EXHIBIT 10.3

 
FORM OF
WARRANT

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. THE SECURITIES REPRESENTED BY THIS WARRANT AND, ACCORDINGLY,
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF.

AEOLUS PHARMACEUTICALS, INC.

Warrant To Purchase Common Stock

Warrant No.:  [    ]
Number of Shares of Common Stock:  [                 ]
Date of Issuance: ________, 20__ (“Issuance Date”)

AEOLUS PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), hereby
certifies that, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged,
[                                              ], the registered holder hereof
or its permitted assigns (the “Holder”), is entitled, subject to the terms set
forth below, to purchase from the Company, at the Exercise Price (as defined
below) then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or
replacement hereof, the “Warrant”), at any time or times on or after the date
hereof but not after 11:59 p.m., New York time, on the Expiration Date (as
defined below), up to [                                    ]
(                        ) fully paid and nonassessable shares of Common Stock
(as defined below) (as may be adjusted pursuant to Section 2 or 3 hereof (the
“Warrant Shares”).  This Warrant is one of the Warrants to purchase Common Stock
(the “SPA Warrants”) issued pursuant to Section 1 of that certain Securities
Purchase Agreement (the “Securities Purchase Agreement”), dated as of August 1,
2008 (the “Subscription Date”), by and among the Company, as issuer, and the
investors listed on the
 

 
 
 

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Schedule of Buyers attached thereto (the “Buyers”).  Except as otherwise defined
herein, capitalized terms in this Warrant shall have the meanings set forth in
Section 14.
 
1.      EXERCISE OF WARRANT.
 
(a)              Mechanics of Exercise.  Subject to the terms and conditions
hereof (including, without limitation, the limitations set forth in Section
1(f)), this Warrant may be exercised by the Holder on any day on or after the
date hereof, in whole or in part, by (i) delivery of a written notice, in the
form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s
election to exercise this Warrant and (ii) (A) payment to the Company of an
amount equal to the applicable Exercise Price multiplied by the number of
Warrant Shares as to which this Warrant is being exercised (the “Aggregate
Exercise Price”) in cash or by wire transfer of immediately available funds to
an account designated by the Company in writing on the Subscription Date (or to
such other account designated by the Company in writing by notice the Holder
thereafter) or (B) by notifying the Company that this Warrant is being exercised
pursuant to a Cashless Exercise (as defined in Section 1(d)).  The Holder shall
not be required to deliver the original Warrant in order to effect an exercise
hereunder.  Execution and delivery of the Exercise Notice with respect to less
than all of the Warrant Shares shall have the same effect as cancellation of the
original Warrant and issuance of a new Warrant evidencing the right to purchase
the remaining number of Warrant Shares.  On or before the second (2nd) Business
Day following the date on which the Company has received each of the Exercise
Notice and the Aggregate Exercise Price (or notice of a Cashless Exercise) (the
“Exercise Delivery Documents”), the Company shall transmit by email or facsimile
an acknowledgment of confirmation of receipt of the Exercise Delivery Documents
to the Holder and the Company’s transfer agent (the “Transfer Agent”).  On or
before the fifth (5th)  Trading Day following the date on which the Company has
received all of the Exercise Delivery Documents (the “Share Delivery Date”), the
Company shall (X) provided that the Transfer Agent is participating in The
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program,
upon the request of the Holder, credit such aggregate number of Warrant Shares
to which the Holder is entitled pursuant to such exercise to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system, or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and dispatch by overnight
courier to the address as specified in the Exercise Notice, a certificate,
registered in the Company’s share register in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder is
entitled pursuant to such exercise.  Upon receipt by the Company of the Exercise
Delivery Documents, the Holder shall be deemed for all corporate purposes to
have become the holder of record of the Warrant Shares with respect to which
this Warrant has been exercised, irrespective of the date such Warrant Shares
are credited to the Holder’s DTC account or the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be.  If this
Warrant is submitted in connection with any exercise pursuant to this Section
1(a) and the number of Warrant Shares represented by this Warrant submitted for
exercise is greater than the number of Warrant Shares being acquired upon an
exercise, then the Company shall as soon as practicable and in no event later
than five (5) Business Days after any exercise and at its own expense, issue a
new Warrant (in accordance with Section 7(d)) representing the right to purchase
the number of
 

 
 
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Warrant Shares purchasable immediately prior to such exercise under this
Warrant, less the number of Warrant Shares with respect to which this Warrant is
exercised.  No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock to be
issued shall be rounded down to the nearest whole number.  The Company shall pay
any and all transfer taxes which may be payable with respect to the issuance and
delivery of Warrant Shares upon exercise of this Warrant (for greater certainty
not including any income taxes or capital gains of the Holder or exercising
holder or any liability of the Company to withhold tax).
 
(b)              Exercise Price.  For purposes of this Warrant, “Exercise Price”
means Fifty Cents ($0.50), subject to adjustment as provided herein.
 
(c)              Company’s Failure to Timely Deliver Securities.  If within five
(5) Trading Days after the Company’s receipt of the Delivery Documents the
Company shall fail to issue and deliver a certificate to the Holder and register
such shares of Common Stock on the Company’s share register or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon the Holder’s exercise hereunder, and if on or
after such Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock in a good faith transaction with an
unaffiliated third party (a “Good Faith Purchase”) to deliver in satisfaction of
a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder is actually entitled to receive from the Company (a “Buy-In”), then
the Company shall, within five (5) Business Days after the Holder’s request and
in the Holder’s discretion, and after Holder provides the Company with written
evidence of such Good Faith Purchase either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including documented
brokerage commissions and other out-of-pocket expenses, if any) for the shares
of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Warrant Shares and pay cash to the
Holder in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Stock, times (B) the Weighted
Average Price on the date of exercise.
 
(d)              Cashless Exercise.  Notwithstanding anything contained herein
to the contrary, at any time and from time to time on or after the 180-day
anniversary of the Issuance Date, the Holder may, in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (a “Cashless Exercise”):
 

 
 
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Net Number = (A x B) - (A x C)
 
B

For purposes of the foregoing formula:
 
 
A= the total number of shares with respect to which this Warrant is then being
exercised.

 
 
B= the Weighted Average Price of the shares of Common Stock over the
fifteen (15) consecutive Trading Day period ending on the fifth (5th) Trading
Day immediately preceding the date the Exercise Notice is received by the
Company (as reported by Bloomberg).

 
 
C= the Exercise Price then in effect for the applicable Warrant Shares at the
time of such exercise.

(e)              Disputes.  In the case of a dispute as to the determination of
the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall promptly issue to the Holder the number of Warrant Shares that are
not disputed and resolve such dispute in accordance with Section 12.
 
(f)              Limitations on Exercises; Beneficial
Ownership.  Notwithstanding anything herein to the contrary, the Company shall
not effect the exercise of this Warrant, and the Holder shall not have the right
to exercise this Warrant, to the extent that after giving effect to such
exercise, such Person (together with such Person’s Affiliates) would
beneficially own in excess of 9.99% (the “Maximum Percentage”) of the shares of
Common Stock outstanding immediately after giving effect to such exercise.  For
purposes of the foregoing sentence, the aggregate number of shares of Common
Stock beneficially owned by such Person and its Affiliates shall include the
number of shares of Common Stock issuable upon exercise of this Warrant with
respect to which the determination of such sentence is being made, but shall
exclude shares of Common Stock which would be issuable upon (x) exercise of the
remaining, unexercised portion of this Warrant beneficially owned by such Person
and its Affiliates and (y) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company beneficially owned by
such Person and its Affiliates (including, without limitation, any convertible
notes or convertible preferred stock or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein.  Except as
set forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).  For purposes of this
Warrant, in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (1) the Company’s most recent Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Current Report on Form 8-K or other public filing with the Securities
and Exchange Commission (“SEC”) as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
 

 
 
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For any reason at any time, upon the written request of the Holder, the Company
shall within two (2) Business Days confirm in writing to the Holder the number
of shares of Common Stock then outstanding.  In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company by the Holder and its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  By written notice to the Company, the Holder may
from time to time increase or decrease the Maximum Percentage to any other
percentage specified in such notice; provided that any such increase will not be
effective until the sixty-first (61st) day after such notice is delivered to the
Company.
 
