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: [·], 2010 (“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 4 hereof
(the “Warrant Shares”). This Warrant is one of the Warrants to purchase Common
Stock (as may be amended or restated from time to time, the “SPA Warrants”)
issued pursuant to Section 1 of that certain Securities Purchase Agreement (as
may be amended or restated from time to time, the “Securities Purchase
Agreement”), dated as of [·], 2010 (the “Subscription Date”), by and among the
Company, as issuer, and the investors listed on the 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 15.

 
 

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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 to 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)), provided that such
Cashless Exercise is permitted pursuant to the terms hereof. 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 fully
completed and executed Exercise Notice and the Aggregate Exercise Price (unless
such Exercise Notice indicates exercise pursuant to a Cashless Exercise and
Cashless Exercise is then permitted under the terms hereof) (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 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 the receipt
of such Warrant) and at its own expense, issue a new Warrant (in accordance with
Section 8(d)) representing the right to purchase the number of 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).

 
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(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, 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”):
 
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.

 
 
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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 13.
 
(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% (as may be adjusted, 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. 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.

 
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(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 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:

 
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(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 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.

 
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(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 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.

 
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(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.
 
(d)                       De Minimis Adjustments.  No adjustment in the Exercise
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 Common Stock.
 
3.           RIGHTS UPON CASH DIVIDENDS AND DISTRIBUTIONS; CHANGE OF CONTROL.
Notwithstanding anything contained herein to the contrary, if (i) the Company at
any time on or after the Subscription Date and prior to the termination,
cancellation or full satisfaction of this Warrant, pays a cash dividend, or
makes any other cash distribution to its stockholders (in each case other than
in connection with the issuance, exercise, exchange or conversion of Excluded
Securities) or (ii) a Change of Control occurs, then:
 
(a)                       the Exercise Price in effect immediately prior to such
payment or dividend will be reduced to $0.01 (there shall not be any adjustment
of the number of Warrant Shares in connection with an adjustment of the Exercise
Price pursuant to this Section 3; provided; however, that upon the occurrence of
an event described in Section 4, the number of Warrant Shares shall be adjusted
as set forth in Section 4); and

 
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(b)                       in the case of any such cash dividend or cash
distribution, the Holder shall receive, for each Warrant Share that has not been
issued under this Warrant as of the record date for such payment or distribution
or, in the absence of a record date, as of immediately prior to such payment or
distribution (each, an “Unissued Warrant Share”), the amount of the cash
dividend or cash distribution the Holder would have received had it exercised
this Warrant in full for all such Unissued Warrant Shares immediately prior to
the record date for such payment or distribution or, in the absence of a record
date, as of immediately prior to such payment or distribution.
 
4.           RIGHTS UPON DISTRIBUTION OF ASSETS.  Except as set forth in
Section 3 above, 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).

 
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5.           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 5 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 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.
 
6.           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).

 
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7.           WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as set forth in
Section 3 above and 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.
 
8.           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 8(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 8(d)) to the Holder
representing the right to purchase the number of Warrant Shares not being
transferred.
 
(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 8(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 8(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.
 
 
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(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 8(a) or Section 8(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.
 
9.           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) within three
(3) Business Days following 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.
 
10.         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 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 10; 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 10. 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.

 
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11.         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.
 
12.         CONSTRUCTION; HEADINGS; REFERENCES.  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. Unless otherwise provided, each reference to a
“Section” herein shall be deemed a reference to such section of this Warrant.
 
13.         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.
 
14.         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 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.
 
15.         CERTAIN DEFINITIONS.  For purposes of this Warrant, the following
terms shall have the following meanings:

 
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(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)                       “Approved Stock Plan” means any employee benefit plan
which has been or hereafter is approved by the board of directors of the
Company, pursuant to which the Company’s securities may be issued to any
employee, consultant, officer or director for services provided to the Company.
 
(d)                       “Bloomberg” means Bloomberg Financial Markets.
 
(e)                       “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.
 
(f)                        “Change of Control” means any Fundamental Transaction
other than (A) any reorganization, recapitalization or reclassification of the
Common Stock, in which holders of the Company's voting power immediately prior
to such reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
 
(g)                      “Closing Sale Price” means, as of any date, the last
closing trade price for the Common Stock 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 on such date shall be the fair market value of the Common
Stock 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 the
Common Stock, then such dispute shall be resolved pursuant to Section 13. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the
applicable calculation period.

 
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(h)                       “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.
 
(i)                        “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.
 
(j)                        “Convertible Securities” means any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for shares of Common Stock.
 
(k)                       “Eligible Market” means The New York Stock Exchange,
Inc., NYSE Amex, The NASDAQ Global Market, The NASDAQ Global Select Market, The
NASDAQ Capital Market or the OTC Bulletin Board.

 
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(l)                        “Excluded Securities” means any (I) Common Stock
issued or issuable, directly or indirectly: (i) in connection with any Approved
Stock Plan or with respect to any shares of Common Stock reserved as employee
shares (or for consultants, officers or directors of the Company and its
Subsidiaries) as of the date immediately preceding the Issuance Date;
(ii) pursuant to a bona fide firm commitment underwritten public offering with a
nationally recognized underwriter which generates gross proceeds to the Company
in excess of $10,000,000 (other than an “at-the-market offering” as defined in
Rule 415(a)(4) under the 1933 Act, and “equity lines”); (iii) upon conversion of
any Options or Convertible Securities which are outstanding on the day
immediately preceding the Issuance Date, provided that the exercise or
conversion price of such Options or Convertible Securities are not reduced on or
after the Issuance Date (except in connection with recapitalizations,
reclassifications, stock dividends, stock splits and the like); (iv) in
connection with any merger, consolidation, acquisition, or similar business
combination approved by the board of directors of the Company; (v) pursuant to
any equipment loan or leasing arrangement, real property leasing arrangement or
debt financing from a bank or similar financial institution approved by the
board of directors of the Company; (vi) in connection with the payment of
interest, penalties, premiums or other liquidated damages on the Notes or under
any registration rights agreement of the Company in effect prior to the Issuance
Date (provided that such registration rights agreement was disclosed to the
Buyers on or prior to the Issuance Date or an exhibit to a Current Report,
Quarterly Report or Annual Report of the Company filed with the SEC at least two
(2) Business Days prior to the Issuance Date); (vii) upon conversion of any
Series B nonredeemable convertible preferred stock, par value $0.01 per share,
of the Company (“Series B Preferred”), outstanding as of the Issuance Date; or
(viii) under the Securities Purchase Agreement or under any SPA Warrants,
including this Warrant; (II) any Options issued in connection with any Approved
Stock Plan or with respect to any shares of Common Stock reserved as employee
shares (or for consultants, officers or directors of the Company and its
Subsidiaries) as of the date immediately preceding the Issuance Date; (III) any
Series B preferred issued or issuable upon conversion of the convertible
promissory note originally issued on February 8, 2007 by the Company to Elan
Pharma International Limited and any replacements thereof (the “Elan Note”)
(provided, however, that the terms relating to the conversion of such note shall
not be materially modified and the principal amount of such note, after
deducting for amounts converted, repaid, redeemed or prepaid, shall not have
been increased) (the “Elan Note Series B Preferred”); (IV) any Common Stock
issued or issuable upon conversion of any of the Elan Note Series B Preferred;
(V) any warrant issued or issuable pursuant to the terms of the Elan Note (an
“Elan Warrant”); (VI) any Series B Preferred issued or issuable upon exercise of
any Elan Warrant (the “Elan Warrant Series B”); (VII) any Common Stock issued or
issuable upon conversion of any Elan Warrant Series B; (VIII) up to 1,538,755
shares (subject to appropriate adjustment for stock splits, stock dividends,
reverse stock splits and other recapitalizations) of Common Stock issued or
issuable to Indevus Pharmaceuticals, Inc. (or its successor) pursuant to that
certain Exchange Agreement, dated July 15, 1999, between the Company (formerly
Intercardia, Inc.) and Indevus Pharmaceuticals, Inc. (formerly Interneuron
Pharmaceuticals, Inc.); and (IX) any Common Stock issued or issuable pursuant to
a stock split, stock dividend, recapitalization, exchange or similar event or
otherwise relating to any of the securities referred to in clauses (I) through
(VIII) hereof.
 
(m)                      “Expiration Date” means the date seven (7) 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.
 
(n)                       “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 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.

 
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(o)                       “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.
 
(p)                       “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.
 
(q)                       “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.
 
(r)                        “Principal Market” means the Eligible Market the
Common Stock is then listed on.
 
(s)                       “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.
 
(t)                       “Subsidiary” means each “Significant Subsidiary” (as
such term is defined in Rule 1-02 of Regulation S-X of the 1933 Act) of the
Company.
 
(u)                       “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.
 
(v)                       “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 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).

 
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(w)                      “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).
 
(x)                       “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 13 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:
   
Name:  John McManus
 
Title:    President and Chief Executive 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]%1 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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1Such amount to be the Maximum Percentages.

 
 

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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 [_____ __,] 2010 from the Company and acknowledged and agreed to by
American Stock Transfer and Trust Company.

 
AEOLUS PHARMACEUTICALS, INC.
     
By:
   
Name:
 
Title:

 
 

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