Number of Shares		Exercise Price			Expiration Date
4,000,000		$	0.50			June 2007
50,000		$	0.50			May 2011
2,500,000		$	0.50			November 2010
7,000,000		$	0.75			June 2011
50,000		$	1.00			May 2011
35,000		$	1.00			July 2008
50,000		$	1.50			May 2011
50,000		$	2.00			May 2011
50,000		$	2.50			May 2011
410,400		$	2.50			April 2009
1,641,600		$	4.00			April 2009
1,860		$	16.125			August 2006
1,759		$	19.90			October 2008
106,783		$	20.25			August 2006
10,000		$	20.25			October 2006
15,957,402

 

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E. Series A Convertible Preferred Stock

On November 21, 2005, the Company completed a private placement whereby the Company issued to certain accredited investors an aggregate of 1,250,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) at a stated price of $2.00 per share and warrants to purchase up to an aggregate of 2,500,000 shares of common stock at an exercise price of $1.00 per share and a five year term resulting in net proceeds of $2,413,000. The Series A Preferred Stock accrued dividends at the rate of 6% of the stated price annually, which were paid in our common stock and was accreted to earnings available to common stockholders on a quarterly basis. Each convertible preferred share was convertible into two shares of our common stock which was subsequently increased to four shares of our common stock and had a liquidation preference of $3.00 per share. The warrants contain a “cashless exercise” feature that allows the holders, under certain circumstances, to exercise the warrants without making a cash payment to the Company.

The fair value of the warrants on November 21, 2005 was estimated to be $2,146,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%; expected volatility of 112% risk free interest rate of 4.4%; and an expected life of five years. The proceeds from the private placement were first allocated to the fair value of the warrants and the remaining proceeds were attributed to the value of the preferred stock, resulting in a carrying value of the Series A Preferred Stock of $354,000. The carrying value of the Series A Preferred Stock was not accreted to its redemption value as the occurrence of the redemption event was not considered probable.

Offering costs of the private placement were $87,000 which were charged to additional paid in capital.

Pursuant to the terms of the registration rights agreement entered into in connection with the transaction, the Company filed a registration statement which was declared effective on March 1, 2006. The registration rights agreement further provides that if a registration statement is not filed, or declared effective within specified time periods, the Company would be required to pay each holder an amount in cash, as liquidated damages, equal to 1.5% per month of the aggregate purchase price paid by such holder in the private placement for the common stock and warrants then held. 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 private placement were accounted for as a liability. The warrant liability was reclassified to equity when the Securities and Exchange Commission declared the registration statement effective on March 1, 2006. Through March 1, 2006, the warrant liability was revalued at each balance sheet date and the change in fair value was charged to the statement of operations. Between November 21, 2005 and March 1, 2006, the fair value of the warrant decreased by $401,000 which was credited to the statement of operations.

In connection with the June 5, 2006 financing (see Note D), all outstanding shares of the Series A Preferred Stock were converted into an aggregate of 5,000,000 shares of common stock. In addition, the exercise price of the warrants to purchase up to an aggregate of 2,500,000 shares of common stock issued in the November 2005 financing were lowered from $1.00 per share to $0.50 per share in accordance with the terms of the warrants.

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F. Stock-Based Compensation

Below is a summary of Aeolus stock option activity during the nine-month period ended June 30, 2006:

		Shares			Weighted Average Exercise Price
Outstanding at September 30, 2005			2,394,091		$	4.05
Granted			180,641		$	0.87
Exercised			(41,666	)	$	1.00
Forfeited			(16,281	)	$	13.23
Outstanding at June 30, 2006 (unaudited)			2,516,785		$	3.81
Exercisable at June 30, 2006 (unaudited)			2,466,917		$	3.87

For the nine months ended June 30, 2006 and 2005, 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.

Beginning October 1, 2005, the Company adopted Statement of Financial Accounting Standa    rds (“SFAS”) No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”) on a modified prospective transition method to account for its employee stock options. Under the modified prospective transition method, fair value of new and previously granted but unvested equity awards are recognized as compensation expense in the statement of operations, and prior period results are not restated. As a result of the adoption, the Company’s loss from continuing operations increased by $101,000 for the nine months ended June 30, 2006.

For the nine months ended June 30, 2006, stock-based compensation expense recognized in the statement of operations is as follows (in thousands):

Research and development expenses		$	31
General and administrative expenses			191
Total stock-based compensation expense		$	222

 

The total deferred compensation expense for outstanding stock options was $31,000 as of June 30, 2006, which will be recognized over the next three months. The fair value of the options associated with the above compensation expense for the nine months ended June 30, 2006, was determined at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Dividend yield			0	%
Expected volatility			187 - 190	%
Risk-free interest rate			4.4% - 5.2	%
Expected option life			10 years

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If the Company had accounted for stock-based compensation plans using the fair value based accounting method described by SFAS No. 123 for the periods prior to October 1, 2005, the Company’s net loss per common share-basic and diluted for the three and nine months ended June 30, 2005, would have approximated the following (in thousands, except per share data):

		Three Months Ended June 30, 2005			Nine Months Ended June 30, 2005
Net loss attributable to common stockholders as reported		$	(1,636	)	$	(5,253	)
Pro forma adjustment for stock-based compensation			(111	)		(400	)
Pro forma net loss attributable to common stockholders		$	(1,747	)	$	(5,653	)
Basic and diluted net loss per weighted share attributable
to common stockholders:
As reported		$	(0.12	)	$	(0.38	)
Pro forma - adjusted for stock-based compensation		$	(0.13	)	$	(0.40	)

The fair value of each option grant for employees and consultants was estimated on the date of the grant using the Black-Scholes option valuation model with the following weighted-average assumptions used for grants for the nine months ended June 30, 2005:

Dividend yield			0	%
Expected volatility			195	%
Risk-free interest rate			2.9% - 4.3	%
Expected option life (in years from vesting)			3 years

G. CPEC LLC

The Company uses the equity method to account for its 35.0% ownership interest in CPEC. During fiscal 2003, CPEC licensed bucindolol, a drug previously under development by the Company for the treatment of heart failure, to ARCA Discovery, Inc. in return for possible future royalty and milestone payments. 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. During the three months ended June 30, 2006, CPEC declared and paid a dividend of which the Company received $315,000. CPEC had $360,000 of net assets at June 30, 2006.

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H. 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 $891,000 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.

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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, 2005. 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 amyotrophic lateral sclerosis, also known as “ALS” or “Lou Gehrig’s disease,” stroke, Parkinson’s disease and cancer radiation therapy. We have reported positive safety results from a completed Phase I single dose study of AEOL 10150 in patients diagnosed with ALS. In addition, in September 2005, we launched a Phase I multiple dose study of AEOL 10150 in patients diagnosed with ALS. We expect to complete this study during the first quarter of fiscal year 2007. The safety data from these studies could be utilized to support subsequent efficacy studies of AEOL 10150 in ALS, as well as other indications for which the Company has developed preclinical efficacy data.  

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.

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Need for Additional Funds

We believe we have adequate financial resources to fund our operations through the third quarter of fiscal year 2007, but in order to fund on-going operating cash requirements beyond the third 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 June 30, 2006 versus three months ended June 30, 2005

We had net losses attributable to common stockholders of $3,178,000 for the three months ended June 30, 2006, versus net losses attributable to common stockholders of $1,636,000 for the three months ended June 30, 2005.

In August 2003, we were awarded a $100,000 Small Business Innovation and Research (“SBIR”) Phase I grant from the National Cancer Institute, a division of the National Institutes of Health. In March 2004, we were awarded up to $375,000 for the first year of a SBIR Phase II grant and received approval for a second year of the Phase II grant program in January 2005. Pursuant to the grants, we are studying the antitumor and radiation-protective effects of our catalytic antioxidants. The study is 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 $121,000 of grant income during the three months ended June 30, 2006 and 2005, respectively.

