Document:

ex101.htm

    Exhibit
10.1

    SECURITIES
PURCHASE AGREEMENT

     

    SECURITIES PURCHASE AGREEMENT
(this “Agreement”),
dated as of March 30, 2009, by and among Aeolus Pharmaceuticals, Inc., a
Delaware corporation with its headquarters located at 26361 Crown Valley
Parkway, Suite 150, Mission Viejo, California  92691 (the “Company”), and the investors
listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the
“Buyers”).

     

    WHEREAS:

     

    A. The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933
Act.

     

    B. Each
Buyer, severally and not jointly, wishes to purchase, and the Company wishes to
sell, upon the terms and conditions stated in this Agreement, (i) that aggregate
number of shares (collectively, the “Shares”) of the Common Stock,
par value $0.01 per share, of the Company (the “Common Stock”) set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers attached
hereto (the “Schedule of
Buyers”)  and (ii) warrants, in substantially the form attached
hereto as Exhibit A (the
“Warrants”), to acquire
up to that number of additional shares of Common Stock set forth opposite such
Buyer’s name in column (4) of the Schedule of Buyers attached hereto
(collectively, the “Warrant
Shares”).

     

    C. Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the
form attached hereto as Exhibit B (as
may be amended or restated from time to time, the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Shares and the Warrant Shares under the
1933 Act and the rules and regulations promulgated thereunder, and applicable
state securities laws.

     

    D. The
Shares, the Warrants and the Warrant Shares collectively are referred to herein
as the “Securities.”

     

    NOW, THEREFORE, the Company
and each Buyer hereby agree as follows:

     

    1. PURCHASE AND SALE OF SHARES
AND WARRANTS.

     

    (a) Purchase and Sale of Shares
and Warrants.

     

    (i) Shares and
Warrants. Subject to the
satisfaction (or waiver) of the conditions set forth in Sections 6 and 7(i) below, the
Company shall issue and sell to each Buyer, and each Buyer severally, but not
jointly, shall purchase from the Company, (x) the number of Shares set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers and
(y) Warrants to acquire up to that number of Warrant Shares set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers.

     

    
      
        
        

      

      
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    (ii) Closing.  The
closing of the purchase and sale of the Shares and Warrants (the “Closing”) shall occur at 10:00
a.m., New York City time, on the date hereof (or such later date as is mutually
agreed to by the Company and each Buyer) after notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6 and 7(i) below at the
offices of Lowenstein Sandler PC, 1251 Avenue of the Americas, 18th Floor, New
York, New York 10020.  The date on which the Closing occurs is
referred to herein as the “Closing Date.”

     

    (iii) Purchase
Price.  The purchase price to be paid by each Buyer for the
Shares and the Warrants to be purchased by such Buyer at the Closing shall be
the amount set forth opposite such Buyer’s name in column (5) of the Schedule of
Buyers (the “Purchase
Price”).

     

    (b) Form of
Payment.  On Closing Date, (i) each Buyer shall pay its
respective Purchase Price to the Company by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions and
(ii) the Company shall deliver to each Buyer (A) one or more stock
certificates, evidencing the number of Shares being purchased by such Buyer as
set forth opposite such Buyer’s name in column (3) of the Schedule of Buyers,
and (B) one or more Warrants exercisable for the number of Warrant Shares
set forth opposite such Buyer’s name in column (4) of the Schedule of Buyers in
all cases duly executed on behalf of the Company and registered in the name of
such Buyer, or such Buyer’s nominee.

     

    2. BUYER’S REPRESENTATIONS AND
WARRANTIES.  Each Buyer, severally and not jointly, represents
and warrants to the Company that:

     

    (a) No Sale or
Distribution.  Such Buyer is acquiring the Shares and the
Warrants, and upon exercise of the Warrants  will acquire the Warrant
Shares issuable upon exercise of the Warrants, for its own account, not as
nominee or agent, and not with a view towards distribution thereof, and such
Buyer has no present intention of selling, granting any participation in, or
otherwise distributing
the same in violation of the 1933 Act or any state securities laws; provided,
however, that by making the representations herein, such Buyer does not agree to
hold any of the Securities for any minimum or other specific term and reserves
the right to dispose of the Securities at any time in accordance with or
pursuant to a registration statement or an exemption under the 1933 Act and
pursuant to the applicable terms of the Transaction Documents (as defined in
Section 3(b)).  Such
Buyer is acquiring the Securities hereunder in the ordinary course of its
business.  Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person (as defined in Section 3(r) below) to
distribute any of the Securities.

     

    (b) Accredited Investor
Status.  Such Buyer is an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D.

     

    (c) Reliance on
Exemptions.  Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to

    
       

      
        
          
          

        

        
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      determine the availability of such exemptions and the eligibility
of such Buyer to acquire the Securities.

    

     

    (d) Information.  Such
Buyer has been furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of
the Securities that have been requested by such Buyer.  Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of and
receive answers from the Company regarding the Company, its business and the
terms and conditions of the offering of the Securities.  Such Buyer
acknowledges that it has had access to the SEC Documents (as defined in Section 3(j) below) via
the SEC’s Electronic Data Gathering and Retrieval System or any successor
database (“EDGAR”).  Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer’s right to rely on the Company’s representations and
warranties contained herein.  Such Buyer understands and acknowledges
that (i) its investment in the Securities involves a high degree of risk, (ii)
it is able to afford a complete loss of such investment in the Securities, and
(iii) it has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the investment
contemplated hereby.  Such Buyer has sought such accounting, legal and
tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.

     

    (e) No Governmental
Review.  Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

     

    (f) Transfer or
Resale.  Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company
an opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or
(C) such Buyer provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or
Rule 144A promulgated under the 1933 Act, as amended (or a successor rule
thereto) (collectively, “Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of the Securities under circumstances in which
the seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under
any obligation to register the Securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.  Notwithstanding the foregoing, the Securities may be
pledged in connection with a bona fide margin account or other loan or financing
arrangement secured by the Securities and such pledge of Securities, by itself,
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer 

    
       

      
        
          
          

        

        
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      effecting a pledge of Securities shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document (as defined in
Section 3(b)), including,
without limitation, this Section 2(f).

    

     

    (g) Legends.  Such
Buyer understands that the certificates or other instruments representing the
Shares and the Warrants and, until such time as the resale of the Warrant Shares
have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement or eligible to be sold under Rule 144 of the 1933 Act
without regard to the availability of current financial information, the stock
certificates representing the Warrant Shares, except as set forth below, shall
bear any legend as required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

     

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

     

    The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection
with a sale, assignment or other transfer, such holder provides the Company with
an opinion of a law firm reasonably acceptable to the Company, in a form
reasonably acceptable to the Company, to the effect that such sale, assignment
or transfer of the Securities may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or
transferred pursuant to Rule 144 or Rule 144A.  If an opinion is
required, the Company shall be obligated to retain counsel in order to cause
such counsel to deliver the legal opinion referred to in clause (I)(B) of the
legend set forth above and to pay any related fees and expenses of said
counsel.

     

    
      
        
        

      

      
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    (h) Validity;
Enforcement.  The execution, delivery and performance by such
Buyer of each of the Transaction Documents (as defined below) to which such
Buyer is a party have been duly and validly authorized, executed and delivered
on behalf of such Buyer and shall constitute the legal, valid and binding
obligations of such Buyer enforceable against such Buyer in accordance with
their respective terms, except (i) as may be limited by general principles
of equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights generally, (ii) as limited by
laws relating to specific performance, injunctive relief of other equitable
remedies, and (iii) to the extent the indemnification provisions contained
in this Agreement may be limited by applicable laws.

     

    (i) No
Conflicts.  The execution, delivery and performance by such
Buyer of each of the Transaction Documents to which such Buyer is a party and
the consummation by such Buyer of the transactions contemplated hereby and
thereby will not (i) result in a violation of the organizational documents
of such Buyer or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which such Buyer is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment  or decree (including federal and state securities laws)
applicable to such Buyer, except in the case of clauses (ii) and (iii) above,
for such conflicts, defaults, rights or violations which would not, individually
or in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Buyer to perform its obligations hereunder or under any
other Transaction Document to which such Buyer is a party.

     

    (j) Residency.  Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

     

    (k) Certain Trading
Activities.  Other than with respect to the transactions
contemplated herein, since the time that such Buyer was first contacted by the
Company or any other Person regarding this investment in the Company neither the
Buyer nor any “affiliate” of such Buyer (as defined in Rule 144 of the 1933 Act)
which (x) had knowledge of the transactions contemplated hereby,
(y) has or shares discretion relating to such Buyer’s investments or
trading or information concerning such Buyer’s investments and (z) is subject to
such Buyer’s review or input concerning such affiliate’s investments or trading
(collectively, “Trading
Affiliates”) has directly or indirectly, nor has any Person acting on
behalf of or pursuant to any understanding with such Buyer or Trading Affiliate,
effected or agreed to effect any transactions in the securities of the
Company.  Such Buyer hereby covenants and agrees not to, and shall
cause its Trading Affiliates not to, engage, directly or indirectly, in any
transactions in the securities of the Company or involving the Company’s
securities during the period from the date hereof until such time as
(i) the transactions contemplated by this Agreement are first publicly
announced as described in Section 4(h) hereof or
(ii) this Agreement is terminated in full pursuant to Section 8
hereof.  Notwithstanding the foregoing, for avoidance of doubt,
nothing contained herein shall constitute a representation or warranty, or
preclude any actions, with respect to the identification of the availability of,
or securing of, available shares to borrow in order to effect short sales or
similar transactions in the future.

     

    
      
        
        

      

      
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    (l) Legal
Investment.  Such Buyer acknowledges that the Company has not
provided any advice as to whether the Securities are a suitable investment or
whether the Securities constitute a legal investment for such
Buyer.

     

    (m) Compliance with SEC
Telephone Interpretation.  Such Buyer acknowledges the SEC’s
position set forth in Compliance & Disclosure Interpretation 239.10 issued
by the SEC’s Division of Corporation Finance on November 26, 2008, and such
Buyer will adhere to such position.

     

    (n) General
Solicitation.  Such Buyer is not
purchasing the Shares and the Warrants as a result of any advertisement,
article, notice or other communication regarding any of the Securities published
in any newspaper, magazine or similar media or broadcast over television or
radio or presented at any seminar.

     

    (o) Organization.  Such Buyer is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate, limited liability company or
partnership power and authority to enter into and to consummate the transactions
contemplated by this Agreement and the other applicable Transaction Documents
and otherwise to carry out its obligations hereunder and
thereunder.

     

    (p) Acknowledgement Regarding
Insolvency.  Notwithstanding anything in this Agreement to the
contrary, each Buyer understands and acknowledges that the Company and its
Subsidiaries, individually and on a consolidated basis, as of the date hereof,
and after giving effect to the transactions contemplated hereby to occur at the
Closing may be, or may become, Insolvent (as defined below).  For
purposes of this Section 2(p), “Insolvent” means, with respect
to any Person (as defined in Section 3(r)),
(i) the present fair saleable value of such Person’s assets is less than
the amount required to pay such Person’s total Indebtedness (as defined in Section 3(q)),
(ii) such Person is unable to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, (iii) such Person intends to incur or believes that it will incur
debts that would be beyond its ability to pay as such debts mature or (iv) such
Person has unreasonably small capital with which to conduct the business in
which it is engaged as such business is now conducted and is proposed to be
conducted.

     

    3. REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.  The Company represents and warrants
to each of the Buyers that, as of the date hereof and at all times to and
including the Closing Date, except as otherwise described in the SEC Documents
filed with the SEC prior to the date hereof:

     

    (a) Organization and
Qualification.  The Company and its “Subsidiaries” (which for
purposes of this Agreement means “Significant Subsidiary” as such term is
defined in Rule 1-02 of Regulation S-X of the 1933 Act; which as of the date of
this Agreement, is solely comprised of Aeolus Sciences, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company), are entities duly
organized and validly existing and, to the extent legally applicable, in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authorization to own their properties and to carry on
their business as now being conducted.  Each of the Company and its
Subsidiaries is duly qualified as a foreign entity to do business and to the
extent legally applicable, is in good standing in every jurisdiction

    
       

      
        
          
          

        

        
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      in which
its ownership of property or the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not reasonably be expected to have a
Material Adverse Effect.  As used in this Agreement, “Material Adverse Effect” means
any material adverse effect on the business, properties, assets, operations,
results of operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby and the other Transaction Documents or by the agreements and
instruments to be entered into in connection herewith or therewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below).  Notwithstanding the foregoing, the entities in which the Company, directly or indirectly, owns any
of the capital stock or holds an equity or similar interest which are not Subsidiaries, taken as whole, do not have
income, revenues or assets which are material to the Company and its
Subsidiaries, individually, or taken as a whole. Except for the capital stock of Aeolus Sciences, Inc.
or as set forth on Schedule 3(a), the Company does not, directly or indirectly, own any
joint venture or similar entity or hold capital stock, equity or similar
interests.

    

     

    (b) Authorization; Enforcement;
Validity.  The Company has the requisite corporate power and
authority to enter into, deliver and perform its obligations under this
Agreement, the Warrants, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined in Section 5(b)) and each of
the other agreements entered into by the Company and any Buyer in connection
with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”), and
to issue the Securities in accordance with the terms hereof and
thereof.  Except as set forth on Schedule 3(b),
the execution and delivery of this Agreement and the other Transaction Documents
by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Shares and the Warrants, and the reservation for issuance and issuance of
Warrant Shares issuable upon exercise of the Warrants, have been duly authorized
by the Company’s board of directors, and no further filing, consent, or
authorization is required by the Company, its board of directors or its
stockholders.  This Agreement and the other Transaction Documents of
even date herewith have been (and, to the extent the Closing Date is after the
date hereof, each Transaction Document to be entered into as of the Closing Date
will have been) duly executed and delivered by the Company as of the Closing
Date, and constitute (or in the case of Transaction Documents entered on the
Closing Date if such date is after the date hereof, will constitute as of the
Closing Date) the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except (i) as may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of applicable creditors’
rights generally, (ii) as limited by laws relating to specific performance,
injunctive relief of other equitable remedies, and (iii) to the extent the
indemnification provisions contained in this Agreement and the Registration
Rights Agreement may be limited by applicable laws.

     

    (c) Issuance of
Securities.  The issuance of the Shares and the Warrants are
duly authorized by the Company and upon issuance in accordance with the terms of
this Agreement shall be free from all taxes, liens and charges with respect to
the issue thereof.  A sufficient number of shares of Common Stock
shall have been duly authorized and reserved for issuance for purposes of
enabling the Company to issue that number of shares of Common Stock

    
      
        
          
          

        

        
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      issuable upon exercise of the Warrants.  Upon exercise
in accordance with the Warrants, the Warrant Shares will be validly issued,
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common
Stock.  Assuming the accuracy of each of the representations and
warranties set forth in Section 2 of this
Agreement, the offer and issuance by the Company of the Securities is exempt
from registration under the 1933 Act.

    

     

    (d) No
Conflicts.  Except as set forth on Schedule 3(d),
the execution, delivery and performance of this Agreement and the other
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Shares and Warrants and reservation for issuance and issuance of
the Warrant Shares) will not (i) result in a violation of any certificate
of incorporation, certificate of formation, any certificate of designations or
other constituent documents of the Company or any of its Subsidiaries, any
capital stock of the Company or any of its Subsidiaries or bylaws of the Company
or any of its Subsidiaries or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
in any respect under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
foreign, federal and state securities laws and regulations and the rules and
regulations of the OTC Bulletin Board (the “Principal Market”)) applicable
to the Company or any of its Subsidiaries or by which any property or asset of
the Company or any of its Subsidiaries is bound or affected, except in the case
of clauses (ii) and (iii) above, to the extent that such violation conflict,
default or right would not reasonably be expected to have a Material Adverse
Effect.

     

    (e) Consents and
Filings.  Except as set forth on Schedule 3(e),
neither the Company nor any of its Subsidiaries is required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court, governmental agency or any regulatory or self-regulatory agency or any
other Person in order to execute, deliver or perform any of its obligations
under or contemplated by the Transaction Documents to which they are a party, in
each case in accordance with the terms hereof or thereof, other than
(i) the filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement,
(ii) the filing of Form D with the SEC and such filings as are required to
be made under applicable state securities laws, (iii) application(s) to the
Principal Market for the listing of the Securities for trading thereon in the
time and manner required thereby, and (iv)  filings required pursuant to
Section 4(h) of this
Agreement.  The Company and its Subsidiaries are unaware of any facts
or circumstances that might prevent the Company from obtaining or effecting any
of the registration, application or filings pursuant to the preceding
sentence.  The Company is not in violation of the listing requirements
of the Principal Market and has no knowledge of any facts that would reasonably
lead to delisting or suspension of the Common Stock in the foreseeable
future.

     

    (f) Acknowledgment Regarding
Buyer’s Purchase of Securities.  The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby.

    
      
        
        

      

      
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    (g) No General
Solicitation.  Neither the Company, nor any of its Subsidiaries
or affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the
Securities.

     

    (h) No Integrated
Offering.  None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of the issuance of
any of the Securities under the 1933 Act, whether through integration with prior
offerings or otherwise, or cause this offering of the Securities to require
approval of stockholders of the Company for purposes of any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of any exchange or automated quotation system on which any of
the securities of the Company are listed or designated.

