Exhibit 10.2
 
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: March 30, 2009 (“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 March 30, 2009 (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
 
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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
Thirty-Five Cents ($0.35), 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.

 
 
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).

 
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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.
 
(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
 
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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,
 
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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 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
 
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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.
 
(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
 
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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.  Notwithstanding anything
contained herein to the contrary, if 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), 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
 
(b) 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
 
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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).
 
5. 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 5(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 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
 
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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).
 
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,
 
10

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(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).
 
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
 
11

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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 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:
 
(a) “1933 Act” means the Securities Act of 1933, as amended.
 
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(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) “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.
 
(g) “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.
 
(h) “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)
 
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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.
 
(i) “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
shares of Common Stock.
 
(j) “Eligible Market” means The New York Stock Exchange, Inc., NYSE Alternext US
LLC, The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ
Capital Market or the OTC Bulletin Board.
 
(k) “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) upon conversion or
exercise of any senior convertible note (each a “Note”) or warrant (each a
“Prior Warrant”) issued or issuable pursuant to that certain Securities Purchase
Agreement, dated as of August 1, 2008, by and among the Company and the
investors listed on the Schedule of Buyers attached thereto, as may be amended
or restated from time to time (the “Prior Purchase Agreement”); (iii) 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”); (iv) 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); (v) in connection with any merger,
consolidation, acquisition, or similar business combination approved by the
board of directors of the Company; (vi) 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; (vii) pursuant to Section 4(m) of the Prior Purchase Agreement;
(viii) 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); (ix) 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 (x) under the Securities
Purchase Agreement or under any SPA Warrants, including this Warrant; (II) 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”); (III) any Common Stock
issued or issuable upon conversion of any of the Elan Note Series B Preferred;
 
15

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(IV) any warrant issued or issuable pursuant to the terms of the Elan Note (an
“Elan Warrant”); (V) any Series B Preferred issued or issuable upon exercise of
any Elan Warrant (the “Elan Warrant Series B”); (VI) any Common Stock issued or
issuable upon conversion of any Elan Warrant Series B; (VII) any Note and any
Prior Warrant; and (VIII) 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
(VII) hereof.
 
(l) “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.
 
(m) “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.
 
(n) “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.
 
(o) “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.
 
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(p) “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.
 
(q) “Principal Market” means the Eligible Market the Common Stock is then listed
on.
 
(r) “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.
 
(s) “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.
 
(t) “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.
 
(u) “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).
 
(v) “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).
 
(w) “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
 
17

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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:           /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]%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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1 Such 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 March 30, 2009 from the Company and acknowledged and agreed to by American
Stock Transfer and Trust Company.
 

AEOLUS PHARMACEUTICALS, INC.

By:                                                                
Name:
Title: