**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, 2006**

| _____ |   | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

**AEOLUS      PHARMACEUTICALS, INC.**

| Delaware                                                                                     |   |  56-1953785                                           |
|----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|
|  (State                or Other Jurisdiction of Incorporation or Organization)          |   |                  (I.R.S. Employer Identification No.) |
|                                                                                         |   |                                                       |
| 23811                Inverness PlaceLaguna                Niguel, California                 |   |   92677                                          |
|  (Address                of Principal Executive Offices)                                |   |                  (Zip Code)                           |
|                                                                                         |   |                                                       |
|  (Registrant’s                Telephone Number, Including Area Code) 949-481-9825 |

** **

|  Class                                                 |  Outstanding                as of February                7, 2007 |
|-------------------------------------------------------------|------------------------------------------------------------------------|
|  Common                Stock, par value $.01 per share |  29,286,082                shares                                 |

----

|                                                                                 |                         |                                                                                                                                                           | **Page** |
|--------------------------------------------------------------------------------------|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|  **PART                I.**  **FINANCIAL                INFORMATION** |
|                                                                                 | Item                1.       | Financial                Statements                                                                                                                            |     |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 |                         | Statement                Regarding Financial Information                                                                                                       | 3        |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 |                         | Condensed                Consolidated Balance Sheets as of December 31, 2006 (unaudited)                and September 30, 2006                                 | 4        |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 |                         | Condensed                Consolidated Statements of Operations for the Three Months ended                December                31, 2006 and 2005 (unaudited) | 5        |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 |                         | Condensed                Consolidated Statements of Cash Flows for the Three                Months ended December 31, 2006 and 2005 (unaudited)                | 6        |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 |                         | Notes                to Condensed Consolidated Financial Statements                                                                                            | 7        |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                2.       | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                                      | 9        |
|                                                                                 |                         |                                                                                                                                                           |
|                                                                                 | Item                3.       | Quantitative                and Qualitative Disclosures About Market Risk                                                                                      | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                4.       | Controls                and Procedures                                                                                                                         | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
| **PART                II.**  **OTHER                INFORMATION**          |
|                                                                                 | Item                1.       | Legal                Proceedings                                                                                                                               | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                1A.      | Risk                Factors                                                                                                                                    | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                2.       | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                     | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                3.       | Defaults                Upon Senior Securities                                                                                                                 | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                4.       | Submission                of Matters to a Vote of Security Holders                                                                                             | 12       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | Item                5.  | Other                Information                                                                                                                               | 12       |
|                                                                                 |                         |                                                                                                                                                           |
|                                                                                 | Item                6.       | Exhibits                                                                                                                                                       | 13       |
|                                                                                 |                         |                                                                                                                                                           |     |
|                                                                                 | SIGNATURES                   | 13                                                                                                                                                             |

