exh1043convpromnote.htm


    Exhibit
      10.43

    


    THIS
      CONVERTIBLE PROMISSORY NOTE AND THE SHARES OF SERIES B PREFERRED STOCK ISSUABLE
      UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
      1933, AS AMENDED, AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED
      OR
      OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH
      SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE
      STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
      THAT
      REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES
      LAWS.

     

    THE
      TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT
      TO
      THE RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, DATED
      DECEMBER 21, 2000 BY AND AMONG, AEOLUS PHARMACEUTICALS, INC., ELAN INTERNATIONAL
      SERVICES, LTD. AND ELAN PHARMA INTERNATIONAL LIMITED.

     

    AEOLUS
      PHARMACEUTICALS, INC.

     

    CONVERTIBLE
      PROMISSORY NOTE

     

    U.S.
      $452,658.60                                                 February
      7,
      2007

     

    The
      undersigned, Aeolus Pharmaceuticals, Inc., a Delaware
      corporation with offices at 23811 Inverness Place, Laguna Niguel, California
      92677 (the “Company”), unconditionally promises to pay to Elan
      Pharma International Limited, an Irish private limited liability
      company (“EPIL”), or its permitted assigns, transferees and successors as
      provided herein (collectively with EPIL, the “Holder”), on February 7,
      2009 (the “Maturity Date”), at such place as may be designated by the
      Holder to the Company, the principal amount of Four Hundred Fifty Two Thousand
      Six Hundred Fifty Eight Dollars and Sixty Cents (U.S.$ 452,658.60) (excluding
      capitalized interest), together with interest thereon accrued at a rate per
      annum equal to 10.0%, compounded on a quarterly basis on each 90-day anniversary
      from and after the date hereof (each such date, a “Compounding Date”),
      which shall be capitalized and added to the principal amount outstanding
      hereunder.

     

    SECTION
      1.  SECURITIES
      PURCHASE AGREEMENT.

     

    This
      Note is issued pursuant to a
      Securities Purchase Agreement, dated December 21, 2000, by and among the
      Company, Elan International Services, Ltd., a Bermuda exempted limited liability
      company (“EIS”), and EPIL (as amended at any time, the “Securities
      Purchase Agreement”), and the Holder hereof is intended to be afforded the
      benefits thereof, including the representations and warranties set forth
      therein. Capitalized terms used but not otherwise defined herein shall, unless
      otherwise indicated, have the meanings given such terms in the Securities
      Purchase Agreement.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SECTION
      2.  PAYMENTS
      OF PRINCIPAL AND INTEREST.

     

    Unless
      earlier converted in accordance
      with the terms of Section 4 below, or repaid in accordance with the terms
      hereof, the entire outstanding principal amount of this Note, together with
      any
      accrued interest thereon, shall be due and payable in full, at the option of
      the
      Company, (x) in cash or (y) by the issuance of a number of shares of Series
      B
      Convertible Preferred Stock, par value U.S.$0.01 per share (the “Series B
      Preferred Stock”), of the Company with an aggregate fair market value (based
      upon the value of the underlying shares of Common Stock, par value $.001 per
      share, of the Company (“Common Stock”) into which such shares of Series B
      Preferred Stock are convertible, as of the Maturity Date), equal to the entire
      outstanding principal amount of this Note, together with any accrued interest
      thereon (rounded down to the nearest whole share, with cash paid for a
      fractional share); provided, however, that if the Common Stock is not
      traded on a securities exchange, The NASDAQ Capital Market, The NASDAQ Global
      Market, The NASDAQ Global Select Market, or the OTC Bulletin Board, the fair
      market value shall be reasonably determined by the Company’s Board of Directors
      in good faith and agreed to by the holder of this Note; and provided
      further, that if payment is made in shares of Series B Preferred Stock, the
      fair market value of the Common Stock, for purposes of calculating the number
      of
      shares of Series B Preferred Stock to be issued, shall not be less than
      U.S.$13.00 per share of Common Stock (subject to adjustment as provided in
      Section 4 hereof).

     

    SECTION
      3.  ADDITIONAL
      WARRANT.  In the event any payment made pursuant to the Note
      is effected by the Company by the issuance of shares of Series B Preferred
      Stock
      and the fair market value of the underlying shares of Common Stock is less
      than
      U.S. $13.00, then, after such payment pursuant to the Note is effected and
      the
      appropriate number of shares of Series B Preferred Stock is issued by the
      Company, the Company shall issue to EIS on the business day following the
      payment a warrant in substantially the form of Exhibit A attached hereto
      (the “Warrant) exercisable for a number of shares of Series B Preferred
      Stock equal to the sum of:

     

    (a)  a
      number
      of shares obtained by dividing (I) the dollar value of the difference between
      the number of shares of Series B Preferred Stock that would have been issued
      upon such payment had the fair market value of the underlying shares of Common
      Stock been calculated at the actual fair market value (as provided in Section
      2
      of this Note), rather than at a price of U.S. $13.00, by (y) the fair
      market value (as provided in Section 2 of this Note) of a share of Common Stock
      on the date of issuance of the Warrant, and

     

    (b)  a
      number
      of shares obtained by dividing (I) the aggregate exercise price of the number
      of
      shares calculated in clause (x) above by (y) the fair market value (as
      provided in Section 2 of this Note) of a share of Common Stock on the date
      of
      issuance of the Warrant.

     

    The
      Warrant shall have (i) an exercise price per share equal to the par value of
      class or series of security that is the issuable upon exercise of the Warrant;
      (ii) a term of five years from the date of issuance, (iii) a cash-less exercise
      provision and (iv) customary anti-dilution adjustments in the event of stock
      splits, stock combination, reorganizations and similar events.

     

    The
      parties hereby agree (a) that the Registration Rights Agreement, dated December
      21, 2000, among the Company, EIS and EPIL, is hereby amended such that the
      definition of the term “Securities” shall include the shares of Common Stock
      issuable upon exercise of the Warrant and the shares of Common Stock issuable
      upon conversion of any shares of Series B Preferred Stock issuable upon exercise
      of the Warrant and (b) to execute, prior to or simultaneously with the issuance
      of the Warrant, any reasonable and customary investment representations or
      similar document to make the issuance of the Warrant comply with or qualify
      for
      exemption under federal, state and any other applicable jurisdiction’s
      securities laws.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EIS
      and
      EPIL acknowledge that, because the number of shares to be covered by the Warrant
      cannot be determined at the time of this Agreement, the Company might not have
      sufficient authorized shares of Series B Preferred Stock to enable the Company
      to issue the shares of Series B Preferred Stock issuable upon exercise of the
      Warrant or the shares of Common Stock issuable upon conversion of any shares
      of
      Series B Preferred Stock issued upon exercise of the Warrant and, accordingly,
      the Company might need to obtain stockholder approval for the issuance of the
      Warrant to comply with securities exchange rules or other governmental or
      regulatory regulations, and EIS and EPIL agree that such lack of approval or
      sufficient shares shall not be a breach by the Company of this Agreement or
      any
      other Transaction Document (as that term is defined in the Purchase
      Agreement).  In such event, the Company agrees to obtain the necessary
      approval of its stockholders and any governmental entity within 90 days of
      the
      exercise of the Warrant.

     

    SECTION
      4.  CONVERSION.

     

    (a)  Conversion
      Right.

     

    (i)  Until
      this Note is repaid in full, the Holder shall have the right from time to time,
      in its sole discretion, to convert all or any portion of the outstanding
      principal amount and accrued and unpaid interest then outstanding hereunder,
      (the “Conversion Right”), into such number of shares of Series B
      Preferred Stock that shall be obtained by dividing the sum of the outstanding
      principal amount and all accrued and unpaid interest by U.S.$9.00 per share,
      subject to adjustment as provided below in this Section (the “Conversion
      Price”).

     

    (ii)  The
      Holder shall be entitled to exercise the Conversion Right from time to time
      as
      to the unconverted portion of this Note upon at least 10 days’ prior written
      notice to the Company, such notice to be in the form attached hereto as Annex
      I.  Within 10 days of the conversion date specified in such notice,
      the Company shall issue appropriate stock certificates to EPIL (or such
      affiliate designated by EPIL) representing the aggregate number of shares of
      Series B Preferred Stock due to EPIL as a result of such
      conversion.

     

    (b)  Reclassification,
      Etc.  In case of (i) any reclassification, reorganization, change
      or conversion of securities of the class issuable upon conversion of the
      outstanding principal amount and accrued and unpaid interest then-outstanding
      hereunder (other than a change in par value, or from par value to no par value),
      or (ii) any consolidation of the Company with or into another entity (other
      than
      a merger or consolidation with another entity in which the Company is the
      surviving entity and that does not result in any reclassification or change
      of
      the class of securities issuable upon the conversion of the outstanding
      principal amount and accrued and unpaid interest then-outstanding hereunder),
      or
      (iii) any sale of all or substantially all the assets of the Company, then
      the
      Company, or such successor or purchasing entity, as the case may be, shall
      duly
      execute and deliver to the Holder a new Note or a supplement hereto (in form
      and
      substance reasonably satisfactory to the Holder of this Note), so that the
      Holder shall have the right to receive, in lieu of the shares of Series B
      Preferred Stock otherwise issuable upon the conversion of such outstanding
      principal amount and accrued and unpaid interest then outstanding hereunder,
      the
      kind and amount of shares of stock and other securities, money and property
      receivable upon such reclassification, reorganization, change, merger,
      consolidation or conversion by a holder of the number of shares of Series B
      Preferred Stock issuable upon conversion of this Note.  Such new Note
      shall provide for adjustments that shall be as nearly equivalent as may be
      practicable to the adjustments provided for in this Section 4.  The
      provisions of this Section 4(b) shall similarly attach to successive
      reclassifications, reorganizations, changes, mergers, consolidations, transfers
      or conversions.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (c)  If
      at any
      time while there is any outstanding principal amount and accrued interest
      then-outstanding hereunder the Company shall:

     

    (i)  fix
      a
      record date for the effectuation of a split or subdivision of the outstanding
      shares of Series B Preferred Stock or the determination of holders of Series
      B
      Preferred Stock entitled to receive a dividend or other distribution payable
      in
      additional shares of Series B Preferred Stock or other securities or property
      or
      rights convertible into, or entitling the holder thereof to receive directly
      or
      indirectly, any of the foregoing (hereinafter referred to as “Series B
      Preferred Stock Equivalents”) without payment of any consideration by such
      holder for the additional shares of Series B Preferred Stock or the Series
      B
      Preferred Stock Equivalents (including the additional shares of Series B
      Preferred Stock or other securities or property issuable upon conversion or
      exercise thereof), then the Conversion Right shall be adjusted for, in addition
      to the number of shares of the Series B Preferred Stock otherwise deliverable
      upon exercise of the Conversion Right, and without adjustment to the Conversion
      Price, the amount of such additional shares of Series B Preferred Stock and
      any
      Series B Preferred Stock Equivalents that the holder hereof would have received
      or become entitled to receive on the same terms and conditions as if such holder
      had been a holder of record of such Series B Preferred Stock as shall have
      been
      deliverable immediately prior to such record date pursuant to the terms of
      this
      Section 4; or

     

    (ii)  shall
      subdivide or combine its Series B Preferred Stock, (A) in the case of a
      subdivision, the Conversion Price shall be proportionately decreased and the
      number of Shares purchasable hereunder shall be proportionately increased,
      and
      (B) in the case of a combination, the Conversion Price shall be proportionately
      increased and the number of shares of Series B Preferred Stock purchasable
      hereunder shall be proportionately decreased.

     

    (iii)  The
      following provisions shall apply for purposes of this Section 4:

     

    (A)  the
      aggregate maximum number of shares of Series B Preferred Stock or other amount
      of securities or property issuable or deliverable as the case may be, or
      delivered upon conversion or exercise of Series B Preferred Stock Equivalents
      (assuming the satisfaction of any conditions to convertibility or
      exercisability, including, without limitation, the passage of time, but without
      taking into account potential antidilution adjustments) shall be deemed to
      have
      been issued or delivered at the time such Series B Preferred Stock Equivalents
      were issued;

     

    (B)  in
      the
      event of any change in the number of shares of Series B Preferred Stock
      deliverable or in the consideration payable to the Company upon conversion
      or
      exercise of such Series B Preferred Stock Equivalents including, but not limited
      to, a change resulting from the antidilution provisions thereof, the Conversion
      Price, to the extent in any way affected by or computed using such Series B
      Preferred Stock Equivalents, shall be recomputed to reflect such change, but
      no
      further adjustment shall be made for the actual issuance of Series B Preferred
      Stock or any payment of such consideration upon the exercise of any such options
      or rights or the conversion or exchange of such securities; and

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (C)  upon
      the
      termination or expiration of the convertibility or exercisability of any such
      Series B Preferred Stock Equivalents, the Conversion Price, to the extent in
      any
      way affected by or computed using such Series B Preferred Stock Equivalents,
      shall be recomputed to reflect the issuance of only the number of shares of
      Series B Preferred Stock (and Series B Preferred Stock Equivalents which remain
      convertible or exercisable) actually issued upon the conversion or exercise
      of
      such Series B Preferred Stock Equivalents.

     

    (d)  Other
      Distributions.  In the event the Company shall declare a
      distribution payable in securities of other persons, evidences of indebtedness
      issued by the Company or other persons, assets, cash (excluding cash dividends
      declared out of retained earnings) or options or rights not referred to in
      the
      previous section (c), then, in each such case for the purpose of this section
      (d), the Holder shall be entitled to a proportionate share of any such
      distribution as though such Holder was a holder of the number of shares of
      Series B Preferred Stock of the Company into which this Note would be
      convertible as of the record date fixed for the determination of the holders of
      Series B Preferred Stock of the Company entitled to receive such
      distribution.

     

    (e)  No
      Impairment.  The Company will not, by amendment of its Certificate
      of Incorporation or bylaws or through any reorganization, recapitalization,
      transfer of assets, consolidation, merger, 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 to be observed or performed hereunder by
      the
      Company, but will at all times in good faith assist in the carrying out of
      all
      the provisions of this Section 4 and in the taking of all such action as maybe
      necessary or appropriate in order to protect the rights of EPIL against
      impairment.

     

    (f)  Notice
      of Adjustments.  Whenever the consideration issuable upon a
      conversion hereunder shall be changed pursuant to this Section 4, the Company
      shall prepare a certificate setting forth, in reasonable detail, the event
      requiring the change and the kind and amount of shares of stock and other
      securities, money and property subsequently issuable upon a conversion
      hereof.  Such certificate shall be signed by its chief financial
      officer and shall be delivered to EPIL.

     

    (g)  Fractional
      Shares, Rounding.  No fractional shares of Series B Preferred
      Stock will be issued in connection with any exercise hereunder, but in lieu
      of
      such fractional shares the Company shall make a cash payment therefor based
      on
      the applicable Conversion Price.  All calculations under this Section
      4 shall be made to the nearest cent or to the nearest one-hundredth of a share,
      as the case may be.

    
      
         

      

      
         

        
          

        

      

      
         

      

    


    SECTION
      5.  EVENTS
      OF DEFAULT.

     

    The
      occurrence of any of the following events shall constitute an event of default
      (an “Event of Default”):

     

    (a)  a
      default
      in the payment of the principal amount of this Note, when and as the same shall
      become due and payable;

     

    (b)  a
      default
      in the payment of any accrued and unpaid interest on this Note, when and as
      the
      same shall become due and payable;

     

    (c)  a
      breach
      by the Company of its obligations under any of the Transaction Documents, which
      breach remains uncured at the conclusion of the cure period specified within
      the
      relevant Transaction Documents, after written notice thereof by
      EPIL;

     

    (d)  a
      distress, execution, sequestration or other process is levied or enforced upon
      the Company or sued out against a material part of its property which is not
      discharged or challenged within 60 days;

     

    (e)  the
      Company is unable to pay its debts in the normal course of
      business;

     

    (f)  the
      Company ceases wholly or substantially to carry on its business (other than
      as a
      result of the merger or consolidation of the Company with another entity),
      without the prior written consent of the Holder (such consent not to be
      unreasonably withheld); or

     

    (g)  the
      appointment of a liquidator, receiver, administrator, examiner, trustee or
      similar officer of the Company or over all or substantially all of its assets
      under the law.

     

    SECTION
      6.  REMEDIES
      IN THE EVENT OF DEFAULT.

     

    (a)  In
      the
      case of any Event of Default by the Company, the Holder may in its sole
      discretion demand that the aggregate amount of funds advanced to the Company
      under this Note and outstanding hereunder and accrued and unpaid interest
      thereon shall, in addition to all other rights and remedies of the Holder
      hereunder and under applicable law, be and become immediately due and payable
      upon written notice delivered by the Holder to the Company.

     

    Notwithstanding
      the preceding sentence, the rights of the Holder as set forth in Sections 3,
      4
      and 5 hereunder shall survive any such acceleration and payment.

     

    (b)  The
      Company hereby waives demand and presentment for payment, notice of nonpayment,
      protest and notice of protest, diligence, filing suit, and all other notice
      and
      promises to pay the Holder its costs of collection of all amounts due hereunder,
      including reasonable attorneys’ fees.

     

    (c)  In
      the
      case of any Event of Default under this Note by the Company, this Note shall
      continue to bear interest after such default at the interest rate otherwise
      in
      effect hereunder plus 3% perannum (but in any event not in excess
      of the maximum rate of interest permitted by applicable law).

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    SECTION
      7.  VOTING
      RIGHTS.

     

    This
      Note
      shall not entitle the holder hereof to any voting rights or other rights as
      a
      stockholder of the Company prior to its conversion.

     

    SECTION
      8.  SENIORITY.

     

    The
      Company shall not incur any indebtedness for money borrowed which shall rank
      senior to this Note, without the prior written consent of the Holder; provided,
      however, that the Company’s capital leases and senior working capital facilities
      shall be senior to this Note so long as (i) in the case of the capital lease,
      the amount of principal attributable to the equipment leased does not exceed
      the
      purchase price thereof at any time, (ii) in the case of the working capital
      facilities, the maximum outstanding principal amount thereunder shall not exceed
      U.S.$1,000,000 and (iii) the capital leases and working capital facilities
      contain customary terms, including events of default provisions, cross-default
      provisions and covenant default provisions.

     

    SECTION
      9.  MISCELLANEOUS.

     

    (a)  This
      Note
      and all of the provisions hereof shall be binding upon and inure to the benefit
      of the parties hereto and their respective successors and permitted
      assigns.  All or any part of this Note may be assigned or transferred
      by the Holder and its permitted assigns and transferees to their respective
      affiliates and subsidiaries, as well as any special purpose financing or similar
      vehicle established by the Holder.  Other than as set forth above, no
      party shall assign or transfer all or any part of this Note, or any interest
      therein, without the prior written consent of the other party.

     

    (b)  All
      notices, demands and requests of any kind to be delivered to any party in
      connection with this Note shall be in writing and shall be deemed to have been
      duly given if personally or hand delivered or if sent by an
      internationally-recognized overnight delivery courier or by registered or
      certified mail, return receipt requested and postage prepaid, or by facsimile
      transmission addressed as follows:

     

    (i)  if
      to the
      Company, to:

     

    Aeolus
      Pharmaceuticals, Inc.

    23811
      Inverness Place

    Laguna
      Niguel, California 92677

    Attention:
      Chief Financial Officer

    Facsimile:
      (949) 481-9829

     

    with
      a
      copy to:

     

    Paul,
      Hastings, Janofsky & Walker LLP

    3579
      Valley Centre Drive

    San
      Diego,
      CA  92130

    Attention:
      Leigh P. Ryan

    Facsimile:
      (858) 720-2555

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (ii)  if
      to
      EPIL, to:

     

    Elan
      Pharma International Limited

    c/o
      102
      St. James Court

    Flatts,
      Smith’s Parish

    Bermuda
      FL04

    Attention:
      President

    Facsimile:
      (441) 292-2224

     

    or
      to
      such other address as the party to whom notice is to be given may have furnished
      to the other party hereto in writing in accordance with provisions of this
      Section 9.  Any such notice or communication shall be deemed to have
      been effectively given (i) in the case of personal or hand delivery, on the
      date
      of such delivery, (ii) in the case of an internationally-recognized overnight
      delivery courier, on the second business day after the date when sent, (iii)
      in
      the case of mailing, on the fifth business day following that day on which
      the
      piece of mail containing such communication is posted and (iv) in the case
      of
      facsimile transmission, the date of telephone confirmation of
      receipt.

     

    (c)  This
      Note
      may not be modified or amended, or any of the provisions hereof waived, except
      by written agreement of the Company and the Holder dated after the date
      hereof.

     

    (d)  This
      Note
      shall be governed by and construed in accordance with the internal laws of
      the
      State of New York, without giving effect to principles of conflicts of laws,
      and
      in accordance with Section 13 of the Securities Purchase
      Agreement.  Any dispute under this Note that is not settled by mutual
      consent maybe finally adjudicated by any federal or state court sitting in
      the
      City, County and State of New York, and the Company consents to the
      non-exclusive jurisdiction of such courts (or any appellate court therefrom)
      over any such dispute.  Nothing contained in this Section shall
      prevent the adjudication of any dispute under this Agreement by any other state
      or federal court, regardless of location, so long as such court has jurisdiction
      and is located in a proper venue.

     

    (e)  This
      Note
      may be executed and delivered to the Holder by a facsimile transmission; such
      transmission shall be deemed a valid signature.

     

    [Signature
      page follows]

     


    
      
         

      

      
         

        
          

        

      

      
         

      

    


    IN
      WITNESS WHEREOF, the Company has executed and delivered this Note on
      the date first above written.

     

    
      	 	
              AEOLUS
                PHARMACEUTICALS INC.

            
	 	
              By:      /s/
                Michael P.
                McManus                                                                    

              Name:  Michael
                P. McManus

              Title:  Chief
                Financial Officer

               

            


    

    


     


    
      
         

      

      
         

        
          

        

      

      
         

      

    


    ANNEX
      I

     

    FORM
      OF NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT

     

    Date:

     

    To:           Aeolus
      Pharmaceuticals, Inc.

     

    From:

     

    Re:           Exercise
      of a Conversion Right

     

    


     

    Pursuant
      to the terms of the Convertible Promissory Note (the “Note”) issued by
      Aeolus Pharmaceuticals, Inc. (the “Company”) to Elan Pharma International
      Limited (“Holder”) dated [________], 2007, specifically Section 3
      thereof, Holder hereby notifies the Company of its intention to exercise a
      right
      of conversion.

     

    Pursuant
      to Section 3 of the Note, Holder hereby elects to convert U.S.$__________ in
      aggregate principal amount and all accrued and unpaid interest thereon for
      shares of the Company’s Series B Preferred Stock, par value U.S.$0.01 per share,
      effective _____________, 200__.

     

    We
      have
      instructed our attorneys to contact the Company to discuss the timing and
      documentation of the conversion.

     

    
      	 	
              Sincerely,

            
	 	
              [HOLDER]

            
	 	
              By:                                                                    

              Name:

              Title:

            


    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    


    Exhibit
      A

     

    [FORM
      OF
      WARRANT]

     

    THE
      SECURITIES REPRESENTED BY THIS WARRANT CERTIFICATE AND THE SHARES OF STOCK
      ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
      ANY

     

    
      
        

SECURITIES
        LAWS OF A STATE OR OTHER JURISDICTION AND MAY NOT UNDER ANY CIRCUMSTANCES
        BE
        SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF (OTHER THAN TO AN AFFILIATE OR
        AS
        OTHERWISE PERMITTED BY THIS WARRANT CERTIFICATE PURSUANT TO WHICH THEY WERE
        ISSUED) EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
        THE ACT
        AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS, OR  (ii) TO THE
        EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE
        ACT
        RELATING TO THE DISPOSITION OF SECURITIES) TOGETHER WITH AN OPINION OF COUNSEL
        SATISFACTORY TO AEOLUS PHARMACEUTICALS, INC. THAT REGISTRATION IS NOT REQUIRED
        UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.

    

     

    AEOLUS
      PHARMACEUTICALS, INC.

     

    WARRANT
      TO PURCHASE SHARES

     

    OF
      SERIES B PREFERRED STOCK

     

    THIS
      CERTIFIES THAT, for value received, Elan International Services, Ltd., a Bermuda
      exempted limited liability company, or its permitted transferees and successors
      as provided herein (each, a "Holder"), is entitled to subscribe for and purchase
      up to [____] shares, as adjusted pursuant to Section 4 (the "Shares"), of the
      fully paid and nonassessable Series B Convertible Preferred Stock, par value
      U.S.$0.01 per share (the "Series B Preferred Stock"), of Aeolus Pharmaceuticals,
      Inc., a Delaware corporation (the "Company"), at the price of U.S.$0.01 per
      share (such price, and such other prices that shall result from time to time,
      from the adjustments specified in Section 4, the "Warrant Price"), subject
      to
      the provisions and upon the terms and conditions hereinafter set
      forth.

     

    1.
      Term.
      Subject to the limitations set forth in Sections 3 and 4, the purchase right
      represented by this Warrant is exercisable, in whole or in part, at any time,
      and from time to time, from and after the date hereof and until 5:00 p.m.
      Eastern Standard Time, [5 YEARS AFTER DATE OF ISSUANCE]. To the
      extent not exercised at 5:00 p.m. Eastern Standard Time on [5 YEARS
      AFTER DATE OF ISSUANCE], this Warrant shall completely and
      automatically terminate and expire, and thereafter it shall be of no force
      or
      effect.

     

    2.
      Method
      of Exercise; Payment; Issuance of New Warrant. (a) The purchase right
      represented by this Warrant may be exercised by the Holder, in whole or in
      part
      and from time to time, by the surrender of this Warrant (with the notice of
      exercise form attached hereto as Annex A duly executed) at the principal office
      of the Company and by the payment to the Company of an amount, at the option
      of
      the Holder, (i) in cash or other immediately available funds,

     

    (ii)
      by
      the surrender of this Warrant (or a portion hereof) in accordance with the
      terms
      hereof but without payment in cash (a "Cashless Exercise") or (iii) with any
      combination of (i) and (ii). The number of shares of Series B Preferred Stock
      issuable in respect of a Cashless Exercise shall be computed using the following
      formula:

     

    X
      = Y
      (A-B)

    
      
        

      

    

    A

     

    Where:
      X
      = the number of shares of Series B Preferred Stock to be issued to the Holder
      in
      respect of a Cashless Exercise

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Y
      = the
      number of shares of Series B Preferred Stock purchasable under the Warrant
      or,
      if only a portion of the Warrant is being exercised, the portion of the Warrant
      being canceled in connection with such Cashless Exercise (at the date of such
      calculation)

     

    A
      = the
      Fair Market Value (as defined below) of one share of the Company's Series B
      Preferred Stock (at the date of such calculation)

     

    B
      =
      Warrant Price (as adjusted to the date of such calculation)

     

    The
      "Fair
      Market Value" of one share of Series B Preferred Stock shall be equal to 10
      times the closing sale price for the Company's common stock the day prior to
      exercise, adjusted appropriately to reflect the then-current conversion ratio
      of
      the Series B Preferred Stock pursuant to the Certificate of Incorporation of
      the
      Company (which conversion ratio is equal to 10 shares of common stock of the
      Company for each share of Series B Preferred Stock on the date hereof);
      provided, however, that if the Company's common stock is no longer traded on
      a
      securities exchange or the Over-the-Counter Bulletin Board the Fair Market
      Value
      shall be determined by the Company's Board of Directors in good faith and
      reasonably agreed to by the holders of the Series B Preferred
      Stock.

     

    (b)
      The
      persons or entities in whose name(s) any certificate(s) representing Shares
      shall be issuable upon exercise of this Warrant shall be deemed to have become
      the holder(s) of record of, and shall be treated for all purposes as the record
      holder(s) of, the Shares represented thereby (and such Shares shall be deemed
      to
      have been issued) immediately prior to the close of business on the date or
      dates upon which this Warrant is properly exercised and full payment for the
      Shares acquired pursuant to such exercise is made. Upon any exercise of the
      rights represented by this Warrant, certificates for the Shares purchased shall be delivered to the holder hereof
      as soon as possible and
      in any event within 30 days of receipt of such notice and payment, and unless
      this Warrant has been fully exercised or expired, a new Warrant representing
      the
      portion of Shares, if any, with respect to which this Warrant shall not then
      have been exercised shall also be issued to the holder hereof as soon as
      possible and in any event within such 30-day period.

     

    3.
      Stock
      Fully Paid, Reservation of Shares. All Shares that may be issued upon the
      exercise of this Warrant will, upon issuance, be duly and validly authorized
      and
      issued, fully paid and nonassessable, and will be free from all transfer taxes,
      liens and charges with respect to the issue thereof and assuming payment of
      the
      Warrant Price for all Shares so purchased, legally and validly owned by the
      Holder. During the period within which this Warrant may be exercised, the
      Company will at all times have authorized, and reserved for the purpose of
      the
      issue upon the exercise of the purchase rights evidenced by this Warrant, a
      sufficient number of shares of Series B Preferred Stock to provide for the
      exercise of the rights represented by this Warrant.

     

    4.
      Adjustment of Warrant Price and Number of Shares. The number and kind of
      securities purchasable upon the exercise of this Warrant and the Warrant Price
      shall be subject to the adjustment from time to time upon the occurrence of
      certain events, as follows:

     

    (a)
      Reclassification, Etc. In case of (i) any reclassification, reorganization,
      change or conversion of securities of the class issuable upon exercise of this
      Warrant (other than a change in par value, or from par value to no par value)
      into other shares or securities of the Company, or (ii) any consolidation of
      the
      Company with or into another entity (other than a merger or consolidation with
      another entity in which the Company is the acquiring and the surviving entity
      and that does not result in any reclassification or change of outstanding
      securities issuable upon exercise of this Warrant), or (iii) any sale of all
      or
      substantially all the assets of the Company, then the Company, or such successor
      or purchasing entity, as the case may be, shall duly execute and deliver to
      the
      holder of this Warrant a new Warrant or a supplement hereto (in form and
      substance reasonably satisfactory to the holder of this Warrant), so that the
      Holder shall have the right to receive, at a total purchase price not to exceed
      that payable upon the exercise of the unexercised portion of this Warrant, and
      in lieu of the shares of Series B Preferred Stock theretofore issuable upon
      the
      exercise of this Warrant, the kind and amount of shares of stock and other
      securities, receivable upon such reclassification, reorganization, change or
      conversion by a holder of the number of shares of Series B Preferred Stock
      then
      purchasable under this Warrant. Such new Warrant shall provide for adjustments
      that shall be as nearly equivalent as may be practicable to the adjustments
      provided for in this Section 4. The provisions of this Section 4(a) shall
      similarly attach to successive reclassifications, reorganizations, changes,
      and
      conversions.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (b)
      Splits; Subdivisions. (i) If at any time prior to the earlier of the exercise
      or
      expiration hereof the Company shall fix a record date for the effectuation
      of a
      split or subdivision of the outstanding shares of Series B Preferred Stock
      or
      the determination of holders of Series B Preferred Stock entitled to receive
      a
      dividend or other distribution payable in additional shares of Series B
      Preferred Stock or other securities or property or rights convertible into,
      or
      entitling the holder thereof to receive directly or
      indirectly, any of the foregoing (hereinafter referred to as "Series B Stock
      Equivalents") without payment of any consideration by such holder for the
      additional shares of Series B Preferred Stock or the Series B Preferred Stock
      Equivalents (including the additional shares of Series B Preferred Stock
      issuable upon conversion or exercise thereof) then, this Warrant shall be
      adjusted for, in addition to the number of shares of the Series B Preferred
      Stock otherwise deliverable upon exercise of this Warrant, and without
      adjustment to the Warrant Price, the amount of such additional shares of Series
      B Preferred Stock and any Series B Preferred Stock Equivalents that the holder
      hereof would have received or become entitled to receive on the same terms
      and
      conditions as if such holder had been a holder of record of such Series B
      Preferred Stock as shall have been deliverable immediately prior to such record
      date pursuant to the terms of this Section 4; or

     

    (ii)
      If
      the Company at any time during which this Warrant remains outstanding and
      unexpired shall subdivide or combine its Series B Preferred Stock, (A) in the
      case of a subdivision, the Warrant Price shall be proportionately decreased
      and
      the number of Shares purchasable hereunder shall be proportionately increased,
      and (B) in the case of a combination, the Warrant Price shall be proportionately
      increased and the number of Shares purchasable hereunder shall be
      proportionately decreased.

     

    (iii)
      The
      following provisions shall apply for purposes of this Section 4:

     

    (A)
      the
      aggregate maximum number of shares of Series B Preferred Stock or other
      securities or property deliverable upon conversion or exercise of Series B
      Preferred Stock Equivalents (assuming the satisfaction of any conditions to
      convertibility or exercisability, including, without limitation, the passage
      of
      time, but without taking into account potential antidilution adjustments) shall
      be deemed to have been issued at the time such Series B Preferred Stock
      Equivalents were issued;

     

    (B)
      in
      the event of any change in the number of shares of Series B Preferred Stock
      deliverable or in the consideration payable to the Company upon conversion
      or
      exercise of such Series B Preferred Stock Equivalents including, but not limited
      to, a change resulting from the antidilution provisions thereof, the Warrant
      Price, to the extent in any way affected by or computed using such Series B
      Preferred Stock Equivalents, shall be recomputed to reflect such change, but
      no
      further adjustment shall be made for the actual issuance of Series B Preferred
      Stock or any payment of such consideration upon the exercise of any such options
      or rights or the conversion or exchange of such securities; and

     

    (C)
      upon
      the termination or expiration of the convertibility or exercisability of any
      such Series B Preferred Stock Equivalents, the Warrant Price, to the extent
      in
      any way affected by or computed using such Series B Preferred Stock Equivalents,
      shall be recomputed to reflect the issuance of only the number
      of shares of Series B Preferred Stock (and Series B Preferred Stock Equivalents
      which remain convertible or exercisable) actually issued upon the conversion
      or
      exercise of such Series B Preferred Stock Equivalents.

     

    (c)
      No
      Impairment. The Company will not, by amendment of its Certificate of
      Incorporation or bylaws or through any reorganization, recapitalization,
      transfer of assets, consolidation, merger, 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 to be observed or performed hereunder by
      the
      Company, but will at all times in good faith assist in the carrying out of
      all
      the provisions of this Section 4 and in the taking of all such action as may
      be
      necessary or appropriate in order to protect the rights of the Holder against
      impairment.

     

    (d)
      Notice of Adjustments. Whenever the Warrant Price or the number of Shares
      purchasable hereunder shall be adjusted pursuant to this Section 4, the Company
      shall prepare a certificate setting forth, in reasonable detail, the event
      requiring the adjustment, the amount of the adjustment, the method by which
      such
      adjustment was calculated. Such certificate shall be signed by its chief
      financial officer and shall be delivered to the Holder.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (e)
      Fractional Shares. No fractional shares of Series B Preferred Stock will be
      issued in connection with any exercise hereunder, but in lieu of such fractional
      shares the Company shall make a cash payment therefor based on the fair market
      value of the Series B Preferred Stock on the date of exercise as reasonably
      determined in good faith by the Company's Board of Directors.

     

    (f)
      Cumulative Adjustments. No adjustment in the Warrant Price shall be required
      under this Section 4 until cumulative adjustments result in a concomitant change
      of 1% or more of the Warrant Price or in the number of shares of Series B
      Preferred Stock purchasable upon exercise of this Warrant as in effect prior
      to
      the last such adjustment; provided, however, that any adjustment that by reason
      of this Section 4 are not required to be made shall be carried forward and
      taken
      into account in any subsequent adjustment. All calculations under this Section
      4
      shall be made to the nearest cent or to the nearest one-hundredth of a share,
      as
      the case may be.

     

    5.
      Compliance with Securities Act; Disposition of Warrant or Shares of Series
      B
      Preferred Stock.

     

    (a)
      The
      Holder, by acceptance hereof, agrees that this Warrant and the Shares to be
      issued upon exercise hereof are being acquired for investment and that such
      holder will not offer, sell or otherwise dispose of this Warrant or any Shares
      to be issued upon exercise hereof except under circumstances which will not
      result in a violation of applicable securities laws. Upon exercise of this
      Warrant, unless the Shares being acquired are registered under the Securities
      Act of 1933, as amended (the "Act"), or an exemption from the registration
      requirements of such Act is available, the Holder shall confirm in writing,
      by
      executing an instrument in form reasonably satisfactory to the Company, that
      the
      Shares so purchased are being acquired for investment and not with a view toward
      distribution or resale. This Warrant and all Shares issued
      upon exercise of this Warrant (unless registered under the Act) shall be stamped
      or imprinted with a legend in substantially the following form:

     

    "THE
      SECURITIES REPRESENTED BY THIS WARRANT CERTIFICATE AND THE SHARES OF STOCK
      ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
      ANY
      SECURITIES LAWS OF A STATE OR OTHER JURISDICTION AND MAY NOT UNDER ANY
      CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF (OTHER THAN TO
      AN
      AFFILIATE OR AS OTHERWISE PERMITTED BY THIS WARRANT CERTIFICATE PURSUANT TO
      WHICH THEY WERE ISSUED) EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS,
      OR
      (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE
      UNDER
      THE ACT RELATING TO THE DISPOSITION OF SECURITIES) TOGETHER WITH AN OPINION
      OF
      COUNSEL SATISFACTORY TO AEOLUS PHARMACEUTICALS, INC. THAT REGISTRATION IS NOT
      REQUIRED UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS."

     

    (b)(i)
      This Warrant may be transferred or assigned, in whole or in part, by EIS to
      its
      affiliates and subsidiaries, including any special purpose financing or similar
      vehicle affiliate. Other than as set forth in the preceding sentence, this
      Warrant may not be transferred or assigned by either party without the prior
      written consent of the other. Subject to the foregoing, this Warrant and all
      of
      the provisions hereof shall be binding upon and inure to the benefit of the
      parties hereto and their respective successors and permitted assigns; provided,
      however, that the transferor and the Company shall continue to be liable and
      obligated for their respective obligations hereunder after any such
      assignment.

     

    (ii)
      With
      respect to any offer, sale or other disposition of this Warrant or any Shares
      acquired pursuant to the exercise of this Warrant prior to registration of
      such
      Shares, the Holder shall give written notice to the Company prior thereto,
      describing briefly the manner thereof, together with a written opinion of such
      Holder's counsel, if requested by the Company, to the effect that such offer,
      sale or other disposition may be effected without registration or qualification
      (under the Securities Act as then in effect or any federal or state law then
      in
      effect) of this Warrant or such Shares and indicating whether or not under
      the
      Act certificates for this Warrant or such Shares to be sold or otherwise
      disposed of require any restrictive legend as to applicable restrictions on
      transferability in order to ensure compliance with the Act. Promptly upon receiving such written notice and reasonably
      satisfactory
      opinion, if so requested, the Company, as promptly as practicable, shall notify
      such Holder that such Holder may sell or otherwise dispose of this Warrant
      or
      such Shares, all in accordance with the terms of the notice delivered to the
      Company. Each certificate representing this Warrant or the Shares thus
      transferred shall bear a legend as to the applicable restrictions on
      transferability in order to insure compliance with the Securities Act, unless
      in
      the aforesaid opinion of counsel for the Holder such legend is not required
      in
      order to insure compliance with the Securities Act. The Company may issue stop
      transfer instructions to its transfer agent in connection with such
      restrictions.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (iii)
      The
      shares of Series B Preferred Stock for which this Warrant is exercisable are
      entitled to the benefit of certain registration rights as set forth in that
      certain Registration Rights Agreement dated as of the date hereof between the
      Company and the initial Holder named herein.

     

    6.
      Rights
      as Shareholders. No Holder, as such, shall be entitled to vote or receive
      dividends or be deemed the holder of Shares or any other securities of the
      Company which may at any time be issuable on the exercise hereof for any
      purpose, nor shall anything contained herein be construed to confer upon the
      Holder, as such, any right to vote for the election of directors or upon any
      matter submitted to shareholders at any meeting thereof, or to receive notice
      of
      meetings, or to receive dividends or subscription rights or otherwise until
      this
      Warrant is exercised and the Shares purchasable upon the exercise hereof shall
      have become deliverable, as provided herein.

     

    7.
      Representations and Warranties. The Company represents and warrants to the
      Holder as follows:

     

    (a)
      The
      Company has all requisite corporate power and authority to authorize and execute
      this Warrant and the certificates evidencing the Shares and to perform all
      obligations and undertakings under this Warrant and the certificates evidencing
      the Shares;

     

    (b)
      This
      Warrant has been duly authorized and executed by the Company and is a valid
      and
      binding obligation of the Company enforceable in accordance with its
      terms;

     

    (c)
      The
      Shares have been duly authorized and reserved for issuance by the Company and,
      when issued in accordance with the terms hereof, will be validly issued, fully
      paid and nonassessable; and

     

    (d)
      The
      execution and delivery of this Warrant are not, and the issuance of the Shares
      upon exercise of this Warrant in accordance with the terms hereof will not
      be,
      inconsistent with the Company's Certificate of Incorporation or bylaws, as
      amended, and do not and will not constitute a default under, any indenture,
      mortgage, contract or other instrument of which the Company is a party or by
      which it is bound.

     

    8.
      Miscellaneous. (a) This Warrant may not be modified or amended, or any
      provisions hereof waived, except by written agreement of the Company and the
      Holder.

     

    (b)
      All
      notices, demands and requests of any kind to be delivered to any party in
      connection with this Note shall be in writing and shall be deemed to have been
      duly given if personally or hand delivered or if sent by an
      internationally-recognized overnight delivery courier or by registered or
      certified mail, return receipt requested and postage prepaid, or by facsimile
      transmission addressed as follows:

     

    (i)
      if to
      the Company, to:

     

    Aeolus
      Pharmaceuticals, Inc.

    23811
      Inverness Place

    Laguna
      Niguel, California 92677

    Attention:
      Chief Financial Officer

    Facsimile:
      (949) 481-9829

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    with
      a
      copy to:

     

    Paul,
      Hastings, Janofsky & Walker LLP

    3579
      Valley Centre Drive

    San
      Diego, CA  92130

    Attention:
      Leigh P. Ryan

    Facsimile:
      (858) 720-2555

     

    (ii)
      if
      to EIS, to:

     

    Elan
      Pharma International Limited

    c/o
      102
      St. James Court

    Flatts,
      Smith’s Parish

    Bermuda
      FL04

    Attention:
      President

    Facsimile:
      (441) 292-2224

     

     (c)
      The Company covenants to the Holder that upon receipt of evidence reasonably
      satisfactory to the Company of the loss, theft, destruction or mutilation of
      this Warrant and, in the case of any such loss, theft or destruction, upon
      receipt of a bond or indemnity reasonably satisfactory to the
      Company, or in the case of any such mutilation upon surrender and cancellation
      of such Warrant, the Company will make and deliver a new Warrant, of like tenor,
      in lieu of the lost, stolen, destroyed or mutilated Warrant.

     

    (d)
      The
      descriptive headings of the several sections and paragraphs contained in this
      Warrant are for reference purposes only and shall not affect in anyway the
      meaning or interpretation of this Warrant.

     

    (e)
      This
      Warrant shall be governed by and construed in accordance with the internal
      laws
      of the State of New York, without giving effect to the principles of conflicts
      of laws. Any dispute under this Warrant that is not settled by mutual consent
      may be finally adjudicated by any federal or state court sitting in the City,
      County and State of New York, and the Company consents to the non-exclusive
      jurisdiction of such courts (or any appellate court therefrom) over any such
      dispute. Nothing contained in this Section shall prevent the adjudication of
      any
      dispute under this Warrant by any other state or federal court, regardless
      of
      location, so long as such court has jurisdiction and is located in a proper
      venue.

     

    (f)
      This
      Warrant may be signed and delivered to the other party by a facsimile
      transmission; such transmission shall be deemed a valid signature.

     

    (g)
      Each
      of the parties shall be responsible for its own costs and expenses incurred
      in
      connection with the transactions contemplated hereby.

     

    [Signature
      page follows]

     


    
      
         

      

      
         

        
          

        

      

      
         

      

    


    


     

    IN
      WITNESS WHEREOF, the Company has executed this Warrant as of the February 7,
      2007.

     

    AEOLUS
      PHARMACEUTICALS,
      INC.

     

    
      	
              By:                                                           

              Name:   Michael
                P. McManus

              Title:     Chief
                Financial Officer

            
	 


    

    


     


    
      
         

      

      
         

        
          

        

      

      
         

      

    


    


     

    Annex
      A

     

    NOTICE
      OF
      EXERCISE

     

    To:
      Aeolus Pharmaceuticals, Inc.

     

    1.
      The
      undersigned hereby elects to purchase _______ shares of Series B Preferred
      Stock
      of Aeolus Pharmaceuticals, Inc. pursuant to the terms of the attached Warrant,
      and tenders herewith full payment of the purchase price of such shares, in
      cash
      or other immediately available funds.

     

    2.
      Please
      issue a certificate or certificates representing said shares in the name of
      the
      undersigned or in such other name or names as are specified below:

     

    ____________________________________
      (Name)

     

    ____________________________________

     

    ____________________________________
      (Address)

     

    3.
      The
      undersigned represents that the aforesaid shares are being acquired for the
      account of the undersigned for investment and not with a view to, or for resale
      in connection with, the distribution thereof and that the undersigned has no
      present intention of distributing or reselling such shares.

     

    Signature:
      ____________________________

     

    


     

    
      	
              Name:__________________________

              Address:________________________

              _______________________________

              _______________________________

            


    

    


    Social
      Security or taxpayer identification number:

     

    _____________________________________