(g)              Insufficient Authorized Shares.  If at any time while this
Warrant remains outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon exercise of this Warrant at least a number of shares
of Common Stock equal to 105% (the “Required Reserve Amount”) of the number of
shares of Common Stock as shall from time to time be necessary to effect the
exercise of all of this Warrant and the other SPA Warrants then outstanding (an
“Authorized Share Failure”), then the Company shall immediately take all action
necessary to increase the Company’s authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for this Warrant then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders or otherwise obtain written consent from its
stockholders without a meeting for the approval of an increase in the number of
authorized shares of Common Stock.  In connection with such meeting or written
consent, the Company shall provide each stockholder with a proxy statement or
written information statement (which such proxy or information statement shall
include all of the information specified in Schedule 14C in accordance with
Rule 14c-2 promulgated under the Exchange Act, in each case as may be amended or
restated from time to time), and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal.
 
2.      ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise
Price and the number of Warrant Shares shall be adjusted from time to time as
follows:
 
(a)              Adjustment upon Issuance of shares of Common Stock.  If and
whenever the Company issues or sells, or in accordance with this Section 2 is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock issued or sold or deemed to
have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the “Applicable Price”) less than the
Exercise Price in effect immediately prior to such issuance or sale or deemed
issuance or sale (the foregoing a “Dilutive Issuance”), then immediately after
such Dilutive Issuance, the Exercise Price in effect immediately prior to
 

 
 
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such Dilutive Issuance shall be reduced to an amount equal to the product of (A)
the Exercise Price in effect immediately prior to such Dilutive Issuance and (B)
the quotient determined by dividing (1) the sum of (I) the product derived by
multiplying the lower of (x) the volume weighted average Closing Sale Price for
the ten (10) consecutive Trading Days immediately preceding such Dilutive
Issuance and (y) the Exercise Price in effect immediately prior to such Dilutive
Issuance (such lower amount, the “Adjustment Price”), by the number of shares of
Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus
(II) the consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying (I) the Adjustment Price by
(II) the number of shares of Common Stock Deemed Outstanding immediately after
such Dilutive Issuance. Upon each such adjustment of the Exercise Price pursuant
to this Section 2(a), the number of Warrant Shares shall be adjusted to the
number of shares of Common Stock determined by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.  In the event an adjustment is required under this Section 2, then
solely for purposes of determining the adjusted Exercise Price under this
Section 2(a), the following shall be applicable:
 
(i)           Issuance of Options.  If the Company grants any Options and the
lowest price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share.  For purposes of this
Section 2(a)(i), the “lowest price per share for which one share of Common Stock
is issuable upon exercise of such Options or upon conversion, exercise or
exchange of such Convertible Securities issuable upon exercise of any such
Option” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option and upon conversion, exercise or exchange of any Convertible Security
issuable upon exercise of such Option.  No further adjustment of the Exercise
Price or number of Warrant Shares shall be made upon the actual issuance of such
shares of Common Stock or of such Convertible Securities upon the exercise of
such Options or upon the actual issuance of such shares of Common Stock upon
conversion, exercise or exchange of such Convertible Securities.
 
(ii)           Issuance of Convertible Securities.  If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for
which one share of Common Stock is issuable upon the conversion, exercise or
exchange thereof is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of
 

 
 
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such Convertible Securities for such price per share.  For the purposes of this
Section 2(a)(ii), the “lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange thereof” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to one share of Common Stock upon the
issuance or sale of the Convertible Security and upon conversion, exercise or
exchange of such Convertible Security.  No further adjustment of the Exercise
Price or number of Warrant Shares shall be made upon the actual issuance of such
shares of Common Stock upon conversion, exercise or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of this Warrant has been or is
to be made pursuant to other provisions of this Section 2(a), no further
adjustment of the Exercise Price or number of Warrant Shares shall be made by
reason of such issue or sale.
 
(iii)           Change in Option Price or Rate of Conversion.  If the purchase
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion, exercise or exchange of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or
exercisable or exchangeable for shares of Common Stock increases or decreases at
any time, the Exercise Price and the number of Warrant Shares in effect at the
time of such increase or decrease shall be adjusted to the Exercise Price and
the number of Warrant Shares which would have been in effect at such time had
such Options or Convertible Securities provided for such increased or decreased
purchase price, additional consideration or increased or decreased conversion
rate, as the case may be, at the time initially granted, issued or sold.  For
purposes of this Section 2(a)(iii), if the terms of any Option or Convertible
Security that was outstanding as of the date of issuance of this Warrant are
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease.  No
adjustment pursuant to this Section 2(a) shall be made if such adjustment would
result in an increase of the Exercise Price then in effect or a decrease in the
number of Warrant Shares.
 