----

**AEOLUS      PHARMACEUTICALS, INC.**

**PART      I - FINANCIAL INFORMATION**

**Statement      Regarding Financial Information**

----

| AEOLUS                PHARMACEUTICALS, INC.                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                      |   |   |   |   |   |   |   |
| CONDENSED                CONSOLIDATED BALANCE SHEETS                                                                                      |
| (In                thousands, except shares and per share data)                                                                           |
|                                                                                                                                      |   |   |   |   |   |   |   |
|                                                                                                                                      |   |   | December                31, |   |   | September                30, |   |
|                                                                                                                                      |   |   | 2006 |   |   | 2006 |   |
|                                                                                                                                      |   |   | (Unaudited) |   |   |   |   |
|  ASSETS                                                                                                                              |
| Current                assets:                                                                                                            |   |   |   |   |   |   |   |
| Cash                and cash equivalents                                                                                                  |   |   | $ | 2,418 |   |   | $ | 3,324 |   |
| Prepaids                and other current assets                                                                                          |   |   |   | 54 |   |   |   | 104 |   |
| Total                current assets                                                                                                       |   |   |   | 2,472 |   |   |   | 3,428 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| Investment                in CPEC LLC                                                                                                     |   |   |   | 126 |   |   |   | 126 |   |
| Total                assets                                                                                                               |   |   | $ | 2,598 |   |   | $ | 3,554 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| LIABILITIES                AND STOCKHOLDERS' DEFICIT                                                                                      |
| Current                liabilities:                                                                                                       |   |   |   |   |   |   |   |   |   |
| Accounts                payable                                                                                                           |   |   | $ | 583 |   |   | $ | 868 |   |
| Accrued                expenses                                                                                                           |   |   |   | 5 |   |   |   | 23 |   |
| Current                maturity of long-term note payable                                                                                 |   |   |   | 977 |   |   |   | 956 |   |
| Total                current liabilities                                                                                                  |   |   |   | 1,565 |   |   |   | 1,847 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                                                                                          |   |   |   | 1,565 |   |   |   | 1,847 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| Commitments                and contingences                                                                                               |   |   |   |   |   |   |   |   |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| Stockholders'                deficit:                                                                                                     |   |   |   |   |   |   |   |   |   |
| Preferred                stock, $.01 par value per share, 10,000,000 shares                authorized:                                    |   |   |   |   |   |   |   |   |   |
| Series                B nonredeemable convertible preferred stock, 600,000                shares                                          |   |   |   |   |   |   |   |   |   |
| authorized;                475,087 shares issued and outstanding at December 31,                                                          |   |   |   |   |   |   |   |   |   |
| 2006                and September 30, 2006                                                                                                |   |   |   | 5 |   |   |   | 5 |   |
| Common                stock, $.01 par value per share, 150,000,000 shares                authorized;                                      |   |   |   |   |   |   |   |   |   |
|                    29,286,082 and 29,265,249 shares issued and outstanding at                                              |   |   |   |   |   |   |   |   |   |
|    December                31, 2006 and September 30, 2006, respectively                                                   |   |   |   | 293 |   |   |   | 293 |   |
| Additional                paid-in capital                                                                                                 |   |   |   | 154,586 |   |   |   | 154,311 |   |
| Accumulated                deficit                                                                                                        |   |   |   | (153,851 | ) |   |   | (152,902 | ) |
| Total                stockholders' deficit                                                                                                |   |   |   | 1,033 |   |   |   | 1,707 |   |
| Total                liabilities and stockholders' deficit                                                                                |   |   | $ | 2,598 |   |   | $ | 3,554 |   |
|                                                                                                                                      |   |   |   |   |   |   |   |   |   |
| The                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 |   |
|                                                                                                                                                                           | December                31, |   |
|                                                                                                                                                                           | 2006 |   | 2005 |   |
| Revenue:                                                                                                                                                                       |   |   |   |   |
| Grant                income                                                                                                                                                    | $ | - |   | $ | 1 |   |
|                                                                                                                                                                           |   |   |   |   |   |   |
| Costs                and expenses:                                                                                                                                             |   |   |   |   |   |   |
| Research                and development                                                                                                                                        |   | 336 |   |   | 1,293 |   |
| General                and administrative                                                                                                                                      |   | 629 |   |   | 491 |   |
| Total                costs and expenses                                                                                                                                        |   | 965 |   |   | 1,784 |   |
|                                                                                                                                                                           |   |   |   |   |   |   |
| Loss                from operations                                                                                                                                            |   | (965 | ) |   | (1,783 | ) |
| Interest                expense, net                                                                                                                                           |   | 16 |   |   | (12 | ) |
| Other                income                                                                                                                                                    |   | - |   |   | 18 |   |
| Decrease                in fair value of common stock warrants                                                                                                                 |   | - |   |   | 254 |   |
|                                                                                                                                                                           |   |   |   |   |   |   |
| Net                loss attributable to common stockholders                                                                                                                    | $ | (949 | ) | $ | (1,523 | ) |
|                                                                                                                                                                           |   |   |   |   |   |   |
| Net                loss per weighted share attributable to common                stockholders:                                                                                 |   |   |   |   |   |   |
| (basic                and diluted)                                                                                                                                             | $ | (0.03 | ) | $ | (0.11 | ) |
|                                                                                                                                                                           |   |   |   |   |   |   |
| Weighted                average common shares outstanding:                                                                                                                     |   |   |   |   |   |   |
| (basic                and diluted)                                                                                                                                             |   | 29,269 |   |   | 14,038 |   |
|                                                                                                                                                                           |   |   |   |   |   |   |
| 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 Ended |   |
|                                                                                                                                   |   | December                31, |   |
|                                                                                                                                   |   | 2006 |   | 2005 |   |
| Cash                flows from operating activities:                                                                                   |   |   |   |   |   |
| Net                loss                                                                                                                |   | $ | (949 | ) | $ | (1,523 | ) |
| Adjustments                to reconcile net loss to net cash used in operating                activities:                              |   |   |   |   |   |   |   |
| Noncash                compensation                                                                                               |   |   | 238 |   |   | 76 |   |
| Noncash                interest and financing costs                                                                                    |   |   | 38 |   |   | 22 |   |
| Decrease                in fair value of common stock warrants                                                                    |   |   | - |   |   | (254 | ) |
| Change                in assets and liabilities:                                                                                  |   |   |   |   |   |   |   |
|  Accounts                receivable                                                                                               |   |   | 1 |   |   | - |   |
|  Prepaids                and other assets                                                                                         |   |   | 48 |   |   | 27 |   |
|  Accounts                payable and accrued expenses                                                                             |   |   | (303 | ) |   | 727 |   |
| Net                cash used in operating activities                                                                                   |   |   | (927 | ) |   | (925 | ) |
|                                                                                                                                   |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                                                                                   |   |   |   |   |   |   |   |
| Proceeds                from issuance of Series A Preferred Stock                                                                      |   |   | - |   |   | 2,413 |   |
| Proceeds                from exercise of stock options                                                                                 |   |   | 21 |   |   | 21 |   |
| Net                cash provided by financing activities                                                                               |   |   | 21 |   |   | 2,434 |   |
|                                                                                                                                   |   |   |   |   |   |   |   |
| Net                (decrease) increase in cash and cash equivalents                                                                    |   |   | (906 | ) |   | 1,509 |   |
| Cash                and cash equivalents at beginning of period                                                                        |   |   | 3,324 |   |   | 626 |   |
| Cash                and cash equivalents at end of period                                                                              |   | $ | 2,418 |   | $ | 2,135 |   |
|                                                                                                                                   |   |   |   |   |   |   |   |
|                                                                                                                                   |   |   |   |   |   |   |   |
| The                accompanying notes are integral part of these unaudited condensed                consolidated financial statements. |