Research and development (“R&D”) expenses decreased $430,000, or 51%, to $419,000 for the three months ended June 30, 2006 from $849,000 for the three months ended June 30, 2005. Research and development activities were limited during the three months ended June 30, 2006 due to our limited financial resources and as we analyzed the results of our ongoing Phase I multiple dose clinical trial for the treatment of ALS. During the three months ended June 30, 2005, our primary operational focus and R&D spending was on preclinical pharmacology and toxicology tests on our lead compound, AEOL 10150, and our Phase I single dose clinical trial for the treatment of ALS. This change in focus resulted in a lower level of clinical trial expenses during the three months ended June 30, 2006 compared to the three months ended June 30, 2005. Occupancy costs also decreased by $68,000 during the three months ended June 30, 2006 compared to the three months ended June 30, 2005 as we did not occupy the lab space during the current quarter.

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General and administrative (“G&A”) expenses decreased $374,000, or 42%, to $524,000 for the three months ended June 30, 2006 from $898,000 for the three months ended June 30, 2005. During the three months ended June 30, 2005, we incurred $219,000 of severance expenses as we did not renew the employment contract with our former Chief Financial Officer. G&A expenses were lower during the three months ended June 30, 2006 versus June 30, 2005 due to a lower amount of amortization expense related to the accelerated vesting of stock options following a change in the board of directors in 2004 (zero during the three months ended June 30, 2006 versus $271,000 during the three months ended June 30, 2005). These lower expenses were offset by increased consulting expenses ($97,000) as the Company shifted its administration activities performed by employees during the three months ended June 30, 2005 whereas we outsourced these activities during the current quarter.

Effective October 1, 2005, we adopted SFAS No. 123(R). SFAS No. 123(R) required that we recognize the fair value of equity awards granted to our employees as compensation expense in the income statement over the requisite service period. For the three months ended June 30, 2006, we recognized $33,000 in employee stock-based compensation expense as a result of the adoption of SFAS No. 123(R), which is included in G&A expenses. Additionally, we recognized $33,000 of stock-based compensation charges associated with stock option grants to consultants.

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, June 5, 2006, the fair value of the warrants issued in the Common 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. During the period from June 5, 2006 to June 30, 2006, the fair value of the warrant increased by $2,111,000 which was charged to the statement of operations. The warrant liability and revaluations have not and will not have any impact on the Company’s working capital, liquidity, or business operations.

In connection with the Private Placement in June 2006, we were required to reduce the exercise price of warrants to purchase 2,500,000 shares from $1.00 per share to $0.50 per share, the purchase price of the common stock issued in the Financing. As a result of the change in the exercise price, these warrants were revalued resulting in an increase in their value of $105,000 which was charged to the statement of operations.

Nine months ended June 30, 2006 versus nine months ended June 30, 2005

We had net losses attributable to common stockholders of $5,595,000 for the nine months ended June 30, 2006, versus net losses attributable to common stockholders of $5,253,000 for the nine months ended June 30, 2005.

We recognized $92,000 and $236,000 of grant income during the nine months ended June 30, 2006 and 2005, respectively from our SBIR grant from the National Cancer Institute. We do not expect to earn further grant revenues for the remainder of fiscal year 2006 as work under our SBIR grant has been completed.

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Research and development (“R&D”) expenses decreased $944,000, or 26%, to $2,677,000 for the nine months ended June 30, 2006 from $3,621,000 for the nine months ended June 30, 2005. Our primary operational focus and R&D spending during the nine months ended June 30, 2006 was on conducting our Phase I multiple dose clinical trial for the treatment of ALS and the advancement of the Aeolus Pipeline Initiative, while our primary operational focus and R&D spending during the nine months ended June 30, 2005 was on preclinical pharmacology and toxicology tests on our lead compound, AEOL 10150, and the launch of our Phase I single dose clinical trial for the treatment of ALS. Clinical trial expenses for the nine months ended June 30, 2006 was $908,000 compared to $1,154,000 during the nine months ended June 30, 2005. Preclinical expenses primarily related to the Aeolus Pipeline Initiative for the nine months ended June 30, 2006 were $491,000, whereas preclinical expenses related to pharmacology and toxicology testing of AEOL 10150 during the nine months ended June 30, 2005 were $1,286,000. Offsetting these declines were increased patent fees ($422,000) as a result of some of our patents entering the international validation phase.

R&D expenses for our antioxidant program have totaled $31,350,000 from inception through June 30, 2006. 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. However, we expect that R&D expenses during the remainder of fiscal year 2006 will be higher than those incurred in the quarter ended June 30, 2006 as we continue the clinical development of AEOL 10150 and expand our pre-clinical testing activities to further the development of other compounds in our pipeline.

General and administrative (“G&A”) expenses decreased $280,000, or 15%, to $1,571,000 for the nine months ended June 30, 2006 from $1,851,000 for the nine months ended June 30, 2005. G&A expenses were lower during the nine months ended June 30, 2006 versus the nine months ended June 30, 2005 due to a decline in employment costs and rent expenses offset by a higher level of consulting, legal and accounting fees. During the nine months ended June 30, 2006, the Company’s administration and accounting activities were outsourced while during the same period in 2005, employees performed these functions resulting in a higher level of consulting fees ($244,000) and a lower level of employment costs ($270,000) during the nine months ended June 30, 2006. Legal and accounting fees increased $141,000 during the nine months ended June 30, 2006 as a result of the Company’s increased regulatory compliance responsibilities. Rental expenses decreased by $97,000 during the nine months ended June 30, 2006 when compared to the same period last year as the Company closed its administrative offices in August 2005 and outsourced all of its administration functions, as a result of which we did not incur any rental expense during the nine months ended June 30, 2006. Also, during the three months ended June 30, 2006, we incurred $219,000 of severance expenses as we did not renew the employment contract with our former Chief Financial Officer.

Effective October 1, 2005, we adopted SFAS No. 123(R). SFAS No. 123(R) required that we recognize the fair value of equity awards granted to our employees as compensation expense in the income statement over the requisite service period. For the nine months ended June 30, 2006, we recognized $101,000 in employee stock-based compensation expense as a result of the adoption of SFAS No. 123(R), which is included in G&A expenses. Additionally, we recognized $121,000 of stock-based compensation charges associated with stock option grants to consultants.

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During the nine months ended June 30, 2006, CPEC LLC, received a milestone payment and equity consideration from ARCA Discovery, Inc., a privately held cardiovascular-focused company (“ARCA”). In 2003, CPEC LLC (“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 and received 400,000 shares of ARCA common stock as consideration for the amendment. In addition, during the nine months ended June 30, 2006, CPEC received a milestone payment of $1,000,000 as a result of ARCA completing a financing. We recorded $433,000 of income during the nine months ended June 30, 2006 as a result of our equity ownership of CPEC LLC.

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 in our November 2005 and June 2006 financings, at the closing dates, November 21, 2005 and June 5, 2006, the fair value of the warrants issued in the financings were initially accounted for as liabilities until such date in which a registration statement registering the shares underlying the warrants were declared effective. The warrant liabilities were revalued at each balance sheet date until the EITF 00-19 equity classification requirements were satisfied 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 November 2005 warrants 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 in the November 2005 financing effective and accordingly the warrant liability was reclassified to additional paid in capital. During the period from June 5, 2006 to June 30, 2006, the fair value of the warrant increased by $2,111,000 which was charged to the statement of operations. The warrant liability and revaluations have not and will not have any impact on the Company’s working capital, liquidity, or business operations.

In connection with the Private Placement in June 2006, we were required to reduce the exercise price of warrants to purchase 2,500,000 shares from $1.00 per share to $0.50 per share, the purchase price of the common stock issued in the Financing. As a result of the change in the exercise price, these warrants were revalued resulting in an increase in their value of $105,000 which was charged to the statement of operations.