(iv)           Calculation of Consideration Received.  In case any Option is
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01.  If any shares
of Common Stock, Options or Convertible Securities are issued or sold or deemed
to have been issued or sold for cash, the consideration received therefor will
be deemed to be the gross amount
 

 
 
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received by the Company therefor.  If any shares of Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of such consideration received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Weighted Average Price of such security on the date of receipt.  If any shares
of Common Stock, Options or Convertible Securities are issued to the owners of
the non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed to be
the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such shares of Common Stock, Options
or Convertible Securities, as the case may be.  The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders in good faith.  If such parties are unable to
reach agreement within ten (10) days after the occurrence of an event requiring
valuation (the “Valuation Event”), the fair value of such consideration will be
determined within five (5) Business Days after the tenth (10th) day following
the Valuation Event by an independent, reputable appraiser jointly selected by
the Company and the Required Holders.  The determination of such appraiser shall
be final and binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.
 
(b)              Adjustment upon Subdivision or Combination of Common Stock.  If
the Company at any time on or after the Subscription Date subdivides (by any
stock split, stock dividend, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision will be
proportionately reduced and the number of Warrant Shares will be proportionately
increased.  If the Company at any time on or after the Subscription Date
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares will be
proportionately decreased.  Any adjustment under this Section 2(b) shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
 
(c)              Other Events.  If any event occurs of the type contemplated by
the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features unless such
rights qualify as Excluded Securities), then the Company’s Board of Directors
will make an appropriate adjustment in the Exercise Price and the number of
Warrant Shares so as to protect the rights of the Holder under this Warrant;
provided that no such adjustment pursuant to this Section 2(c) will increase the
Exercise Price or decrease the number of Warrant Shares except as otherwise
determined pursuant to this Warrant.
 

 
 
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(d)              De Minimis Adjustments.  No adjustment in the Conversion Price
shall be required unless such adjustment would require an increase or decrease
of at least $0.01 in such price; provided, however, that any adjustment which by
reason of this Section 2(d) is not required to be made shall be carried forward
and taken into account in any subsequent adjustments under this Section 2.  All
calculations under this Section 2 shall be made by the Company in good faith and
shall be made to the nearest cent or to the nearest one hundredth of a share, as
applicable, provided that the Company shall not be required to issue any
fractional shares pursuant to this Warrant.  No adjustment need be made for a
change in the par value or no par value of the Company’s Common Stock.
 
3.      RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of shares of Common Stock (other than in connection with the
issuance, exercise, exchange or conversion of Excluded Securities), by way of
return of capital or otherwise (including, without limitation, any distribution
of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or
other similar transaction) (a “Distribution”), at any time prior to the
termination, cancellation or full satisfaction of this Warrant, then, in each
such case:
 
(a)              any Exercise Price in effect immediately prior to the close of
business on the date of Distribution shall be reduced, effective as of the close
of business on the date of Distribution, to a price determined by multiplying
such Exercise Price by a fraction of which (i) the numerator shall be the
Weighted Average Price of the shares of Common Stock on the Trading Day
immediately preceding such date of Distribution minus the value of the
Distribution (as determined in good faith by the Company’s Board of Directors)
applicable to one share of Common Stock, and (ii) the denominator shall be the
Weighted Average Price of the shares of Common Stock on the Trading Day
immediately preceding such date of Distribution; and
 
(b)              the number of Warrant Shares shall be increased to a number of
shares equal to the number of shares of Common Stock obtainable immediately
prior to the close of business on the date of Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding paragraph (a).
 
4.      FUNDAMENTAL TRANSACTIONS.
 
(a)              Fundamental Transactions.  The Company shall not enter into or
be party to a Fundamental Transaction unless (i)  the Successor Entity assumes
in writing all of the obligations of the Company under this Warrant and the
other Transaction Documents (as defined in the Securities Purchase Agreement) in
accordance with the provisions of this Section (4)(a) pursuant to written
agreements in form and substance reasonably satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of the SPA Warrants in exchange
for such Warrants a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to this Warrant,
including, without limitation, an adjusted exercise price equal to the value for
the shares of Common Stock reflected by the terms of such Fundamental
Transaction, and
 

 
 
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exercisable for a corresponding number of shares of capital stock equivalent to
the shares of Common Stock acquirable and receivable upon exercise of this
Warrant (without regard to any limitations on the exercise of this Warrant)
prior to such Fundamental Transaction, and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market.  Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Warrant with the same effect as if such Successor Entity had been named as the
Company herein.  Upon consummation of the Fundamental Transaction, the Successor
Entity shall deliver to the Holder confirmation that there shall be issued upon
exercise of this Warrant at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Common Stock (or other securities,
cash, assets or other property) issuable upon the exercise of the Warrant prior
to such Fundamental Transaction, such shares of the publicly traded Common Stock
(or its equivalent) of the Successor Entity (including its Parent Entity) which
the Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had this Warrant been exercised immediately prior to
such Fundamental Transaction, as adjusted in accordance with the provisions of
this Warrant.  In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a
“Corporate Event”), the Company shall make appropriate provision to insure that
the Holder will thereafter have the right to receive upon an exercise of this
Warrant at any time after the consummation of the Fundamental Transaction but
prior to the Expiration Date, in lieu of the shares of the Common Stock (or
other securities, cash, assets or other property) issuable upon the exercise of
this Warrant prior to such Fundamental Transaction, such shares of stock,
securities, cash, assets or any other property whatsoever (including warrants or
other purchase or subscription rights) which the Holder would have been entitled
to receive upon the happening of such Fundamental Transaction had this Warrant
been exercised immediately prior to such Fundamental Transaction.  Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the Holder.  The provisions of this Section shall
apply similarly and equally to successive Fundamental Transactions and Corporate
Events and shall be applied without regard to any limitations on the exercise of
this Warrant.
 
(b)              Black-Scholes Redemption Offer.  Notwithstanding the foregoing,
the Company may enter into a Fundamental Transaction where the Successor Entity
(including its Parent Entity) is not a publicly traded corporation whose common
stock is quoted on or listed for trading on an Eligible Market if the Holder
shall receive a written offer from the Company to exchange for cancellation this
Warrant for an amount in cash determined in accordance with the Black-Scholes
Option Pricing Method (with volatility being determined, for purposes of such
pricing method, by reference to the trading prices of the Common Stock on the
Principal Market during the 100 trading days immediately preceding the date of
the first public announcement of the Fundamental Transaction) .
 

 
 
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5.      NONCIRCUMVENTION.  The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, and will at all times in good faith carry out all the
provisions of this Warrant and take all action as it believes may be required to
protect the rights of the Holder in accordance with the terms of this
Warrant.  Without limiting the generality of the foregoing, the Company
(i) shall not increase the par value of any shares of Common Stock receivable
upon the exercise of this Warrant above the Exercise Price then in effect,
(ii) shall take all such actions as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
shares of Common Stock upon the exercise of this Warrant and (iii) shall, so
long as any of the SPA Warrants are outstanding, take all action necessary to
reserve and keep available out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the exercise of the SPA Warrants,
105% of the number of shares of Common Stock as shall from time to time be
necessary to effect the exercise of the SPA Warrants then outstanding (without
regard to any limitations on exercise).
 
6.      WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as otherwise
specifically provided herein, the Holder, solely in such Person’s capacity as a
holder of this Warrant, shall not be entitled to vote or receive dividends or be
deemed the holder of share capital of the Company for any purpose, nor shall
anything contained in this Warrant be construed to confer upon the Holder,
solely in such Person’s capacity as the Holder of this Warrant, any of the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the Holder of the Warrant Shares which such
Person is then entitled to receive upon the due exercise of this Warrant.  In
addition, nothing contained in this Warrant shall be construed as imposing any
liabilities on the Holder to purchase any securities (upon exercise of this
Warrant or otherwise) or as a stockholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.
 