----

**AEOLUS      PHARMACEUTICALS, INC.**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

----

|                                                        |   | **Shares** |      | **Weighted                Average Exercise Price** |   | **Weighted                Average Remaining Contractual Term** |   | **Aggregate                Intrinsic Value** |   |
|-------------------------------------------------------------|--------|------------|-----------|----------------------------------------------------|--------|----------------------------------------------------------------|--------|----------------------------------------------|--------|
| Outstanding                at September 30, 2006            |   |       | 3,071,806 |                                               | $      | 3.25                                                           |   |                                         |   |   |   |
| Granted                                                     |   |       | 721,000   |                                               | $      | 0.61                                                           |   |                                         |   |   |   |
| Exercised                                                   |   |       | (20,833   | )                                                  | $      | 1.00                                                           |   |                                         |   |   |   |
| Forfeited                                                   |   |       | (1,703    | )                                                  | $      | 0.40                                                           |   |                                         |   |   |   |
| Outstanding                at December 31, 2006 (unaudited) |   |       | 3,770,270 |                                               | $      | 2.75                                                           |   | 7.9                                          | $      | - |   |
| Exercisable                at December 31, 2006 (unaudited) |   |       | 2,706,935 |                                               | $      | 3.57                                                           |   | 7.1                                          | $      | - |   |