Liquidity and Capital Resources

We do not have any revenue, other than grant income, and therefore we rely on investors, grants, collaborations and licensing of our compounds to finance our operations. At June 30, 2006, we had $4,003,000 of cash, an increase of $3,377,000 from September 30, 2005. The increase in cash was primarily due to combined net proceeds of $7,167,000 from the sale of the Series A Convertible Preferred Stock and common stock in November 2005 and June 2006 offset by the $4,156,000 loss from operations for the nine months ended June 30, 2006. We believe we have adequate financial resources to conduct operations through the third 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.

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We incurred significant losses from operations of $4,156,000 and $6,937,000, and cash outflows from operations of $4,147,000 and $6,842,000, for the nine months ended June 30, 2006 and for the fiscal year ended September 30, 2005, 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 nine months ended June 30, 2006. We do not have any foreign currency or other derivative financial instruments. Our debt bears interest at a fixed rate.

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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.

The following list sets forth information regarding all unregistered securities sold by the registrant since April 1, 2006.

(1)  On June 5, 2006, the registrant sold and issued to accredited investors an aggregate of 10,000,000 shares of its Common Stock at a purchase price of $0.50 per share, warrants to purchase up to an aggregate of 7,000,000 shares of common stock with an exercise price of $0.75 per share and warrants to purchase up to an aggregate of 4,000,000 shares of common stock with an exercise price of $0.50 per share, generating aggregate proceeds of $5,000,000. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

(2)  On May 24, 2006, the registrant issued to accredited investors a warrant to purchase up to an aggregate of 50,000 shares of common stock with an exercise price of $0.50 per share, a warrant to purchase up to an aggregate of 50,000 shares of common stock with an exercise price of $1.00 per share, a warrant to purchase up to an aggregate of 50,000 shares of common stock with an exercise price of $1.50 per share, a warrant to purchase up to an aggregate of 50,000 shares of common stock with an exercise price of $2.00 per share, a warrant to purchase up to an aggregate of 50,000 shares of common stock with an exercise price of $2.50 per share in accordance with the terms of a consulting agreement. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

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(3)  On May 22, 2006, the registrant issued to an accredited investor 25,000 shares of its Common Stock in accordance with the terms of a licensing agreement. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3.  Defaults Upon Senior Securities.

None.

 

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

None.

ITEM 5.  Other Information.

 

None.

 

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ITEM 6. Exhibits

Exhibit #		Description
10.1		Subscription Agreement dated June 5, 2006 by and between the Company and the investors whose names appear on the signature pages thereof (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed dated June 6, 2006).
10.2		Conversion Agreement dated June 5, 2006 by and among the Company, the Company’s Series A Preferred Stockholders, Efficacy Biotech Master Fund Ltd. and Ronin Capital, LLC (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed dated June 6, 2006).
10.3		Form of Warrant to Purchase Common Stock dated June 5, 2006 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed dated June 6, 2006).
10.4		Warrant to Purchase Common Stock dated June 5, 2006.by and among the Company and Efficacy Biotech Master Fund Ltd (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed dated June 6, 2006).
10.5		Right of First Offer Agreement dated June 5, 2006 by and among the Company and Efficacy Biotech Master Fund Ltd (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed dated June 6, 2006).
10.6		Board Observer Letter dated June 5, 2006 by and among the Company and Efficacy Biotech Master Fund Ltd (incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K filed dated June 6, 2006).
10.7		Employment Agreement dated July 14, 2006 between Aeolus Pharmaceuticals, Inc. and John L. McManus (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed dated July 14, 2006).
10.8		Consulting Agreement dated July 10, 2006 between Aeolus Pharmaceuticals, Inc. and McManus & Company, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed dated June 14, 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.

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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: August 11, 2006	By:	/s/ John L. McManus
		John L. McManus President and Chief Operating Officer (Principal Executive Officer)
Date: August 11, 2006	By:	/s/ Michael P. McManus
		Michael P. McManus Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)