7.      REISSUANCE OF WARRANTS.
 
(a)              Transfer of Warrant.  This Warrant may be offered for sale,
sold, transferred or assigned without the consent of the Company, except as may
otherwise be required by Section 2(f) of the Securities Purchase Agreement. If
this Warrant is to be transferred, the Holder shall surrender this Warrant to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of
Warrant Shares being transferred by the Holder and, if less than the total
number of Warrant Shares then underlying this Warrant is being transferred, a
new Warrant (in accordance with Section 7(d)) to the Holder representing the
right to purchase the number of Warrant Shares not being transferred.
 

 
 
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(b)              Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company
of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Warrant, the Company shall execute and deliver to the Holder a new
Warrant (in accordance with Section 7(d)) representing the right to purchase the
Warrant Shares then underlying this Warrant.
 
(c)              Exchangeable for Multiple Warrants.  This Warrant is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Warrant or Warrants (in accordance with Section 7(d))
representing in the aggregate the right to purchase the number of Warrant Shares
then underlying this Warrant, and each such new Warrant will represent the right
to purchase such portion of such Warrant Shares as is designated by the Holder
at the time of such surrender; provided, however, that no Warrants for
fractional shares of Common Stock shall be given.
 
(d)              Issuance of New Warrants.  Whenever the Company is required to
issue a new Warrant pursuant to the terms of this Warrant, such new Warrant (i)
shall be of like tenor with this Warrant, (ii) shall represent, as indicated on
the face of such new Warrant, the right to purchase the Warrant Shares then
underlying this Warrant (or in the case of a new Warrant being issued pursuant
to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder
which, when added to the number of shares of Common Stock underlying the other
new Warrants issued in connection with such issuance, does not exceed the number
of Warrant Shares then underlying this Warrant), (iii) shall have an issuance
date, as indicated on the face of such new Warrant which is the same as the
Issuance Date, and (iv) shall have the same rights and conditions as this
Warrant.
 
8.      NOTICES.  Whenever notice is required to be given under this Warrant,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement.  The Company shall provide
the Holder with prompt written notice of all actions taken pursuant to this
Warrant, including in reasonable detail a description of such action and the
reason therefore.  Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of
the Exercise Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least ten (10) days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the shares of Common Stock, (B) with respect to
any grants, issuances or sales of any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property to all holders of
shares of Common Stock (other than Excluded Securities) or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case that such information has been made known to
the public prior to or in conjunction with such notice being provided to the
Holder.
 
9.      AMENDMENT AND WAIVER.  Except as otherwise provided herein, the
provisions of this Warrant may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Required
Holders; provided, however, that without the
 

 
 
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prior written consent of the Holder, no such action may be taken that (x) would
increase the exercise price of any SPA Warrant or decrease the number of shares
or class of stock obtainable upon exercise of any SPA Warrant (except in
connection with recapitalizations, reclassifications, stock dividends, stock
splits and the like), (y) has or would reasonably be expected to have a material
adverse effect upon the rights of the Holder under this Warrant or (z) would
modify this Section 9; provided that, notwithstanding the foregoing, none of a
Dilutive Issuance, a Distribution or a Fundamental Transaction shall require the
prior written consent of the Holder (solely in its capacity as a holder of this
Warrant) under this Section 9.  No such amendment shall be effective to the
extent that it applies to less than all of the holders of the SPA Warrants then
outstanding unless consented to in writing by the Holder and each other holder
of the SPA Warrants then outstanding.
 
10.           GOVERNING LAW.  This Warrant shall be governed by and construed
and enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Warrant shall be governed by,
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.
 
11.           CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be
jointly drafted by the Company and all the Buyers and shall not be construed
against any person as the drafter hereof.  The headings of this Warrant are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Warrant.
 
12.           DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within five (5) Business Days of receipt of the
Exercise Notice giving rise to such dispute, as the case may be, to the
Holder.  If the Holder and the Company are unable to agree upon such
determination or calculation of the Exercise Price or the Warrant Shares within
three Business Days of such disputed determination or arithmetic calculation
being submitted to the Holder, then the Company shall, within two (2) Business
Days submit via facsimile (a) the disputed determination of the Exercise Price
to an independent, reputable investment bank selected by the Company and
approved by the Holder, which approval shall not be unreasonably withheld,
conditioned or delayed,  or (b) the disputed arithmetic calculation of the
Warrant Shares to the Company’s independent, outside accountant.  The Company
shall use its best efforts to cause at its expense the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than ten Business
Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
 
13.           REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant and the other Transaction Documents,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder right
to pursue actual damages for any failure by the Company
 

 
 
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to comply with the terms of this Warrant.  The Company acknowledges that a
breach by it of its obligations hereunder may cause irreparable harm to the
Holder and that the remedy at law for any such breach may be inadequate.  The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
 
14.           CERTAIN DEFINITIONS.  For purposes of this Warrant, the following
terms shall have the following meanings:
 
(a)              “1933 Act” means the Securities Act of 1933, as amended.
 
(b)              “Affiliate” means with respect to a specified Person, any other
Person who or which is (a) directly or indirectly controlling, controlled by or
under common control with the specified Person, or (b) any member, stockholder,
director, officer, manager, or comparable principal of, or relative or spouse
of, the specified Person. For purposes of this definition, “control”,
“controlling”, and “controlled” mean the right to exercise, directly or
indirectly, more than fifty percent of the voting power of the stockholders,
members or owners and, with respect to any individual, partnership, trust or
other entity or association, the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of the
controlled entity.
 
(c)              “Bloomberg” means Bloomberg Financial Markets.
 
(d)              “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
 
(e)              “Closing Sale Price” means, for any security as of any date,
the last closing trade price for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing trade price then the
last trade price of such security prior to 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last trade price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last trade price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no last trade price is reported for such security by Bloomberg, , the average
of the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the “pink sheets”.  If the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Sale Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
Holder in good faith.  If the Company and the Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved
pursuant to Section 12.  All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.
 

 
 
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(f)              “Common Stock” means (i) the Company’s shares of common stock,
par value $0.01 per share, and (ii) any share capital into which such common
stock shall have been changed or any share capital resulting from a
reclassification of such common stock.
 
(g)              “Common Stock Deemed Outstanding” means, at any given time, the
number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
2(a)(i) and 2(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any shares of
Common Stock owned or held by or for the account of the Company or issuable upon
exercise of the SPA Warrants.
 
(h)              “Convertible Securities” means any stock or securities (other
than Options) directly or indirectly convertible into or exercisable or
exchangeable for shares of Common Stock.
 
(i)              “Eligible Market” means The New York Stock Exchange, Inc., the
American Stock Exchange, The NASDAQ Global Market, The NASDAQ Global Select
Market, The NASDAQ Capital Market or the OTC Bulletin Board.
 
(j)              “Excluded Securities” has the meaning ascribed to such term in
the SPA Securities.
 
(k)              “Expiration Date” means the date five (5) years after the
Issuance Date or, if such date falls on a day other than a Business Day or on
which trading does not take place on the Principal Market (a “Holiday”), the
first date thereafter that is not a Holiday.
 
(l)              “Fundamental Transaction” means any of the following
transactions, in which the Company shall, directly or indirectly, in one or more
related transactions, (i) consolidate or merge with or into (whether or not the
Company is the surviving corporation) another Person or Persons, and the holders
of the Voting Stock (not including any shares of Voting Stock held by the Person
or Persons making or party to, or associated or affiliated with the Persons
making or party to, such consolidation or merger) immediately prior to such
consolidation or merger hold or have the right to direct the voting of less than
50% of the Voting Stock or such voting securities of such other surviving Person
immediately following such transaction, or (ii) sell, assign, transfer, convey
or otherwise dispose of all or substantially all of the properties or assets of
the Company to another Person, or (iii) be the subject of a purchase, tender or
exchange offer that is accepted by the holders of more than 50% of the
outstanding shares of Voting Stock (not including any shares of Voting Stock
held by the Person or Persons making or party to, or associated or affiliated
with the Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person other than Goodnow Capital, L.L.C.,
Xmark Opportunity Partners, LLC or an Affiliate of either of the foregoing
whereby such other Person acquires more than 50% of the outstanding shares of
Voting Stock (not including
 

 
 
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any shares of Voting Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or party to,
such stock purchase agreement or other business combination), or (v) be the
subject of a change in ownership such that any “person” or “group” (as these
terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act)
other than Goodnow Capital, L.L.C., Xmark Opportunity Partners, LLC or an
Affiliate of either of the foregoing is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
50% of the aggregate ordinary voting power represented by issued and outstanding
Common Stock.
 
