rate securities, reimbursement for lost interest income and lost revenue
due to delays in the development of its drug candidates and punitive
damages.  In January 2009, the Company settled its arbitration claim
against UBS.





In
October 2008, the Company entered into an agreement (the “UBS Agreement”)
with UBS for which the Company received the right (“Put Option”) to sell all
four of the auction rate securities back to UBS at par, at its sole
discretion, anytime during the period from January 2, 2009 through January 4,
2011, and gave UBS the right to purchase these auction rate securities or sell
them on the Company’s behalf at par anytime after the execution of the Agreement
through January 4, 2011.  The Put Option is not transferable, tradable
or marginable, and will not be listed or quoted on any securities exchange or
any electronic communications network.  Since the UBS Agreement is a
legally enforceable firm commitment, the Put Option is recognized as a financial
asset at fair value in the financial statements, and accounted for
separately from the associated securities as a noncurrent asset. Since we intend
to and subsequently did exercise the Put Option in January 2009, we did not have
the intent to hold the associated auction rate securities until recovery or
maturity. Therefore, we have classified these securities as trading pursuant to
Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” (“SFAS 115”).  SFAS 115
requires changes in the fair value of these securities to be recorded in current
period earnings. As a result of this transfer, the Company recognized in
the Statement of Operations a change in market value of $65,000, reflecting a
reversal of the related temporary valuation allowance that was previously
recorded in other comprehensive loss.








Prior to
entering into the UBS Agreement, we recorded the auction rate securities as
investments available-for-sale.  We recorded unrealized gains and
losses on the available-for-sale debt securities in accumulated other
comprehensive income in the shareholders’ equity section of the balance
sheets.  Such an unrealized loss did not reduce net income for the
applicable accounting period.





The
Company elected to measure the Put Option under the fair value option of SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”,
recorded income of approximately $114,000 and recorded a corresponding long term
investment.  The Company anticipates that any future changes in the fair
value of the Put Option will be offset by the changes in the fair value of the
related auction rate securities with no material net impact to the Statement of
Operations.




Following the reclassification of the
auction rate securities to trading, we recorded an additional charge to the
Statement of Operations of $16,000 to reduce the value of the auction rate
securities, offset by the gain on the Put Option of $16,000.






The
Company's investments in auction rate securities and the related Put Option are
classified within Level 3 of SFAS No. 157, “Fair Value Measurements”
because there are currently no active markets or observable market prices.
Therefore, the auction rate securities and the Put Option were valued primarily
based on an income approach using an estimate of future cash flows. The Company
has estimated the fair value using a discounted cash flow analysis which
considered the following key inputs: (i) the underlying structure and
maturity of each security; (ii) the timing of expected future principal and
interest payments; and (iii) discount rates that are believed to reflect
current market conditions and the relevant risk associated with each
security.







E.         Note
Payable





Senior
Convertible Notes to Related Parties





On August
1, 2008, the Company entered into a Securities Purchase Agreement (the "SCN
Purchase Agreement") with three accredited institutional
investors  (the "Investors") pursuant to which the Company agreed to
sell to the Investors units comprised of senior unsecured convertible notes of
the Company (the "Notes"), in an aggregate principal amount of up to $5,000,000,
which shall bear interest at a rate of 7% per year and mature on the 30-month
anniversary of their date of issuance, and warrants to purchase up to an
aggregate of 10,000,000 additional shares of Common Stock (the "Warrant
Shares"), each with an initial exercise price of $0.50 per share, subject to
adjustment pursuant to the warrants (the "Warrants") (collectively the “SCN
Financing”). Each unit (collectively, the "Units") is comprised of $1,000 in
Note principal and Warrants to purchase up to 2,000 shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), and has a purchase
price of $1,000.





On August
1, 2008, the Company sold and issued to the Investors 500 Units comprised of
Notes in the aggregate principal amount of $500,000 and Warrants to purchase up
to 1,000,000 shares of Common Stock for an aggregate purchase price of $500,000
(the "Financing").





