**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 March 31, 2007** .





_____
            
            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.)23811
                Inverness Place
              Laguna
                Niguel, California
            
            92677(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
              May
                3, 2007Common
                Stock, par value $.01 per share
            
            29,286,082
                shares










AEOLUS
      PHARMACEUTICALS, INC.


FORM
      10-Q


For
      the
      Quarter Ended March 31, 2007


Table
      of
      Contents





**Page**PART
                I.  FINANCIAL INFORMATIONItem
                1.
            Financial
                StatementsStatement
                Regarding Financial Information
            3Condensed
                Consolidated Balance Sheets as of March 31, 2007 (unaudited) and
                September
                30, 2006
            4Condensed
                Consolidated Statements of Operations for the Three Months and Six
                Months
                ended March 31, 2007 and 2006 (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the Six Months ended March
                31,
                2007 and 2006 (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            10Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            13Item
                4.
            Controls
                and Procedures
            13PART
                II.  OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            13Item
                1A.
            Risk
                Factors
            13Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            13Item
                3.
            Defaults
                Upon Senior Securities
            13Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            14Item
                5.
            Other
                Information
            14Item
                6.
            Exhibits
            14SIGNATURES
            14














**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, 2006), 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, 2006, filed
      with the SEC on December 15, 2006.










AEOLUS
                PHARMACEUTICALS, INC.CONDENSED
                CONSOLIDATED BALANCE SHEETS(In
                thousands, except shares and per share data)March
                31,
            
            September
                30,2007
            
            2006(Unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            913
            
            $
            3,324Prepaids
                and other current assets
            
            
            347
            
            
            104Total
                current assets
            
            
            1,260
            
            
            3,428Investment
                in CPEC LLC
            
            
            126
            
            
            126Total
                assets
            
            $
            1,386
            
            $
            3,554LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Accounts
                payable
            
            $
            273
            
            $
            868Accrued
                expenses
            
            
            16
            
            
            23Current
                maturity of long-term note payable
            
            
            -
            
            
            956Total
                current liabilities
            
            
            289
            
            
            1,847Long-term
                note payable
            
            
            459
            
            
            -Total
                liabilities
            
            
            748
            
            
            1,847Commitments
                and contingencesStockholders'
                deficit: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 March 31,2007
                and September 30, 2006
            
            
            5
            
            
            5Common
                stock, $.01 par value per share, 150,000,000 shares
                authorized;29,286,082 and 29,265,249 shares issued and outstanding atMarch
                31, 2007 and September 30, 2006, respectively
            
            
            293
            
            
            293Additional
                paid-in capital
            
            
            154,735
            
            
            154,311Accumulated
                deficit
            
            
            (154,395
            )
            
            (152,902
            )Total
                stockholders' deficit
            
            
            638
            
            
            1,707Total
                liabilities and stockholders' deficit
            
            $
            1,386
            
            $
            3,554The
                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 Ended
            
            Six
                Months EndedMarch
                31,
            
            March
                31,2007
            
            2006
            
            2007
            
            2006RevenueGrant
                income
            
            $
            -
            
            $
            91
            
            $
            -
            
            $
            92Costs
                and expenses:Research
                and development
            
            
            341
            
            
            965
            
            
            677
            
            
            2,258General
                and administrative
            
            
            447
            
            
            556
            
            
            1,076
            
            
            1,047Total
                costs and expenses
            
            
            788
            
            
            1,521
            
            
            1,753
            
            
            3,305Loss
                from operations
            
            
            (788
            )
            
            (1,430
            )
            
            (1,753
            )
            
            (3,213
            )Interest
                income (expense), net
            
            
            19
            
            
            (8
            )
            
            35
            
            
            (19
            )Equity
                in income of CPEC LLC
            
            
            -
            
            
            433
            
            
            -
            
            
            433Other
                income
            
            
            225
            
            
            19
            
            
            225
            
            
            36Decrease
                in fair value of common stock warrants
            
            
            -
            
            
            147
            
            
            -
            
            
            401Net
                loss
            
            
            (544
            )
            
            (839
            )
            
            (1,493
            )
            
            (2,362
            )Preferred
                stock dividend accreted
            
            
            -
            
            
            (55
            )
            
            -
            
            
            (55
            )Net
                loss attributable to common stockholders
            
            $
            (544
            )
            $
            (894
            )
            $
            (1,493
            )
            $
            (2,417
            )Net
                loss per weighted share attributable to common
                stockholders:(basic
                and diluted)
            
            $
            (0.02
            )
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.17
            )Weighted
                average common shares outstanding:Basic
                and diluted
            
            
            29,286
            
            
            14,077
            
            
            29,277
            
            
            14,058The
                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)Six
                Months EndedMarch
                31,2007
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (1,493
            )
            $
            (2,362
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Noncash
                compensation
            
            
            403
            
            
            156Noncash
                interest and financing costs
            
            
            28
            
            
            41Forgiveness
                of Note Payable
            
            
            (225
            )
            
            -Equity
                income of CPEC LLC
            
            
            -
            
            
            (433
            )Decrease
                in fair value of common stock warrants
            
            
            -
            
            
            (401
            )Change
                in assets and liabilities:Accounts
                receivable
            
            
            (199
            )
            
            9Prepaids
                and other assets
            
            
            (44
            )
            
            (71
            )Accounts
                payable and accrued expenses
            
            
            (602
            )
            
            284Net
                cash used in operating activities
            
            
            (2,132
            )
            
            (2,777
            )Cash
                flows from financing activities:Repayment
                of Note Payable
            
            
            (300
            )
            
            -Proceeds
                from issuance of Series A Preferred Stock
            
            
            -
            
            
            2,413Proceeds
                from exercise of stock options
            
            
            21
            
            
            42Net
                cash (used in) provided by financing activities
            
            
            (279
            )
            
            2,455Net
                decrease in cash and cash equivalents
            
            
            (2,411
            )
            
            (322
            )Cash
                and cash equivalents at beginning of period
            
            
            3,324
            
            
            626Cash
                and cash equivalents at end of period
            
            $
            913
            
            $
            304The
                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 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 applications are for cancer radiation therapy and
      amyotrophic lateral sclerosis, also known as “ALS” or “Lou Gehrig’s disease.”
The Company reported positive safety results from two Phase I clinical trials
      of
      AEOL 10150, our lead drug candidate, with no serious adverse events noted.
      The
      Company plans on initiating a clinical trial for AEOL 10150 as a protector
      of
      healthy normal cells in radiation therapy upon securing additional financial
      resources. Further development of AEOL 10150 for the treatment of ALS, if any,
      will be dependent upon future specific financing for this development or a
      partnership.





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 March 31, 2007, Aeolus also owned
      a 35.0% interest in CPEC LLC, a Delaware limited liability company (“CPEC”). The
      Company’s primary operations are located in Laguna Niguel,
      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,
      2006
      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,
      2006. 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.





B.   Liquidity





The
      Company has incurred significant losses from operations of $1,753,000 and
      $5,604,000, and cash outflows from operations of $2,132,000 and $4,867,000,
      for
      the six months ended March 31, 2007 and for the fiscal year ended September
      30,
      2006, respectively. The Company expects to incur additional losses and negative
      cash flow from operations during the remainder of fiscal year 2007 and for
      several more years.





Management
      believes the Company has adequate financial resources to conduct operations
      through the fourth quarter of fiscal year 2007. 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
      profit.





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,
      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 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
      fourth quarter of fiscal year 2007, 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. Diluted weighted average common shares excluded
      incremental shares of approximately 19,705,000 as of March 31, 2007 issuable
      upon the exercise or conversion of stock options to purchase common stock,
      convertible preferred stock, convertible debt 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.   Note
      Payable





In
      August
      2002, Aeolus borrowed from Elan
      Corporation, plc .
      (“Elan”) $638,000 pursuant to the terms of a note arrangement with Elan. The
      note payable accrues 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 $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 and the Company entered into a new note payable in the amount of $453,000
      for a period of two years under substantially the same terms as the original
      note and Elan forgave $225,000 of the note payable.





The
      remaining principal plus accrued interest will be due and payable in two years.
      During the term of the Note Payable, Elan has the option to convert the note
      to
      shares of Series B Preferred Stock at a value 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
      March 31, 2007, the outstanding balance on the note payable to Elan was
      $459,000.





E.   Stock-Based
      Compensation





Below
      is
      a summary of Aeolus stock option activity during the six-month period ended
      March 31, 2007:





**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at September 30, 2006
            
            
            3,071,806
            
            $
            3.25
            
            
            7.7
                years
            
            $
            22,000Granted
            
            
            742,000
            
            $
            0.60Exercised
            
            
            (20,833
            )
            $
            1.00Forfeited
            
            
            (452,356
            )
            $
            0.64Outstanding
                at December 31, 2006 (unaudited)
            
            
            3,340,617
            
            $
            3.02
            
            
            7.2
                years
            
            $
            27,000Exercisable
                at December 31, 2006 (unaudited)
            
            
            2,957,700
            
            $
            3.32
            
            
            6.9
                years
            
            $
            15,000





For
      the
      six months ended March 31, 2007 and 2006, 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 March 31, 2007 were as
      follows:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number
                Outstanding at March 31, 2007**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Number
                Exercisable at March 31, 2007**
            
            **Weighted
                Average Exercise Price**$0.38
                - 0.73
            
            
            337,211
            
            $
            0.61
            
            
            8.0
                years
            
            
            183,044
            
            $
            0.61$0.75
                - $0.80
            
            
            396,000
            
            $
            0.76
            
            
            8.9
                years
            
            
            282,667
            
            $
            0.76$0.81
                - $0.85
            
            
            350,994
            
            $
            0.85
            
            
            8.6
                years
            
            
            235,994
            
            $
            0.85$0.89
                - $1.12
            
            
            340,477
            
            $
            0.95
            
            
            8.5
                years
            
            
            340,477
            
            $
            0.95$1.13
                - $1.45
            
            
            50,450
            
            $
            1.16
            
            
            7.7
                years
            
            
            50,450
            
            $
            1.16$1.50
            
            
            1,256,015
            
            $
            1.50
            
            
            6.3
                years
            
            
            1,256,015
            
            $
            1.50$1.52
                - $5.00
            
            
            374,556
            
            $
            2.74
            
            
            7.3
                years
            
            
            374,139
            
            $
            2.74$5.10
                - $31.88
            
            
            186,115
            
            $
            18.84
            
            
            4.2
                years
            
            
            186,115
            
            $
            18.84$50.9375
            
            
            2,999
            
            $
            50.94
            
            
            3.0
                years
            
            
            2,999
            
            $
            50.94$51.25
            
            
            45,800
            
            $
            51.25
            
            
            3.0
                years
            
            
            45,800
            
            $
            51.25$0.38
                - $51.25
            
            
            3,340,617
            
            $
            3.02
            
            
            7.2
                years
            
            
            2,957,700
            
            $
            3.32





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





**For
                the six months**
              **March
                31,****2007**
            
            **2006**Research
                and development expenses
            
            $
            130
            
            $
            23General
                and administrative expenses
            
            
            248
            
            
            133Total
                stock-based compensation expense
            
            $
            378
            
            $
            156




The
      total
      deferred compensation expense for outstanding and unvested stock options was
      $294,000 as of March 31, 2007, which will be recognized over the next four
      months. The fair value of the options associated with the above compensation
      expense for the six months ended March 31, 2007, was determined at the date
      of
      the grant using the Black-Scholes option pricing model with the following
      weighted average assumptions:





**For
                the six months March 31,****2007**
            
            **2006**Dividend
                yield
            
            0%
            
            0%Expected
                volatility
            
            191
                - 195%
            
            187
                - 189%Risk-free
                interest rate
            
            4.5%
                - 5.1%
            
            4.3%
                - 4.9%Expected
                option life after shares are vested
            
            10
                years
            
            10
                years








F.   Commitments
      and Contingencies




In
      December 1999, the Company sold its anti-infectives division (“IRL”) to a
      private pharmaceutical company. The Company remains contingently liable through
      May 2007 for a lease obligation of approximately $219,000 assumed by the
      purchaser on the former IRL facility in Cranbury, New Jersey. No amounts are
      recorded in the accompanying financial statements for this contingent
      liability.