(m)              “Options” means any rights, warrants or options to subscribe
for or purchase shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock.
 
(n)              “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
 
(o)              “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
 
(p)              “Principal Market” means the Eligible Market the Common Stock
is then listed on.
 
(q)              “Required Holders” means the holders of the SPA Warrants
representing at least fifty and one-tenth percent (50.1%) of the shares of
Common Stock underlying the SPA Warrants then outstanding.
 
(r)              “SPA Securities” means the Notes issued pursuant to the
Securities Purchase Agreement.
 
(s)              “Successor Entity” means the Person, which may be the Company,
formed by, resulting from or surviving any Fundamental Transaction or the Person
with which such Fundamental Transaction shall have been made, provided that if
such Person is not a publicly traded entity whose common stock or equivalent
equity security is quoted or listed for trading on an Eligible Market, Successor
Entity shall mean such Person’s Parent Entity.
 
(t)              “Trading Day” means any day on which the Common Stock are
traded on the Principal Market, or, if the Principal Market is not the principal
trading market for the Common Stock, then on the principal securities exchange
or securities market on which the Common Stock are then traded; provided that
“Trading Day” shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or
 

 
 
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market does not designate in advance the closing time of trading on such
exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
 
(u)              “Voting Stock” of a Person means capital stock of such Person
of the class or classes pursuant to which the holders thereof have the general
voting power to elect, or the general power to appoint, at least a majority of
the board of directors, managers or trustees of such Person (irrespective of
whether or not at the time capital stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency).
 
(v)              “Weighted Average Price” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York City
time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg
through its “Volume at Price” function or, if the foregoing does not apply, the
dollar volume-weighted average price of such security in the over-the-counter
market on the electronic bulletin board for such security during the period
beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New
York City time, as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of any
of the market makers for such security as reported in the “pink sheets”.  If the
Weighted Average Price cannot be calculated for such security on such date on
any of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and
the Required Holders in good faith; provided that if the Company and the
Required Holders are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 12 with the
term “Weighted Average Price” being substituted for the term “Exercise Price.”
All such determinations shall be appropriately adjusted for any share dividend,
share split or other similar transaction during such period.
 
[Signature Page Follows.]

 
 
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IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock
to be duly executed as of the Issuance Date set out above.

 
AEOLUS PHARMACEUTICALS, INC.

 

 
 
By:
/s/ Michael P. McManus
 

 
 
Name:
Michael P. McManus

 
 
Title:
Chief Financial Officer

 

Signature Page to Warrant to Purchase Common Stock
 
 

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 EXHIBIT A

EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK

AEOLUS PHARMACEUTICALS, INC.
The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of Aeolus Pharmaceuticals,
Inc., a Delaware corporation (the “Company”), evidenced by the attached Warrant
to Purchase Common Stock (the “Warrant”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

1.  Form of Exercise Price.  The Holder intends that payment of the Exercise
Price shall be made as:

 
____________
a “Cash Exercise” with respect to _________________ Warrant Shares; and/or

 
____________
a “Cashless Exercise” with respect to _______________ Warrant Shares.

2.  Payment of Exercise Price.  In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the Warrant.

3.  Maximum Exercise Percentage.  The Holder represents and warrants to the
Company that the Holder, together with the Holder’s affiliates, will not
beneficially own in excess of 9.99% of the shares of Common Stock of the Company
outstanding immediately after giving effect to the exercise of the Warrant for
the number of Warrant Shares to be issued pursuant to this Exercise Notice.

4.  Delivery of Warrant Shares.  The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.

Date: _______________ __, ______

   Name of Registered Holder

By:      _______________________     
Name:
Title:

 
 

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ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice and hereby directs American
Stock Transfer and Trust Company to issue the above indicated number of shares
of Common Stock in accordance with the Irrevocable Transfer Agent Instructions
dated August 1, 2008 from the Company and acknowledged and agreed to by American
Stock Transfer and Trust Company.

 
AEOLUS PHARMACEUTICALS, INC.

 

 
 
By:
 _________________________________

 
 
Name:

 
 
Title: