Document:

EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT  AGREEMENT (this "Agreement"),  made and entered into as of
May 30, 2007, by and between HERLEY  INDUSTRIES,  INC., a Delaware  corporation,
with its  principal  office  located at 101 North Pointe  Boulevard,  Lancaster,
Pennsylvania  17601  (together with its successors and assigns  permitted  under
this  Agreement,  "Herley")  and  JEFFREY L.  MARKEL  ("Markel")  residing  at 5
Constitution Lane, Totowa, NJ 07512.

                                   WITNESSETH:

     WHEREAS,  Herley has determined  that it is in the best interests of Herley
and its  stockholders  to employ  Markel and to set forth in this  Agreement the
obligations and duties of both Herley and Markel; and

     WHEREAS,  Herley  wishes to assure itself of the services of Markel for the
period hereinafter provided,  and Markel is willing to be employed by Herley for
said period, upon the terms and conditions provided in this Agreement;

     NOW,  THEREFORE,  in  consideration  of the premises  and mutual  covenants
contained herein and for other good and valuable  consideration,  the receipt of
which is mutually  acknowledged,  Herley and Markel  (individually a "Party" and
together the "Parties" ) agree as follows:

     1. DEFINITIONS.

     (a) "Beneficiary" shall mean the person or persons named by Markel pursuant
to Section 15 below or, in the event that no such  person is named who  survives
Markel, his estate.

     (b) "Board" shall mean the Board of Directors of Herley.

     (c) "Cause" shall mean:

     (i)  Markel's  conviction  of,  or  pleading  guilty  to, a felony  or nolo
contender  to a charge of any felony or of any lesser crime  involving  fraud or
moral turpitude;

     (ii)  willful  failure  of Markel to  perform  his  obligations  under this
Agreement,  resulting in economic harm to Herley,  which willful  failure is not
discontinued within ten (10) days after written  notification thereof to Markel,
or

     (iii) a material breach by Markel of the provisions of Sections 12 or 13 of
this Agreement; or
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     (iv)  commission  of any other  act  which is done with the  intent to harm
Herley or its shareholders or employees.

     Any  act or  failure  to act  based  upon  authority  given  pursuant  to a
resolution  adopted by the Board or based upon the written advice of counsel for
Herley  shall be  conclusively  presumed to be done,  or omitted to be done,  by
Markel in good faith and in the best interests of Herley.

     (d) "Change in Control"  shall mean the  occurrence of any of the following
events:

     (i) the acquisition by any individual,  entity or group (within the meaning
of Section  13(d)(3)  or  14(d)(2)  of the  Securities  Exchange  Act of 1934 as
amended (the "Exchange  Act") (a "Person") of beneficial  ownership  (within the
meaning of Rule 13d-3  promulgated  under the Exchange Act) of voting securities
of Herley when such  acquisition  causes such Person to  beneficially  own 50.1%
percent or more of the  combined  voting  power of the then  outstanding  voting
securities  of Herley  entitled to vote  generally  in the election of directors
(the  "Outstanding  Herley  Voting  Securities");  provided,  however,  that for
purposes of this subsection (i), the following  acquisitions shall not be deemed
to result in a Change of Control:  (A) any acquisition directly from Herley, (B)
any acquisition by Herley,  (C) any acquisition by any employee benefit plan (or
related trust)  sponsored or maintained by Herley or any corporation  controlled
by Herley or (D) any  acquisition  pursuant to a transaction  that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided,  further, that
if any Person's beneficial ownership of the Outstanding Herley Voting Securities
reaches or exceeds 50.1 percent as a result of a transaction described in clause
(A) or (B) above, and such Person subsequently  acquires beneficial ownership of
additional  voting  securities of Herley,  such subsequent  acquisition shall be
treated as an  acquisition  that causes such  Person to  beneficially  own 50.1%
percent or more of the Outstanding Herley Voting Securities; or

     (ii)  individuals  who, as of the date  hereof,  constitute  the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided,  however, that any individual becoming a director subsequent to
the  date  hereof  whose  election,  or  nomination  for  election  by  Herley's
stockholders,  was  approved by a vote of at least a majority  of the  directors
then  comprising  the  Incumbent  Board  shall  be  considered  as  though  such
individual were a member of the Incumbent  Board, but excluding for this purpose
any such individual whose initial  assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened  solicitation  of proxies or consents by
or on behalf of a Person other than the Board; or

     (iii) consummation of a reorganization,  merger or consolidation or sale or
other  disposition  of all or  subsequently  all of the  assets of Herley or the
acquisition of assets of another  entity  ("Business  Combination");  excluding,
however,  such a Business Combination pursuant to which (A) all or substantially
all of the  individuals  and  entities  who were the  beneficial  owners  of the
Outstanding  Herley  Voting  Securities   immediately  prior  to  such  Business

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Combination  beneficially own, directly or indirectly,  more than 60 percent of,
respectively,  the then  outstanding  shares  of common  stock and the  combined
voting  power  of the  then  outstanding  voting  securities  entitled  to  vote
generally in the election of directors,  as the case may be, of the  corporation
resulting from such Business  Combination in substantially  the same proportions
as their  ownership,  immediately  prior  to such  Business  Combination  of the
Outstanding  Herley Voting  Securities,  (B) no Person  (excluding  any employee
benefit plan (or related  trust) of Herley or such  corporation  resulting  from
such Business Combination) beneficially owns, directly or indirectly, 20 percent
or more of,  respectively,  the then  outstanding  shares of common stock of the
corporation  resulting  from such Business  Combination  or the combined  voting
power of the then outstanding  voting  securities of such corporation  except to
the extent that such ownership existed prior to the Business Combination and (C)
at least a majority of the members of the board of directors of the  corporation
resulting  from such Business  Combination  (including,  without  limitation,  a
corporation  that  as a  result  of  such  transaction  owns  Herley  or  all or
substantially  all of  Herley's  assets  either  directly or through one or more
subsidiaries)  were members of the Incumbent  Board at the time of the execution
of the  initial  agreement,  or of the action of the Board,  providing  for such
Business Combination; or

     (iv) approval by the  stockholders  of Herley of a complete  liquidation or
dissolution of the Company.

     (e) "Code"  shall mean the Internal  Revenue Code of 1986,  as amended from
time to time.

     (f) "Committee" shall mean the Compensation Committee of the Board.

     (g) "Consulting Period" shall mean the period specified in Section 11 below
during which Markel serves as a consultant to Herley.

     (h)  "Disability"  shall  mean the  illness  or other  mental  or  physical
disability  of Markel,  as  determined  by a physician  acceptable to Herley and
Markel,  resulting  in  his  failure  during  the  Employment  Term  to  perform
substantially  his applicable  material duties under this Agreement for a period
of six consecutive months.

     (i)  "Employment  Term"  shall mean the period  specified  in Section  2(b)
below.

     (j)  "Fiscal  Year"  shall mean the 52-week  period  beginning  on or about
August 1 and  ending on or about  the next  subsequent  July 31,  or such  other
12-month period as may constitute Herley's fiscal year at any time hereafter.

     (k) "Good Reason" shall mean,  at any time during the  Employment  Term, in
each case without Markel's prior written consent or his acquiescence:

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     (i) reduction in his then current Salary; or

     (ii) Herley's  failure to pay Markel any amounts  otherwise  vested and due
him under  Sections 3 and 4 hereof which breach is not cured within  thirty (30)
business days after written notification to Herley of such breach; or

     (iii) assignment to Markel of duties materially  incompatible with his then
current title and position of COO or such higher  position as may be agreed upon
in writing  between the parties,  which  breach is not cured within  thirty (30)
business days after written notification to Herley of such breach; or

     (iv) relocation of Markel's principal place of work to a location more than
thirty (30) miles from Lancaster, Pennsylvania.

     (l) "Salary" shall mean the annual salary  provided for in Section 3 below,
as adjusted from time to time.

     (m) "Spouse"  shall mean,  during the Term of Employment and the Consulting
Period, the woman who as of any relevant date is legally married to Markel.

     (n) "Subsidiary" shall mean any corporation of which Herley owns,  directly
or indirectly, more than 50 percent of its voting stock.

     2. EMPLOYMENT TERM, POSITIONS AND DUTIES.

     (a) Employment of Markel. Herley hereby agrees to employ Markel, and Markel
hereby accepts  employment with Herley, in the positions and with the duties and
responsibilities set forth below and upon such other terms and conditions as are
hereinafter  stated.  Markel  shall  render  services to Herley  principally  at
Herley's corporate  headquarters in Lancaster,  Pennsylvania,  and shall do such
traveling on behalf of Herley as shall be  reasonably  required in the course of
the performance of his duties hereunder.

     (b) Employment  Term. The Employment Term shall commence as of June 4, 2007
and shall  terminate on July 31, 2010,  provided that the Employment  Term shall
extend  for  additional  one-year  periods on July 31,  2008 and July 31,  2009,
unless this agreement is terminated under the provisions of Section 10 below. In
no event, however, shall the Employment Term extend beyond July 31, 2012.

     (c) Titles and  Duties.  Until the date of  termination  of his  employment
hereunder, Markel shall be employed as Chief Operating Officer, reporting to the
Chief  Executive  Officer.  In his capacity as Chief Operating  Officer,  Markel
shall have the  customary  powers,  responsibilities  and  authorities  of chief
operating officers of corporations of the size, type and nature of Herley.

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     (d) Time and Effort.

     (i) Markel  agrees to devote his best efforts and  abilities,  and his full
time and  attention,  to the  affairs of Herley in order to carry out his duties
and responsibilities under this Agreement.

     (ii) Notwithstanding the foregoing,  nothing shall preclude Markel from (A)
serving on the boards of a reasonable number of trade  associations,  charitable
organizations  and/or businesses not in competition with Herley, (B) engaging in
charitable  activities  and  community  affairs and (C)  managing  his  personal
investments  and  affairs;  provided,  however,  that,  such  activities  do not
interfere  with  the  proper  performance  of his  duties  and  responsibilities
specified in Section 2 (c) above.

     3. SALARY.

(a) Initial Salary. Markel shall receive from Herley a Salary, payable in
accordance with the regular payroll practices of Herley, at the annual rate of
$350,000.

     (b)  Cost-of-Living  Increase.  During the Employment  Term Markel's Salary
shall be increased  semiannually by an amount equal to the change in the cost of
living index since the prior semiannual adjustment, as reported in the "Consumer
Price  Index,  New York and  Northeastern  New  Jersey,  All  Items,  Series  ID
CUURA101SA0" published by the United States Department of Labor, Bureau of Labor
Statistics (or, if such index is no longer published,  a successor or comparable
index that is published),  using July 31, 2007 as the base year of  computation.
Such amount shall be calculated  and paid to Markel in a single sum on or before
the first day of the second month  following the applicable  calendar half year,
and  thereafter  his Salary  shall be adjusted to include the amount of any such
increase.  The first  calculation  and payment shall be made with respect to the
six month  period from and after July 31,  2007.  If Markel's  employment  shall
terminate during any such six-month period, the cost-of-living increase provided
in this Section 3(b) shall be prorated accordingly.

     (c) Salary Increase.  Any amount to which Markel's Salary is increased,  as
provided in Section 3(b) above or  otherwise,  shall not  thereafter  be reduced
without his consent, and the term "Salary" as used in this Agreement shall refer
to his Salary as thus increased.

     4. ANNUAL BONUS.

     Not later than one  hundred  twenty  (120) days after the end of the fiscal
year of the Company and each subsequent fiscal year of the Company ending during
the employment  term commencing with the fiscal year ending on or about July 31,
2008, the Company shall pay to Markel, as incentive compensation an amount to be

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determined  by the Board of Directors  in its  discretion.  Notwithstanding  the
foregoing,  the  minimum  incentive  compensation  to be paid to Markel  for the
fiscal year ending on or about July 31, 2008 shall be $300,000.

     5. LONG-TERM INCENTIVE.

     During the Employment Term, Markel shall be eligible for an award under any
long-term  incentive  compensation plan established by Herley for the benefit of
Markel or, in the absence  thereof,  under any such plan that may be established
for the benefit of members of the senior management of Herley.

     6. EQUITY GRANTS.

     As a condition to his employment,  Markel shall receive options to purchase
250,000 shares of Herley's common stock at a price of $15.77 per share, which is
the closing market price of Herley's common stock on the date prior to execution
of this Agreement. Twenty percent (20%) of the options shall vest upon execution
hereof with the  balance  vesting at the rate of twenty  percent  (20%) per year
over the next four (4) years  commencing  June 1, 2008, so that all options will
be fully vested by June 1, 2011.  During the  Employment  Term,  Markel shall be
eligible to receive  further  grants of options to  purchase  shares of Herley's
stock and awards of shares of Herley's  stock,  either or both as  determined by
the  Committee,  under and in accordance  with the terms of applicable  plans of
Herley and related option and award agreements.

     7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS.

     During the  Employment  Term and any  Consulting  Period,  Markel  shall be
entitled  to prompt  reimbursement  by Herley for all  reasonable  out-of-pocket
expenses incurred by him in performing services under this Agreement.

     8. PERQUISITES.

     During the Employment Term and any Consulting Period,  Herley shall provide
Markel with the following perquisites:

     (a) an  office  in  Lancaster,  Pennsylvania  with  secretarial  and  other
assistance; and

     (b)  use of an  automobile  and  reimbursement  of  related  expenses;

     (c)  reimbursement  for relocation  expenses to his permanent  residence in
Lancaster, Pennsylvania;

     (d) reimbursement for temporary living expenses in Lancaster,  Pennsylvania
for up to six (6) months from the date of this Agreement.

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     9. EMPLOYEE BENEFIT PLANS.

     (a)  General.  During the  Employment  Term,  Markel  shall be  entitled to
participate  in all  employee  benefit  plans and  programs  made  available  to
Herley's  senior  executives  or to its  employees  generally,  as such plans or
programs  may be in effect  from time to time,  including,  without  limitation,
pension and other retirement plans,  profit-sharing  plans,  savings and similar
plans,  group life  insurance,  accidental  death and  dismemberment  insurance,
travel accident insurance,  hospitalization insurance, surgical insurance, major
and excess major medical insurance,  dental insurance,  short-term and long-term
disability insurance,  sick leave (including salary continuation  arrangements),
holidays, vacation (not less than four weeks in any calendar year) and any other
employee  benefit plans or programs that may be sponsored by Herley from time to
time,  including plans that supplement the above-listed types of plans,  whether
funded or unfunded.

     (b) Medical Care  Reimbursement  and Insurance.  During the Employment Term
Herley shall provide Markel and his Spouse, with life insurance, hospitalization
insurance,  surgical  insurance,  major and excess major  medical  insurance and
dental insurance in accordance with the most favorable plans, policies, programs
and  practices of Herley made  available  generally  to other  senior  executive
officers of Herley.

     10. TERMINATION OF EMPLOYMENT.

     (a) Voluntary  Termination and Termination by Mutual Agreement.  Markel may
terminate  his  employment  voluntarily  at any time after July 31,  2010 in the
event  of a  Change  in  Control  at any  time  during  the  Employment  Term in
accordance with the provisions of Section  10(f)(ii).  The Parties may terminate
this Agreement by mutual written  agreement at any time. If they do so, Markel's
entitlements shall be as the Parties mutually agree.

     (b) General.  Notwithstanding anything to the contrary herein, in the event
of  termination  of  Markel's  employment  under  this  Agreement,   he  or  his
Beneficiary,  as the case may be,  shall be entitled to receive (in  addition to
payments and benefits under, and except as specifically provided in, subsections
(c) through (h) below, as applicable):

     (i) his Salary through the date of termination;

     (ii) any annual or special bonus awarded but not yet paid to him;

     (iii) any other  compensation  or benefits,  including  without  limitation
long-term incentive  compensation  described in Section 5 above,  benefits under
equity  grants and awards  described  in Section 6 above and  employee  benefits
under plans  described in Section 9 above,  that have vested through the date of
termination  or to  which  he may  then  be  entitled  in  accordance  with  the
applicable terms and conditions of each grant, award or plan; and

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     (iv)  reimbursement  in accordance  with Sections 9(a) and (b) above of any
business and medical expenses  incurred by Markel or his Spouse,  as applicable,
through the date of termination but not yet paid to him.

     (c)  Termination  due to Death.  In the event that  Markel's  employment is
terminated due to his death, his Beneficiary  shall be entitled,  in addition to
the  compensation  and benefits  specified in Section 10(b), to his compensation
payable for the remainder of the Consulting Term as set forth in Section 11.

     (d)  Termination due to Disability.  In the event of Disability,  Herley or
Markel may terminate Markel's  employment.  If Markel's employment is terminated
due to Disability,  he shall be entitled,  in addition to the  compensation  and
benefits  specified  in  Section  10(b),  to his  compensation  payable  for the
remainder  of the  Consulting  Term as set forth in  Section  11,  offset by any
long-term  disability  insurance benefit that Herley may have elected to provide
for him.

     (e)  Termination  by  Herley  for  Cause.  Herley  may  terminate  Markel's
employment  hereunder for Cause only upon written notice to Markel not less than
fifteen (15) days prior to any intended termination,  which notice shall specify
the grounds for such termination in reasonable  detail.  Cause shall in no event
be deemed to exist except upon a finding reflected in a resolution approved by a
majority  of the  members of the Board at a meeting of which  Markel  shall have
been given proper notice and at which Markel shall have a reasonable opportunity
to present his case.

     In the event that Markel's  employment is terminated for Cause, he shall be
entitled only to the compensation and benefits specified in Section 10(b).

     (f) Termination Without Cause or by Markel for Good Reason.

     (i) Termination without Cause shall mean termination of Markel's employment
by Herley and shall exclude  termination (A) due to death,  Disability or Cause,
(B) by Markel  voluntarily  or (C) by mutual  written  agreement  of Markel  and
Herley.  Herley shall provide  Markel fifteen (15) days' prior written notice of
termination  by it without  Cause,  and Markel shall provide Herley fifteen (15)
days' prior written notice of his termination for Good Reason.

     (ii) In the event of termination by Herley of Markel's  employment  without
Cause or of termination by Markel of his employment for Good Reason, he shall be
entitled,  in addition to the  compensation  and  benefits  specified in Section
10(b), to:

          (A) a  lump-sum  payment  equal to the  Salary  payable to him for the
     remainder of the Employment Term at the rate in effect  immediately  before
     such termination;

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          (B) a lump sum payment  equal to the annual  bonuses for the remainder
     of the Employment  Term  (including a prorated bonus for any partial Fiscal
     Year) equal to the average of the annual bonuses  awarded to him during the
     Agreement,  provided that in no event shall such bonus for purposes of this
     subparagraph  be less than  $300,000 for the fiscal year ending on or about
     July 31, 2008;

          (C) a lump sum payment of  $500,000  representing  full  consideration
     under the ten (10) year Consulting Term;

          (D) the immediate  vesting of all outstanding  unvested stock options;
     and

          (E)  continued   medical   reimbursement  for  the  remainder  of  the
     Employment Term.

     (iii) Prior  written  consent by Markel to any of the events  described  in
Section 1(k) above shall be deemed a waiver by him of his right to terminate for
Good Reason under this Section 10(f) solely by reason of the events set forth in
such waiver.

     (g) Voluntary  Termination  by Markel after Change in Control.  At any time
after July 31, 2010, and provided there is a Change in Control at any time under
this Agreement, Markel shall have the right, upon sixty (60) days' prior written
notice,  voluntarily to terminate his employment,  in which event his employment
shall cease and he shall be entitled to receive  compensation and benefits as if
Herley had  terminated  his  employment  Without  Cause,  as provided in Section
10(f)(ii).

     (h) Change in Control.  Notwithstanding  anything  to the  contrary in this
Section 10,  termination of Markel's  employment by the Company or its successor
within the  one-year  period  following a Change in Control for any reason other
than For Cause, death or Disability,  shall be governed by Section 10(f). In the
event of any such  termination,  Markel  shall be entitled to  compensation  and
benefits in accordance with the provisions of Section 10(f)(ii).

     11. CONSULTING PERIOD.

     (a) General. Effective upon the end of the Employment Term (but only if the
Employment  Term  ends  by  reason  of its  expiration)  or,  if  earlier,  upon
termination of Markel's employment (i) voluntarily,  (ii) by mutual agreement or
(iii) by death or Disability, Markel shall become a consultant to Herley. Unless
earlier terminated,  as provided in this Agreement,  the Consulting Period shall
continue for ten (10) years.

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         (b) Duties and Extent of Services.

     (i) During the Consulting Period,  Markel shall consult with Herley and its
senior executive  officers  regarding its respective  businesses and operations.
Such  consulting  services  shall not require  more than 50 days in any calendar
year,  nor more than one day in any week,  it being  understood  and agreed that
during the Consulting  Period Markel shall have the right,  consistent  with the
prohibitions  of Sections 12 and 13 below,  to engage in  full-time or part-time
employment with any business enterprise that is not a competitor of Herley.

     (ii) Markel's  service as a consultant shall only be required at such times
and such  places  as shall  not  result in  unreasonable  inconvenience  to him,
recognizing his other business  commitments  that he may have to accord priority
over the performance of services for Herley.  In order to minimize  interference
with Markel's  other  commitments,  his  consulting  services may be rendered by
personal  consultation  at his residence or office  wherever  maintained,  or by
correspondence   through  mail,   telephone,   fax  or  other  similar  mode  of
communication at times, including weekends and evenings, most convenient to him.

     (iii) During the Consulting Period,  Markel shall not be obligated to serve
as a member of the Board or to occupy  any  office on behalf of Herley or any of
its Subsidiaries.

     (c) Compensation.  During the Consulting Period,  Markel shall receive from
Herley each year the annual sum of $100,000, payable on a monthly basis.

     (d)  Disability  or Death.  In the event of  Disability or death during the
Consulting Period, Markel, his spouse or his other beneficiary,  as the case may
be, shall be entitled to compensation, in accordance with Section 11(c), for the
remainder of the Consulting Period.

     12. CONFIDENTIAL INFORMATION.

     (a) General.

     (i)  Markel  understands  and hereby  acknowledges  that as a result of his
employment with Herley he will necessarily become informed of and have access to
certain  valuable  and  confidential  information  of  Herley  and  any  of  its
Subsidiaries,  joint ventures and  affiliates,  including,  without  limitation,
inventions,   trade  secrets,  technical  information,   computer  software  and
programs,  know-how and plans  ("Confidential  Information"),  and that any such
Confidential Information,  even though it may be developed or otherwise acquired
by Markel, is the exclusive property of Herley to be held by him in trust solely
for Herley's benefit.

     (ii) Accordingly, Markel hereby agrees that, during the Employment Term and
the Consulting  Period and subsequent to both, he shall not, and shall not cause
others to, use, reveal, report,  publish,  transfer or otherwise disclose to any

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person,  corporation or other entity any Confidential  Information without prior
written consent of the Board,  except to (A) responsible  officers and employees
of Herley or (B)  responsible  persons  who are in a  contractual  or  fiduciary
relationship  with  Herley  or who need such  information  for  purposes  in the
interest of Herley.  Notwithstanding,  the foregoing,  the  prohibitions of this
clause  (ii) shall not apply to any  Confidential  Information  that  becomes of
general public knowledge other than from Markel or is required to be divulged by
court order or administrative process.

     (b) Return of  Documents.  Upon  termination  of his  Employment  Term with
Herley for any reason  or, if  applicable,  upon  expiration  of the  Consulting
Period,  Markel shall promptly deliver to Herley all plans,  drawings,  manuals,
letters, notes, notebooks, reports, computer programs and copies thereof and all
other materials,  including without limitation those of a secret or confidential
nature,  relating  to  Herley's  business  that  are then in his  possession  or
control.

     (c)  Remedies  and  Sanctions.  In the event that  Markel is found to be in
violation of Section  12(a) or (b) above,  Herley shall be entitled to relief as
provided in Section 14 below.

     13. NON-COMPETITION/NON-SOLICITATION.

     (a)  Prohibitions.  During the  Employment  Term and,  if  applicable,  the
Consulting Period,  Markel shall not, without prior written authorization of the
Board, directly or indirectly, through any other individual or entity:

     (i) become on officer or employee  of, or render any service to, any direct
competitor of Herley;

     (ii) solicit or induce any customer of Herley to cease  purchasing goods or
services from Herley or to become a customer of any competitor of Herley; or

     (iii)  solicit or induce any  employee of Herley to become  employed by any
competitor of Herley.

     (b)  Remedies  and  Sanctions.  In the event that  Markel is found to be in
violation of Section 13(a) above, Herley shall be entitled to relief as provided
in Section 14 below.

     (c) Exceptions.  Notwithstanding  anything to the contrary in Section 13(a)
above, its provisions shall not:

     (i) apply if Herley terminates  Markel's employment without Cause or Markel
terminates  his  employment  for Good Reason,  each as provided in Section 10(f)
above; or

                                       11
<PAGE>

     (ii) be construed as  preventing  Markel from  investing  his assets in any
business that is not a direct competitor of Herley.

     14. REMEDIES/SANCTIONS.

     Markel  acknowledges that the services he is to render under this Agreement
are of a unique and  special  nature,  the loss of which  cannot  reasonably  or
adequately be compensated for in monetary damages,  and that irreparable  injury
and damage may result to Herley in the event of any breach of this  Agreement or
default by Markel. Because of the unique nature of the Confidential  Information
and the importance of the  prohibitions  against  competition and  solicitation,
Markel further  acknowledges and agrees that Herley will suffer irreparable harm
if he fails to comply with his  obligations  under Section 12(a) or (b) above or
Section 13(a) above and that monetary  damages would be inadequate to compensate
Herley for any such breach. Accordingly,  Markel agrees that, in addition to any
other remedies available to either Party at law, in equity or otherwise,  Herley
will be entitled to seek  injunctive  relief or specific  performance to enforce
the  terms,  or  prevent  or remedy the  violation,  of any  provisions  of this
Agreement.

     15. BENEFICIARIES/REFERENCES.

     Markel  shall be entitled to select (and  change,  to the extent  permitted
under  any  applicable  law) a  beneficiary  or  beneficiaries  to  receive  any
compensation  or benefit  payable  under this  Agreement  following his death by
giving Herley written notice  thereof.  In the event of Markel's  death, or of a
judicial  determination  of his  incompetence,  reference  in this  Agreement to
Markel shall be deemed to refer, as appropriate,  to his beneficiary,  estate or
other legal representative.

     16. TAXES.

     (a) All payments to Markel or his Beneficiary under this Agreement shall be
subject to withholding on account of federal,  state and local taxes as required
by law.

     (b) 409A Compliance. To the extent necessary to comply with the restriction
in Section  409A(a)(2)(B)  of the Internal Revenue Code of 1986, as amended (the
"Code") concerning payments to "specified  employees,"  payments hereunder shall
be made on the  first  business  day of the  seventh  month  following  the date
Markel's employment terminates.

     (c)  Excess  parachute   payments.   In  the  event  that  either  Herley's
independent  public  accountants or the Internal Revenue Service determines that
any payment, coverage or benefit provided to Markel is subject to the excise tax
imposed Section 4999 (or any successor  provision) of the Code ("Section 4999"),
Herley  shall pay to  Markel,  on the later of the 30th day  thereafter  (or the
first business day following such 30th day) or the date that the payment is paid
pursuant to Section 16(b) above,  in addition to any other payment,  coverage or

                                       12
<PAGE>

benefit due and owing hereunder, an amount determined by multiplying the rate of
excise tax then imposed by Section  4999 by the amount of the "excess  parachute
payment" received by Markel  (determined  without regard to any payments made to
Markel  pursuant to this  Section 16 (c) and dividing the product so obtained by
the amount obtained by subtracting the aggregate local, state and Federal income
tax rate applicable to the receipt by Markel of the "excess  parachute  payment"
(taking into account the  deductibility  for Federal  income tax purposes of the
payment of state and local income  taxes  thereon)  from the amount  obtained by
subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the
Code, it being the  intention of the parties  hereto that Markel's net after tax
position be  identical to that which would have  obtained had Sections  280G and
4999 not been part of the Code.

     17. INDEMNIFICATION AND LIABILITY INSURANCE.

     Nothing herein is intended to limit Herley's indemnification of Markel, and
Herley shall  indemnify him to the fullest  extent  permitted by applicable  law
consistent with Herley's  Certificate of Incorporation  and By-Laws as in effect
at the beginning of the Employment  Term,  with respect to any action or failure
to act on his part while he is an officer, director or employee of Herley or any
Subsidiary.  Herley shall cause Markel to be covered at all times by  directors'
and officers' liability insurance.  Herley shall continue to indemnify Markel as
provided  above and maintain such  liability  insurance  coverage for him for at
least three (3) years after the Employment  Term for any claims that may be made
against him with respect to his service as an officer of Herley.

     18. EFFECT OF AGREEMENT ON OTHER BENEFITS.

     The  existence of this  Agreement  shall not prohibit or restrict  Markel's
entitlement to participate  fully in  compensation,  employee  benefit and other
plans of Herley in which senior executives are eligible to participate.

     19. ASSIGNABILITY; BINDING NATURE.

     This  Agreement  shall be  binding  upon and  inure to the  benefit  of the
Parties  and their  respective  successors,  heirs (in the case of  Markel)  and
assigns. No rights or obligations of Herley under this Agreement may be assigned
or transferred  by Herley except  pursuant to (a) a merger or  consolidation  in
which Herley is not the  continuing  entity or (b) sale or liquidation of all or
substantially all of the assets of Herley, provided that the surviving entity or
assignee or  transferee  is the  successor  to all or  substantially  all of the
assets of Herley and such surviving entity or assignee or transferee assumes the
liabilities,  obligations  and  duties of Herley  under this  Agreement,  either
contractually or as a matter of law.

     Herley further agrees that, in the event of a sale of assets or liquidation
as described  in the  preceding  sentence,  it shall use  reasonable  commercial
efforts  to have such  assignee  or  transferee  expressly  agree to assume  the
liabilities, obligations and duties of Herley hereunder; provided, however, that
notwithstanding such assumption,  Herley shall remain liable and responsible for

                                       13
<PAGE>

fulfillment  of the  terms  and  conditions  of this  Agreement;  and  provided,
further, that in no event shall such assignment and assumption of this Agreement
adversely affect Markel's right upon a Change in Control, as provided in Section
10(h) above.  No rights or  obligations  of Markel under this  Agreement  may be
assigned or transferred by him.

     20. REPRESENTATIONS.

     The  Parties  respectively   represent  and  warrant  that  each  is  fully
authorized and empowered to enter into this  Agreement and that the  performance
of its or his  obligations,  as the case may be, under this  Agreement  will not
violate  any  agreement  between  such  Party  and  any  other  person,  firm or
organization.  Herley  represents and warrants that this Agreement has been duly
authorized  by  all  necessary  corporate  action  and  is  valid,  binding  and
enforceable in accordance with its terms.

     21. ENTIRE AGREEMENT.

     Except to the extent otherwise provided herein, this Agreement contains the
entire  understanding and agreement  between the Parties  concerning the subject
matter hereof and  supersedes  any prior  agreements,  whether  written or oral,
between the Parties concerning the subject matter hereof.  Payments and benefits
provided  under this  Agreement  are in lieu of any  payments or other  benefits
under any severance  program or policy of Herley to which Markel would otherwise
be entitled.

     22. AMENDMENT OR WAIVER.

     No  provision in this  Agreement  may be amended  unless such  amendment is
agreed to in writing  and signed by both  Markel  and an  authorized  officer of
Herley.  No  waiver  by either  Party of any  breach  by the other  Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent  time.  Any waiver must be in writing and
signed by the Party to be charged  with the waiver.  No delay by either Party in
exercising  any right,  power or privilege  hereunder  shall operate as a waiver
thereof.

     23. SEVERABILITY.

     In the event  that any  provision  or portion  of this  Agreement  shall be
determined to be invalid or unenforceable  for any reason,  in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.

     24. SURVIVAL.

     The respective  rights and  obligations of the Parties under this Agreement
shall survive any termination of Markel's employment with Herley.

                                       14
<PAGE>

     25. GOVERNING LAW/JURISDICTION.

     This  Agreement  shall be  governed by and  construed  and  interpreted  in
accordance  with  the laws of  Delaware,  without  reference  to  principles  of
conflict of laws.

     26. NOTICES.

     Any notice given to either Party shall be in writing and shall be deemed to
have been given when delivered either personally,  by fax, by overnight delivery
service  (such as Federal  Express)  or sent by  certified  or  registered  mail
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the  address  indicated  below or to such  changed  address  as the Party may
subsequently give notice of.

If to Herley or the Board:
Herley Industries, Inc.
101 North Pointe Boulevard
Lancaster, Pennsylvania  17601
Fax No.  717-397-9503
Attn:  Mr. Myron Levy, Chairman

With a copy to:
Beckman, Lieberman & Barandes, LLP
100 Jericho Quadrangle, Suite 329
Jericho, NY  11753
Fax No. 516-433-5858
Attn:  David H. Lieberman, Esq.

If to Markel:
Jeffrey L. Markel
5 Constitution Lane
Totowa, NJ 07512
Fax No. 973-720-9225

With a copy to:
Ogletree, Deakins, Nash,
Smoak & Stewart, P.C.
10 Madison Avenue, Suite 402
Morristown, New Jersey  07960
Fax No.   973-656-1611
Attn:  Patrick M. Stanton, Esq.

                                       15
<PAGE>

     27. HEADINGS.

     The  headings  of  the  sections   contained  in  this  Agreement  are  for
convenience  only and shall not be deemed to control  or affect  the  meaning or
construction of any provision of this Agreement.

     28. COUNTERPARTS.

     This  Agreement  may be  executed  in  counterparts,  each of which when so
executed and delivered shall be an original,  but all such counterparts together
shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
May 30, 2007.

                                         HERLEY INDUSTRIES, INC.

                                         By: /s/ Myron Levy
                                            -------------------------
                                                   Myron Levy

                                                    EMPLOYEE

                                             /s/ Jeffrey L. Markel
                                            -------------------------
                                                Jeffrey L. Markel

                                       16exh1043convpromnote.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:

     

    _____________________________________

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