On each
of September 4, 2008, October 1, 2008, November 3, 2008 and December 1, 2008,
the Company sold and issued to the Investors 125 Units comprised of Notes in the
aggregate principal amount of $125,000 and Warrants to purchase up to 250,000
shares of Common Stock for an aggregate purchase price of $125,000 (the
"Subsequent Financings").





The Notes
issued in the Financing and the Subsequent Financings have an initial conversion
price of $0.35 per share, subject to adjustment pursuant to the
Notes.  In addition, the Investors have the option to purchase up to
an additional 4,000 Units, in one or more closings (each, an "Election
Closing"), and at their sole option at any time on or before February 1,
2010.  The additional Units sold at an Election Closing would also be
sold by the Company at a purchase price of $1,000 per Unit, except that the
initial conversion price of the Notes issued in an Election Closing will equal
the volume weighted average closing sale price for the Common Stock for the
sixty consecutive trading day period ending on the trading day immediately
preceding such Election Closing, provided that such initial conversion price may
not be less than $0.20 per share or greater than $0.75 per share, in each case
subject to adjustment pursuant to the Note.





The Notes
will be convertible, at the Investors' sole election, into shares of Common
Stock at any time and from time to time.  As of December 31, 2008, the
Notes would be convertible into 2,857,000 shares of Common Stock with a fair
value of $1,000,000.  The conversion price of the Notes (including the
$0.20 floor and $0.75 ceiling price with respect to Notes issued at Election
Closings) and the exercise price of the Warrants are subject to adjustment in
the event of a stock dividend or split, reorganization, recapitalization or
similar event.  Additionally, the conversion price of the Notes and
the exercise price of the Warrants may be reduced in the event the Company
issues securities at a price per share lower than the then current conversion
price of the Notes.  The Notes are due and payable in cash at the
aggregate principal value plus accrued interest 30 months from the date of
issuance if not converted earlier by the Investors.





Interest
on the Notes accrues at the rate of 7.0% per annum from the date of issuance,
and is payable semi-annually, on January 31 and July 31 of each
year.  Interest shall be payable, at the Company's sole election, in
cash or shares of Common Stock, to holders of Notes on the record date for such
interest payments, with the record dates being each January 15 and July 15
immediately preceding an interest payment date.





The
Warrants are exercisable for a five year period from the date of issuance and
contain a "cashless exercise" feature that allows the Investors to exercise the
Warrants without a cash payment to the Company under certain
circumstances.





The net
proceeds to the Company from the sale of 1,000 Units in the Financing and
Subsequent Financing, after deducting for expenses, were approximately
$844,000.  The Company intends to use the net proceeds to fund the
development of AEOL 10150 and to fund ongoing operations of the
Company.  Offering costs of the private placement were $156,000 and
were allocated to the Notes and Warrants based upon their respective fair
values.  The offering costs attributed to the Notes in the amount of
$100,000 were capitalized as Debt Issuance Costs and are included in Prepaid and
other current assets in the Condensed Consolidated Balance Sheet.  The
Debt Issuance Costs are being amortized over the 30-month life of the Notes in
the Financing.





As of
December 31, 2008, the carrying value of the Notes was $396,000 and the
redemption value was $1,000,000.  In connection with the Financing and
the Subsequent Financings, the Company recorded a note discount in the amount of
$365,000 based on the relative fair value of the warrants issued in connection
with the Notes.  In addition, the Company determined that the Notes
contained an embedded conversion feature with a computed value of $347,000 which
was also recorded as a discount to the Notes.  The note discounts are
being amortized to interest expense over the thirty-month term of the
Notes.  The effective interest rate of the Note including the effect
of the amortization of the embedded conversion feature and the note discount is
39.4 percent.





The
maturity of the Notes may be accelerated upon the occurrence of an event of
default, which includes, subject to certain grace periods, exceptions and
qualifications as set forth in the Notes, the failure by the Company to maintain
the listing of the Common Stock, the failure of the Company to deliver shares
Common Stock in a timely manner following a conversion, the failure of the
Company to have reserved a sufficient number shares of Common Stock to issue
upon conversion of the Notes, the failure by the Company to make payments on the
Notes in a timely manner, payment defaults by the Company or any of its
significant subsidiaries on debt or other obligations in excess of $100,000, the
occurrence of certain bankruptcy events with respect to the Company or its
significant subsidiaries, judgments rendered against the Company or its
significant subsidiaries in excess of $100,000 and breaches of material
representations, warranties or covenants by the Company under the Amended
Purchase Agreement or the Notes. Upon the occurrence of an event of default
related to a bankruptcy of the Company, the Notes shall immediately become due
and payable.  Upon the occurrence of any event default other than a
bankruptcy event of default, any holder of the Notes, in its sole discretion,
may declare this Note to be immediately due and payable and the Company shall
pay to the holder in cash the sum of all outstanding principal multiplied by
115%, plus accrued and unpaid interest and late charges, if any,
thereon.  The Notes are unsubordinated obligations of the Company and
all payments due under the Notes rank pari passu with the Elan Note and shall
not be subordinated to any other Indebtedness of the Company.





The Notes
also provide that the Company shall not issue any equity securities other than
certain exempt securities as defined in the Notes, incur any indebtedness other
than certain exempt indebtedness as defined in the Notes, allow the incurrence
of any liens on its assets, repay any indebtedness other than the Notes, pay a
dividend on its common stock or make an investment other than ordinary investing
activities without the consent of the holders of Notes representing a majority
of the then-outstanding principal subject to the Notes.





Affiliates
of Xmark Opportunity Partners, LLC are the sole investors in the SCN Financing.
Together with its affiliates, Xmark Opportunity Partners, LLC beneficially owned
approximately 52% of the Company's outstanding common stock prior to the
Financing. Xmark Opportunity Partners, LLC is the sole manager of Goodnow
Capital, L.L.C. and possesses sole power to vote and direct the disposition of
all securities of the Company held by Goodnow. Goodnow has the right to
designate up to two directors for election to the Company's Board of Directors
pursuant to the terms of a purchase agreement between Goodnow and the Company.
David C. Cavalier, a current director of the Company, is President of
Goodnow.  The transaction was evaluated by Management and the Board of
Directors for fairness to ensure the terms were reasonable given the related
party nature of the SCN Financing by providing an option for non-related party
investors to participate in the transaction.





Elan
Note Payable





In August 2002, Aeolus borrowed from
Elan Corporation, plc. (“Elan”) $638,000.  The note payable accrued
interest at 10% compounded semi-annually. The note was convertible at the option
of Elan into shares of the Company’s Series B non-voting convertible preferred
stock (“Series B Stock”) at a rate of $43.27 per share. The original note
matured on December 21, 2006.  However, in February 2007, the Company
and Elan terminated the note, the Company paid $300,000 in cash to
Elan,  Elan forgave $225,000 of the note payable and Elan and the
Company entered into a new two-year note payable in the amount of $453,000 under
substantially the same terms as the original note.





The remaining principal plus accrued
interest will be due and payable in February 2009.  During the term of
the note payable, Elan has the option to convert the note into shares of Series
B Preferred Stock at a rate of $9.00 per share.  Upon the maturity of
the note payable, Aeolus has the option to repay the note either in cash or in
shares of Series B Stock and warrants having a then fair market value of the
amount due; provided that the fair market value used for calculating the number
of shares to be issued will not be less than $13.00 per share. As of December
31, 2008, the outstanding balance, including interest, on the note payable to
Elan was $548,000.








Margin
Loan with UBS Financial Services, Inc.





Aeolus
has entered into a secured credit agreement (the “Margin Agreement”) with UBS
Financial Services, Inc and subsequently drew $367,000 under the Margin
Agreement.  The Margin Agreement bears interest at the per annum rate
of LIBOR plus 0.25 percent.  The Company repaid the loan in full on
January 2, 2009.





F.           Stockholders’
Equity





In
connection with the SCN Financing (Note E), Aeolus issued warrants to purchase
2,000,000 shares at an exercise price of $0.50 per share with a five year
term.  The fair value of the warrants issued on August 1, 2008 was
estimated to be $282,000 using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%; expected volatility of 128% risk
free interest rate of 3.2%; and an expected life of five years.  The
fair value of the warrants issued on September 4, 2008 was estimated to be
$53,000 using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 130% risk free
interest rate of 3.0%; and an expected life of five
years.    The fair value of the warrants issued on October
1, 2008 was estimated to be $93,000 using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
133% risk free interest rate of 2.9%; and an expected life of five
years.    The fair value of the warrants issued on November
3, 2008 was estimated to be $76,000 using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
139% risk free interest rate of 2.7%; and an expected life of five
years.    The fair value of the warrants issued on December
1, 2008 was estimated to be $75,000 using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
138% risk free interest rate of 1.7%; and an expected life of five
years.





In
addition, as a result of the SCN Financing, the Company was required to lower
the exercise price of 4,687,000 warrants previously issued in the November 2005
Financing and in the 2007 Financing to $0.35 per share, the conversion price of
the Notes issued in the SCN Financing.   As a result of the
change in the exercise price, these warrants were revalued resulting in an
increase in the value of $118,000 which was charged to the statement of
operations during the fourth quarter of fiscal year 2008.





As of
December 31, 2008, warrants to purchase 15,988,668 shares of common stock were
outstanding. Details of the warrants for common stock outstanding at December
31, 2008 were as follows:





Number of Shares
                              
                              Exercise Price
                              
                              Expiration Date50,000
                              
                              
                              $    0.35
                              
                              May
      20112,500,000
                              
                              
                              $    0.35
                              
                              November
      20102,186,668
                              
                              
                              $    0.35
                              
                              May
      20121,000,000
                              
                              
                              $    0.50
                              
                              August
      2013250,000
                              
                              
                              $    0.50
                              
                              September
      2013250,000
                              
                              
                              $    0.50
                              
                              October
      2013250,000
                              
                              
                              $    0.50
                              
                              November
      2013250,000
                              
                              
                              $    0.50
                              
                              December
      20137,000,000
                              
                              
                              $    0.75
                              
                              June
      201150,000
                              
                              
                              $    1.00
                              
                              May
      201150,000
                              
                              
                              $    1.50
                              
                              May
      201150,000
                              
                              
                              $    2.00
                              
                              May
      201150,000
                              
                              
                              $    2.50
                              
                              May
      2011410,400
                              
                              
                              $    2.50
                              
                              April
      20091,641,600
                              
                              
                              $    4.00
                              
                              April
      200915,988,668
                              
                              
                              $    0.99





G.         Stock-Based
Compensation





Below is
a summary of Aeolus stock option activity during the three-month period ended
December 31, 2008:





Shares
                      
                      Weighted
      Average Exercise Price
                      
                      Weighted
      Average Remaining Contractual Term
                      
                      Aggregate
      Intrinsic ValueOutstanding
      at September 30, 2008
                      
                      
                      4,235,281
                      
                      $
                      2.50
                      
                      6.7
      years
                      $
                      46Granted
                      
                      
                      194,000
                      
                      $
                      0.41Exercised
                      
                      
                      ---
                      
                      $
                      ---Forfeited
                      
                      
                      ---
                      
                      $
                      ---Outstanding
      at December 31, 2008 (unaudited)
                      
                      
                      4,429,281
                      
                      $
                      2.40
                      
                      6.6
      years
                      $
                      8Exercisable
      at December 31, 2008 (unaudited)
                      
                      
                      4,081,114
                      
                      $
                      2.58
                      
                      6.3
      years
                      $
                      4











For the
three months ended December 31, 2008 and 2007, all stock options were issued
with an exercise price at or above the fair market value of the Company’s common
stock on the date of grant.





The
details of stock options outstanding at December 31, 2008 were as
follows:





Options
      Outstanding
                          
                          Options
      ExercisableRange
      of Exercise Prices
                          
                          Number
      Outstanding at December 31, 2008
                          
                          Weighted
      Average Exercise Price
                          
                          Weighted
      Average Remaining Contractual Life
                          
                          Number
      Exercisable at December 31, 2008
                          
                          Weighted
      Average Exercise Price$0.32
      - 0.40
                          
                          569,000
                          
                          $
                          0.36
                          
                          9.6
      years
                          
                          220,833
                          
                          $
                          0.35$0.44
      - $0.60
                          
                          526,050
                          
                          $
                          0.55
                          
                          8.4
      years
                          
                          526,050
                          
                          $
                          0.55$0.68
      - $0.80
                          
                          464,161
                          
                          $
                          0.75
                          
                          7.5
      years
                          
                          464,161
                          
                          $
                          0.75$0.81
      - $0.90
                          
                          780,085
                          
                          $
                          0.88
                          
                          7.4
      years
                          
                          780,085
                          
                          $
                          0.88$0.91
      - $1.45
                          
                          224,500
                          
                          $
                          1.04
                          
                          7.3
      years
                          
                          224,500
                          
                          $
                          1.04$1.50
                          
                          1,256,015
                          
                          $
                          1.50
                          
                          4.6
      years
                          
                          1,256,015
                          
                          $
                          1.50$1.52
      - $12.85
                          
                          461,418
                          
                          $
                          4.24
                          
                          5.1
      years
                          
                          461,418
                          
                          $
                          4.24$14.50
      - $31.88
                          
                          99,253
                          
                          $
                          25.97
                          
                          1.9
      years
                          
                          99,253
                          
                          $
                          25.97$50.9375
                          
                          2,999
                          
                          $
                          50.94
                          
                          1.3
      years
                          
                          2,999
                          
                          $
                          50.94$51.25
                          
                          45,800
                          
                          $
                          51.25
                          
                          1.3
      years
                          
                          45,800
                          
                          $
                          51.25$0.32
      - $51.25
                          
                          4,429,281
                          
                          $
                          2.40
                          
                          6.6
      years
                          
                          4,081,114
                          
                          $
                          2.58











Stock-based
compensation expense recognized in the statement of operations is as follows (in
thousands):





For
      the three months
                December
      31,2008
              
              
              2007Research
      and development expenses
              
              $
              22
              
              $
              20General
      and administrative expenses
              
              
              43
              
              
              127Total
      stock-based compensation expense
              
              $
              65
              
              $
              147




The total
deferred compensation expense for outstanding and unvested stock options was
$70,000 as of December 31, 2008.  The weighted average remaining
recognition period for the total deferred compensation expense is four months.
The fair value of the options associated with the above compensation expense was
determined at the date of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions:





For
      the three months December 31,2008
                  
                  2007Dividend
      yield
                  
                  0%
                  
                  0%Expected
      volatility
                  
                  200%–
      201%
                  
                  197%Risk-free
      interest rate
                  
                  2.6%
      - 3.8%
                  
                  4.6%Expected
      option life after shares are vested
                  
                  10
      years
                  
                  10
      years





H.           Commitments





The
Company has acquired assets still in development and entered into research and
development arrangements with third parties that may require milestone and
royalty payments to the third party contingent upon the occurrence of certain
future events linked to the success of the asset in development. Milestone
payments may be required, contingent upon the successful achievement of an
important point in the development life-cycle of the pharmaceutical product
(e.g., approval of the product for marketing by a regulatory agency). If
required by the arrangement, the Company may have to make royalty payments based
upon a percentage of the sales of the pharmaceutical product in the event that
regulatory approval for marketing is obtained.








These
arrangements may be material individually, and in the unlikely event that
milestones for multiple products covered by these arrangements were reached in
the same period, the aggregate charge to expense could be material to the
results of operations in any one period. In addition, these arrangements often
give Aeolus the discretion to unilaterally terminate development of the product,
which would allow Aeolus to avoid making the contingent payments; however,
Aeolus is unlikely to cease development if the compound successfully achieves
clinical testing objectives.





I.           Subsequent
Events





On
January 2, 2009, the Company exercised its rights under the Put Option and sold
its four auction rate securities for their par value of $525,000 to UBS and upon
settlement of the trade the Company paid in full the UBS Margin
Loan.  In addition, the Company settled its arbitration claim against
UBS Financial Services, Inc.








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





Introduction





Unless
otherwise noted, the terms “we,” “our” or “us” refer collectively to AeolusPharmaceuticals, Inc.
and our wholly owned subsidiary, Aeolus Sciences, Inc.





This
report contains, in addition to historical information, statements by us with
respect to expectations about our business and future results which are
“forward-looking” statements under the Private Securities Litigation Reform Act
of 1995. These statements and other statements made elsewhere by us or by our
representatives, which are identified or qualified by words such as “likely,”
“will,” “suggests,” “expects,” “might,” “believe,” “could,” “should,” “may,”
“estimates,” “potential,” “predict,” “continue,” “would,” “anticipates,”
“plans,” or similar expressions, are based on a number of assumptions that are
subject to risks and uncertainties. Such statements include, but are not limited
to, those relating to Aeolus’ product candidates, as well as its proprietary
technologies and uncertainties and other factors that may cause Aeolus’ actual
results to be materially different from historical results or from any results
expressed or implied by such forward-looking statements. Important factors that
could cause results to differ include risks associated with uncertainties of
progress and timing of clinical trials, scientific testing, obtaining regulatory
approval, the need to obtain funding for pre-clinical and clinical trails and
operations, the scope and validity of intellectual property protection for
Aeolus’ product candidates, proprietary technologies and their uses, new
accounting and SEC requirements and competition from other biopharmaceutical
companies. Certain of these factors and others are more fully described in
Aeolus’ filings with the SEC, including, but not limited to, Aeolus’ Annual
Report on Form 10-K for the fiscal year ended September 30, 2008. All
forward-looking statements are based on information available as of the date
hereof, and we do not assume any obligation to update such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.





Operations
Summary





We are
developing a series of catalytic antioxidant molecules to protect against the
damaging effects of reactive oxygen derived molecules, commonly referred to as
free radicals.  Free radicals cause damage in a broad group of
diseases and conditions.  Our initial target indications are as a
protective agent against the effects of mustard gas exposure, as a protective
agent against radiation exposure, cancer radiation therapy, as a protective
agent against the effects of chlorine gas exposure and amyotrophic lateral
sclerosis, also known as “ALS” or “Lou Gehrig’s disease.”  We have
reported positive safety results from two Phase I clinical trials of AEOL 10150,
our lead drug candidate, with no serious adverse events noted.  We
also have a long-term clinical trial underway in a single patient with ALS to
test the efficacy and further test the safety of AEOL 10150.  However,
further development of AEOL 10150 for the treatment of ALS and cancer radiation
therapy, if any, will be dependent upon future specific financing for this
development or a partnership and the results of our ongoing studies of AEOL
10150 for the treatment of mustard gas exposure and chlorine gas
exposure.





We do not
have any revenue, other than grant income, and therefore we must rely on public
or private equity offerings, debt financings, collaboration arrangements or
grants to finance our operations.





Need for Additional
Funds





We
believe we have adequate financial resources to fund our operations into the
third quarter of fiscal year 2009, but in order to fund on-going operating cash
requirements beyond the third quarter of fiscal year 2009, or to accelerate or
expand our programs, we will need to raise significant additional funds. Our
need for additional financing is discussed under “Liquidity and Capital
Resources.”








Results of
Operations





Three months ended December
31, 2008 versus three months ended December 31, 2007





We had
net losses attributable to common stockholders of $459,000 for the three months
ended December 31, 2008, versus net losses attributable to common stockholders
of $641,000 for the three months ended December 31, 2007.





Research
and development (“R&D”) expenses decreased $129,000, or 51%, to $125,000 for
the three months ended December 31, 2008 from $254,000 for the three months
ended December 31, 2007.  R&D expenses were lower during the three
months ended December 31, 2008 versus December 31, 2007 due to a decline in
grant expenses. During the three months ended December 31, 2008, our development
program was focused on the development of AEOL 10150 as a protective agent
against chemical agents which were funded through grants from the National
Institutes of Health CounterAct Program, whereas during the three months ended
December 31, 2007 there were two studies underway which were funded by the
Company in the amount of $110,000.





R&D
expenses for our antioxidant program have totaled $34,636,000 from inception
through December 31, 2008. Because of the uncertainty of our research and
development and clinical studies, we are unable to predict the level of spending
and the anticipated program completion date, if any.





General
and administrative (“G&A”) expenses decreased $112,000, or 28%, to $283,000
for the three months ended December 31, 2008 from $395,000 for the three months
ended December 31, 2007.  G&A expenses were lower during the three
months ended December 31, 2008 versus December 31, 2007 due to a decline in
stock based compensation expense and Board of Directors
expense.   Stock compensation expense decreased by $84,000 as a
result of the lower level of grant activity during the current quarter and an
average lower valuation assigned to such grants in the current quarter when
compared to the prior year quarter.  Board of Directors expense
decreased by $34,000 as the Board of Directors adopted a stock based
compensation plan in July 2008 whereas during the quarter ended December 31,
2007, the Board of Directors received cash and stock based
compensation.





We
incurred net interest expense of $100,000 for the three months ended December
31, 2008 compared to net interest income of $8,000 for the three months ended
December 31, 2007.  The change reflects higher interest expense as a
result of the issuance of the Senior Convertible Notes which bear interest at a
rate of 7% as well as the related amortization of debt issuance costs and a note
issuance discounts related to warrant issuances and beneficial conversion
features.  Interest expense also increased as a result of a higher
average balance of our note payable with Elan and the draws on our margin loan
with UBS Financial Services, Inc.  Interest income on our investments
also decreased due to a lower level of investable assets as well as a lower
level of interest rates during the current quarter.





We
recorded a gain of $49,000 related to the net increase in the market value of
our trading securities during the three months ended December 31,
2008.





Liquidity and Capital
Resources





We do not
have any revenue and therefore we rely on investors, grants, collaborations and
licensing of our compounds to finance our operations. At December 31, 2008, we
had $169,000 of cash, a decrease of $230,000 from September 30, 2008. The
decrease in cash was primarily due to the $408,000 loss from operations for the
three months ended December 31, 2008.  We believe we have adequate
financial resources to conduct operations into the third quarter of fiscal year
2009, but in order to fund on-going operating cash requirements beyond that
point, or to further accelerate or expand our programs, we need to raise
significant additional funds.





We
incurred significant losses from operations of $408,000 and $2,517,000, and cash
outflows from operations of $606,000 and $1,813,000, for the three months ended
December 31, 2008 and for the fiscal year ended September 30, 2008,
respectively. Our ongoing future cash requirements will depend on numerous
factors, particularly the progress of our catalytic antioxidant program and
clinical trials and our ability to negotiate and complete collaborative
agreements or out-licensing arrangements. In order to help fund our on-going
operating cash requirements, we intend to seek new collaborations for our
antioxidant research program that include initial cash payments and on-going
research support. In addition, we might sell additional shares of our stock
and/or convertible debentures and explore other strategic and financial
alternatives, including a merger with another company, the sale of stock and/or
debt, the establishment of new collaborations for current research programs,
that include initial cash payments and ongoing research support and the
out-licensing of our compounds for development by a third party.





There are
significant uncertainties as to our ability to access potential sources of
capital. We may not be able to enter into any collaboration on terms acceptable
to us, or at all, due to conditions in the pharmaceutical industry or in the
economy in general or based on the prospects of our catalytic antioxidant
program. Even if we are successful in obtaining a collaboration for our
antioxidant program, we may have to relinquish rights to technologies, product
candidates or markets that we might otherwise





develop
ourselves. These same risks apply to any attempt to out-license our
compounds.





Similarly,
due to market conditions, the illiquid nature of our stock and other possible
limitations on equity offerings, we may not be able to sell additional
securities or raise other funds on terms acceptable to us, if at all. Any
additional equity financing, if available, would likely result in substantial
dilution to existing stockholders.





Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is forward-looking information, and actual
results could vary.





Off-Balance Sheet
Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.





ITEM
3.                      Quantitative
and Qualitative Disclosures About Market Risk.





Our
exposure to market risk is presently limited to the interest rate sensitivity of
our cash and cash equivalents, which is affected by changes in the general level
of U.S. interest rates. However, we believe that we are not subject to any
material market risk exposure and do not expect that changes in interest rates
would have a material effect upon our financial position. A hypothetical 10%
change in interest rates would not have a material effect on our Statement of
Operations or Cash Flows for the three months ended December 31, 2008. We do not
have any foreign currency or other derivative financial instruments. Our debt
bears interest at a fixed rate.





ITEM
4.                      Controls
and Procedures.





(a)                 As
of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including the Company’s President and Chief Executive Officer (the
Company’s Principal Executive Officer) and Chief Financial Officer (the
Company’s Principal Financial and Accounting Officer), of the effectiveness of
the Company’s disclosure controls and procedures required by Exchange Act Rule
13a-15.  Based upon that evaluation, the Company’s Principal Executive
Officer and Principal Financial and Accounting Officer have concluded that the
Company’s disclosure controls and procedures were not effective as of
December 31, 2008 to provide reasonable assurance that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms because of the material weakness discussed
below.





As a
result of the lack of segregation of duties, management has determined that a
material weakness in internal control over financial reporting related to the
segregation of duties existed as of December 31, 2008, and based on the
criteria set forth by by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), concluded that the Company’s internal control over
financial reporting was not effective as of December 31, 2008.





A
“material weakness,” as defined by the Public Company Accounting Oversight Board
(PCAOB) is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis.  This material
weakness has not resulted in an adjustment or misstatements to the financial
statements.





To
address the material weakness, management has established mitigating controls to
minimize the potential for material misstatements in the financial
statements.  Management has determined that given the Company’s size,
level of operations and financial resources, it is not practicable for the
Company to eliminate the segregation of controls weakness and therefore
management has established mitigating controls to minimize the impact of the
lack of segregation of duties.





(b)                 During
the most recent fiscal quarter, there were no significant changes in the
Company’s internal control over financial reporting or in other factors that
materially affected or are reasonably likely to materially affect the Company’s
internal control over financial reporting.








PART
II. - OTHER INFORMATION





ITEM
1.                      Legal
Proceedings.





None.





ITEM
1A.                                                                                                                                                    Risk
Factors.





None.





ITEM
2.                      Unregistered
Sales of Equity Securities and Use of Proceeds.





None.





ITEM
3.                      Defaults
Upon Senior Securities.





None.




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





None.





ITEM
5.                      Other
Information.




None.





ITEM
6.                      Exhibits





Exhibit
      #
                  
                  Description31.1
                  
                  Certification
      of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)
      and 15d-14(a).31.2
                  
                  Certification
      of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)
      and 15d-14(a).32.1
                  
                  Certification
      by the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.





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.





AEOLUS
PHARMACEUTICALS, INC.








Date:                         February 6,
      2009
              By:
              /s/
      John L. McManusJohn
      L. McManus
                President
      and Chief Executive Officer
                (Principal
      Executive Officer)Date:                         February 6,
      2009
              By:
              /s/
      Michael P. McManusMichael
      P. McManus
                Chief
      Financial Officer, Treasurer and Secretary
                (Principal
      Financial and Accounting
Officer)