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
      Aeolus Pharmaceuticals, 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, 2006. 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 applications will be the use of our catalytic
      antioxidants for cancer radiation therapy 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 in patients diagnosed
      with ALS with no serious adverse events noted. We plan on initiating a clinical
      trial for AEOL 10150 as a protector of healthy normal cells in radiation therapy
      upon securing additional financial resources.





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 through
      the
      fourth quarter of fiscal year 2007, but in order to fund on-going operating
      cash
      requirements beyond the fourth quarter of fiscal year 2007, 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 March 31, 2007 versus three months ended March 31,
      2006*





We
      had
      net losses attributable to common stockholders of $544,000 for the three months
      ended March 31, 2007, versus net losses attributable to common stockholders
      of
      $894,000 for the three months ended March 31, 2006.





In
      August
      2003, we were awarded a Small Business Innovation and Research (“SBIR”) grant
      from the National Cancer Institute, a division of the National Institutes of
      Health. Pursuant to the grant, we studied the antitumor and radiation-protective
      effects of our catalytic antioxidants. The study was a collaboration between
      us
      and the Department of Radiation Oncology at Duke University Medical Center.
      The
      grant ended in March 2006. We recognized zero and $91,000 of grant income during
      the three months ended March 31, 2007 and 2006, respectively. We do not expect
      to earn further grant revenues as work under our SBIR grant has been
      completed.





Research
      and development (“R&D”) expenses decreased $624,000, or 65%, to $341,000 for
      the three months ended March 31, 2007 from $965,000 for the three months ended
      March 31, 2006. Research and development activities were focused on completing
      the final report of our Phase I multiple dose clinical trial for the treatment
      of ALS and preparing for a proposed clinical trial for AEOL 10150 as a radiation
      protection agent. During the three months ended March 31, 2006, our primary
      operational focus and R&D spending was on conducting our Phase I multiple
      dose clinical trial for the treatment of ALS and the advancement of the Aeolus
      Pipeline Initiative. In addition, patent fees were lower this quarter compared
      to the same quarter last year as the Company was in the process of validating
      several patents internationally during the three years ended March 31, 2006
      whereas we had limited patent activity during the current year
      quarter.





R&D
      expenses for our antioxidant program have totaled $32,830,000 from inception
      through March 31, 2007. 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 $109,000, or 20%, to $447,000
      for the three months ended March 31, 2007 from $556,000 for the three months
      ended March 31, 2006. G&A expenses were lower during the three months ended
      March 31, 2007 versus March 31, 2006 due to our efforts
      to decrease the level of services provided by consultants resulting in a lower
      level of legal and professional fees ($153,000).





During
      the three months ended March 31, 2006, CPEC LLC (“CPEC”) received a milestone
      payment and equity consideration from ARCA Discovery, Inc., a privately held
      cardiovascular-focused company (“ARCA”). In 2003, CPEC, of which we own 35%
      out-licensed all rights to a potential therapeutic compound referred to as
      “bucindolol” to ARCA. During the three months ended March 31, 2006, CPEC agreed
      to modify the license agreement between CPEC and ARCA Discovery, Inc. and
      received 400,000 shares of ARCA Discovery, Inc. common stock as consideration
      for the amendment. In addition, during the three months ended March 31, 2006,
      CPEC received a milestone payment of $1,000,000 as a result of ARCA Discovery,
      Inc. completing a financing. We recognized zero and $433,000 of income during
      the three months ended March 31, 2007 and 2006, respectively, as a result of
      our
      equity ownership of CPEC LLC.





During
      the three months ended March 31, 2007, we recognized $225,000 in income as
      a
      result of the forgiveness of a portion of the principal balance of a note
      payable from Elan Corporation, plc. (“Elan”). In connection with the termination
      of a note payable and issuance of a new note payable, we paid $300,000 in cash
      to Elan, Elan and the Company entered into a new note payable in the amount
      of
      $453,000 for a period of two years under substantially the same terms as the
      original note and Elan forgave $225,000 of the original note
      payable.





During
      the three months ended March 31, 2006 and in accordance with EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed To, and Potentially
      Settled In a Company’s Own Stock,” and the terms of the warrants and the
      transaction documents related to our November 2005 Series A Preferred Stock
      financing, at the closing date, November 21, 2005, the fair value of the
      warrants issued in the private placement were accounted for as a liability.
      Until the date in which the registration statement registering the shares
      underlying the warrants was declared effective, the warrant liability was
      revalued at each balance sheet date and any changes in fair value were charged
      to the statement of operations. During the three months ended March 31, 2006,
      the fair value of the warrant decreased by $147,000 which was credited to the
      statement of operations. On March 1, 2006, the Securities and Exchange
      Commission declared the registration statement registering the shares underlying
      the warrants effective and accordingly the warrant liability was reclassified
      to
      additional paid in capital.





*Six
      months ended March 31, 2007 versus six months ended March 31,
      2006*





We
      had
      net losses attributable to common stockholders of $1,493,000 for the six months
      ended March 31, 2007, versus net losses attributable to common stockholders
      of
      $2,417,000 for the six months ended March 31, 2006.





We
      recognized zero and $92,000 of grant income during the six months ended March
      31, 2007 and 2006, respectively from our SBIR grant from the National Cancer
      Institute.





R&D
      expenses decreased $1,581,000, or 70%, to $677,000 for the six months ended
      March 31, 2007 from $2,258,000 for the six months ended March 31, 2006. Our
      primary operational focus and R&D spending during the six months ended March
      31, 2007 was on analyzing the results and preparing the final report of our
      Phase I multiple dose clinical trial for the treatment of ALS and preparing
      for
      a proposed clinical trial for AEOL 10150 as a radiation protection agent while
      our primary operational focus and R&D spending during the six months ended
      March 31, 2006 was on conducting our Phase I multiple dose clinical trial for
      the treatment of ALS and the advancement of the Aeolus Pipeline Initiative.
      Clinical trial expenses for the six months ended March 31, 2007 was $14,000
      compared to $850,000 during the six months ended March 31, 2006. Preclinical
      expenses primarily related to the Aeolus Pipeline Initiative for the six months
      ended March 31, 2007 was zero compared to $400,000 for the six months ended
      March 31, 2006. Patent fees also decreased during the current period as we
      were
      in the process of validating several patents internationally during the six
      months ended March 31, 2006 while no such activity occurred during the current
      period. Offsetting these declines were increased contract manufacturing and
      chemistry costs ($254,000) as we began manufacturing additional supplies of
      AEOL
      10150 during the six months ended March 31, 2007.








G&A
      expenses increased $29,000, or 3%, to $1,076,000 for the six months ended March
      31, 2007 from $1,047,000 for the six months ended March 31, 2007. G&A
      expenses were higher during the six months ended March 31, 2007 versus the
      six
      months ended March 31, 2006 due to increased non-cash stock based compensation
      expense ($115,000) and employee and severance expenses ($106,000) offset by
      a
      lower level of consulting fees and legal fees. During the six months ended
      March
      31, 2007, the Company continued its program to decrease the level of services
      provided by consultants resulting in a lower level of legal and professional
      fees ($198,000).





During
      the six months ended March 31, 2006, CPEC received a milestone payment and
      equity consideration from ARCA. We
      recognized zero and $433,000 of income during
      the six months ended March 31, 2007 and 2006, respectively as a result of our
      equity ownership of CPEC LLC.





During
      the three months ended March 31, 2007, we recognized $225,000 in income as
      a
      result of the forgiveness of a portion of the principal balance of a note
      payable from Elan.





In
      accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
      Indexed To, and Potentially Settled In a Company’s Own Stock,” and the terms of
      the warrants and the transaction documents, at the closing date, November 21,
      2005, the fair value of the warrants issued in the Series A Preferred Stock
      private placement were accounted for as a liability until such date in which
      a
      registration statement registering the shares underlying the warrants was
      declared effective. The warrant liability was revalued at each balance sheet
      date and changes in fair value were charged to the statement of operations.
      Between November 21, 2005 and March 31, 2006, the fair value of the warrant
      decreased by $401,000 which was credited to the statement of operations. On
      March 1, 2006, the Securities and Exchange Commission declared the registration
      statement registering the shares underlying the warrants effective and
      accordingly the warrant liability was reclassified to additional paid in
      capital.





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 March 31, 2007, we
      had
      $913,000 of cash, a decrease of $2,411,000 from September 30, 2006. The decrease
      in cash was primarily due to the $1,753,000 loss from operations for the six
      months ended March 31, 2007 and the payment of $300,000 to Elan in connection
      with the termination of a note payable. We believe we have adequate financial
      resources to conduct operations through the fourth quarter of fiscal year 2007,
      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 $1,753,000 and $5,604,000, and
      cash outflows from operations of $2,132,000 and $4,867,000, for the six months
      ended March 31, 2007 and for the fiscal year ended September 30, 2006,
      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
      explore other strategic and financial alternatives, including a merger with
      another company, the sale of stock, 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. We do have operating leases, which are
      generally for office and laboratory space. In accordance with accounting
      principles generally accepted in the United States, operating leases are not
      reflected in the accompanying consolidated balance sheets. We do not have any
      capital leases.







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 six months ended March 31, 2007. 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 .





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Accounting Officer, of the effectiveness
      of
      our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant
      to Rule 13a-15 of the Securities and Exchange Act of 1934 as amended. Based
      upon
      their evaluation, our Chief Executive Officer and Chief Accounting Officer
      have
      concluded that our disclosure controls and procedures are
      effective.





No
      change
      in our internal control over financial reporting occurred during our last fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





Management
      is aware that there is a lack of segregation of duties due to the small number
      of employees and consultants addressing the Company’s general administrative and
      financial matters. However, management has determined that, considering the
      employees involved and the control procedures in place, risks associated with
      such lack of segregation are not significant and any potential benefits of
      adding employees or consultants to clearly segregate duties do not justify
      the
      expenses associated with such increases at this time.





**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.





The
      Annual Meeting of Stockholders of Aeolus Pharmaceuticals was held on March
      27,
      2007. The following is a brief description of each matter voted upon at the
      meeting and the number of affirmative votes and the number of negative votes
      cast with respect to each matter.





(a)
            The
                stockholders elected the following persons as directors of Aeolus
                Pharmaceuticals: David C. Cavalier, John M. Farah, Jr., Joseph J.
                Krivulka, Amit Kumar, Michael E. Lewis, Chris A. Rallis and Peter
                D.
                Suzdak, The votes for and against (withheld) each nominee were as
                follows:




Nominee
            
            Votes
              For
            
            Votes
                Withheld
            
            Votes
                AbstainedDavid
                C. Cavalier
            
            
            18,386,139
            
            
            57,637
            
            
            0John
                M. Farah, Jr.
            
            
            18,406,960
            
            
            36,816
            
            
            0Joseph
                J. Krivulka
            
            
            18,407,960
            
            
            35,816
            
            
            0Amit
                Kumar
            
            
            18,414,360
            
            
            29,416
            
            
            0Michael
                E. Lewis
            
            
            18,413,360
            
            
            30,416
            
            
            0Chris
                A. Rallis
            
            
            18,388,442
            
            
            55,334
            
            
            0Peter
                D. Suzdak
            
            
            18,413,360
            
            
            30,416
            
            
            0





(b)
            The
                stockholders approved the appointment by the Audit Committee of the
                Board
                of Directors of Haskell & White LLP as the Company’s independent
                public accountants to audit the Company’s financial statements for fiscal
                2007, with 18,406,040 shares voting for approval, 20,968 shares voting
                against and 16,769 shares
                abstained.





(c)
            The
                stockholders approved the amendment of the Company’s 2004 Stock Option
                Plan to increase the authorized number of shares of Common Stock
                of Aeolus
                from 2,000,000 shares to 5,000,000 shares, with 15,425,154 shares
                voting
                for approval, 172,793 shares voting against, 32,063 shares abstained
                and
                2,813,767 shares were broker non-votes.





ITEM
      5.   Other
      Information.




None.





ITEM
      6.   Exhibits





**Exhibit
                #**
            
            **Description**31.1
            
            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:May
                10, 2007
            By:
            /s/
                John L. McManusJohn
                L. McManus
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)Date:May
                10, 2007
            By:
            /s/
                Michael P. McManusMichael
                P. McManus
              Chief
                Financial Officer, Treasurer and Secretary
              (Principal
                Financial and Accounting Officer)