----

|                                        |   | **Options                Outstanding**                     |                           | **Options                Exercisable**             |
|---------------------------------------------|--------|------------------------------------------------------------|--------------------------------|----------------------------------------------------|
| **Range                of Exercise Prices** |   | **Number                Outstanding at December 31, 2006** |                           | **Weighted                Average Exercise Price** |   | **Weighted                Average Remaining Contractual Life** |   | **Number                Exercisable at December 31, 2006** |   | **Weighted                Average Exercise Price** |
|                                        |   |                                                       |                           |                                               |   |   |   |   |   |   |   |   |
| $0.55                                       |   | 8,800                                                      |       | $                                                  | 0.55 |       | 8.7                years |       | 8,800 |       | $ | 0.55 |
| $0.60                                       |   | 665,250                                                    |       | $                                                  | 0.60 |       | 9.9                years |       | 15,250 |       | $ | 0.60 |
| $0.66                - $0.80                |   | 488,161                                                    |                           | $                                                  | 0.75 |   | 8.9                years |   | 248,161 |   | $ | 0.75 |
| $0.81                - $0.89                |   | 384,035                                                    |                           | $                                                  | 0.85 |   | 8.9                years |   | 211,535 |   | $ | 0.85 |
| $0.90                - $1.45                |   | 357,886                                                    |                           | $                                                  | 0.98 |   | 8.6                years |   | 357,886 |   | $ | 0.98 |
| $1.50                                       |   | 1,256,015                                                  |                           | $                                                  | 1.50 |   | 6.6                years |   | 1,256,015 |   | $ | 1.50 |
| $1.52                - $5.10                |   | 394,391                                                    |                           | $                                                  | 2.86 |   | 7.4                years |   | 393,556 |   | $ | 2.86 |
| $6.25                - $31.90               |   | 166,933                                                    |                           | $                                                  | 20.52 |   | 4.3                years |   | 166,933 |   | $ | 20.53 |
| $50.9375                                    |   | 2,999                                                      |                           | $                                                  | 50.94 |   | 3.3                years |   | 2,999 |   | $ | 50.94 |
| $51.25                                      |   | 45,800                                                     |                           | $                                                  | 51.25 |   | 3.3                years |   | 45,800 |   | $ | 51.25 |
| $0.55                - $51.25               |   | 3,770,270                                                  |                           | $                                                  | 2.75 |   | 7.9                years |   | 2,706,935 |   | $ | 3.57 |

| Research                and development expenses      |   | $      | 73  |   |
|-------------------------------------------------------|--------|--------|-----|--------|
| General                and administrative expenses    |   |   | 165 |   |
| Total                stock-based compensation expense |   | $      | 238 |   |

|                                                        |   | **For                the three months December 31,** |
|-------------------------------------------------------------|--------|------------------------------------------------------|
|                                                        |   | **2006**                                             |   | **2005** |
| Dividend                yield                               |   | 0%                                                   |   | 0% |
| Expected                volatility                          |   | 191%                                                 |   | 189% |
| Risk-free                interest rate                      |   | 4.5%                - 5.0%                           |   | 4.3%                - 4.6% |
| Expected                option life after shares are vested |   | 10                years                              |   | 10                years |

----

*Three      months ended December 31, 2006 versus three months ended December 31,      2005*

----

----

**PART      II. - OTHER INFORMATION**

----

| **Exhibit                #** |   | **Description**                                                                                                                                                                                                                                                                                    |
|------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                          |   | Certificate                of Amendment of Amended and Restated Certificate of Incorporation                (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed                dated October 27, 2006).                                                               |
| 10.1                         |   | Separation                Agreement between Aeolus Pharmaceuticals, Inc. and Richard P. Burgoon,                Jr.                dated December 6, 2006 (incorporated by reference to Exhibit 10.1                of the                Company’s Form 8-K filed dated November 30, 2006). |
| 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**

| Date:  February                9, 2007   | By:    | /s/                John L. McManus                                                                                                                          |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         |   | John                L. McManusPresident                and Chief Operating Officer(Principal                Executive Officer)                              |
|                                                         |   |                                                                                                                                                        |
| Date:  February                9, 2007   | By:    | /s/                Michael P. McManus                                                                                                                       |
|                                                         |   | Michael                P. McManusChief                Financial Officer, Treasurer and Secretary(Principal                Financial and Accounting Officer) |