     

    (i) Application of Takeover
Protections; Rights Agreement.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation (as defined in
Section 3(q)) or the laws
of the state of its incorporation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company’s issuance of the Securities and any Buyer’s
ownership of the Securities.  The Company and its board of directors
have taken all necessary action, if any, in order to render inapplicable any
stockholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the
Company.

     

    (j) SEC Documents; Financial
Statements.  During the two (2) years prior to the date hereof,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the
foregoing filed during the two (2) years prior to the date hereof and all
exhibits included therein and financial statements, notes and schedules thereto
and documents incorporated by reference therein being hereinafter referred to as
the “SEC
Documents”).  The Company has made available to the Buyers or
their respective representatives, through EDGAR, true, correct and complete
copies of the SEC Documents.  As of their respective filing dates, and
to the Company's knowledge, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.  As of their respective filing dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude

    
      
        
          
          

        

        
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      footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).  No other information provided by or on behalf of
any officer or director of the Company to the Buyers, solely in their capacity
as Buyers, which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this
Agreement or in any disclosure schedules, contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstance under which they are or
were made not misleading.

    

     

    (k) Absence of Certain
Changes.  Except as set forth on Schedule 3(k),
since September 30, 2008, there has been no material adverse change and no
material adverse development in the business, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company or
its Subsidiaries.  Since September 30, 2008, the Company has not (i)
declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside of the ordinary course of business or
(iii) had capital expenditures, individually or in the aggregate, in excess of
$500,000.  Neither the Company nor any of its Subsidiaries has taken
any steps to seek protection pursuant to any bankruptcy law nor does the Company
have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact that
would reasonably lead a creditor to do so.

     

    (l) No Undisclosed Events,
Liabilities, Developments or Circumstances.  No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

     

    (m) Conduct of Business;
Regulatory Permits.  Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or the Bylaws or their organizational charter or
bylaws, respectively.  Neither the Company nor any of its Subsidiaries
is in violation of any judgment, decree or order or any statute, ordinance, rule
or regulation applicable to the Company or its Subsidiaries, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of
any of the foregoing, except for possible violations which could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.  Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the Principal Market and has no knowledge of any facts or circumstances that
would reasonably lead to delisting or suspension of the Common Stock by the
Principal Market in the foreseeable future.  During the two (2) years
prior to the date hereof, (i) the Common Stock has been designated for quotation
on the Principal Market, (ii) trading in the Common Stock has not been suspended
by the SEC or the Principal Market and (iii) the Company has received no
communication, written or oral, from the SEC or the Principal Market regarding
the suspension or delisting of the Common Stock from the Principal
Market.  The Company and its Subsidiaries 

    
      
        
          
          

        

        
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      possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

    

     

    (n) Foreign Corrupt
Practices.  Neither the Company nor any of its Subsidiaries
nor, to the Company's knowledge, any of their respective current or former
directors, officers, agents, employees or other Persons acting on behalf of the
Company or any of its Subsidiaries has, in the course of its actions for, or on
behalf of, the Company or any of its Subsidiaries (i) used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.

     

    (o) Sarbanes-Oxley
Act.  Except as set forth on Schedule 3(o), the Company is
in material compliance with any and all requirements of the Sarbanes-Oxley Act
of 2002 that are effective and applicable to the Company as of the date hereof,
and any and all rules and regulations promulgated by the SEC thereunder that are
effective and applicable to the Company as of the date hereof.

     

    (p) Transactions with
Affiliates.  Except as discussed on Schedule 3(p), none of the
officers, directors or employees of the Company or any of its Subsidiaries is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such
officer, director or employee or, to the knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

     

    (q) Equity
Capitalization.  As of the date hereof, the authorized capital
stock of the Company consists of 210,000,000 shares, comprised of
(x) 200,000,000 shares of Common Stock, of which as of the date hereof,
32,110,712 shares are issued and outstanding, and (y) 10,000,000 shares of
preferred stock, par value $0.01 per share, of which 600,000 shares are
designated Series B nonredeemable convertible preferred stock, of which 475,087
shares are issued and outstanding, and no other shares of the Company’s
preferred stock are issued or outstanding.  All outstanding shares of
the Company’s capital stock have been, or upon issuance will be, validly issued
and are, or upon issuance will be, fully paid and
nonassessable.  Except as described on Schedule 3(q), with respect
to any debt or equity instruments of the Company and its Subsidiaries,
(i) none of the Company’s capital stock is subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Company; (ii) there are no outstanding options, warrants, scrip, rights
to subscribe to, calls or commitments of any character whatsoever relating to,
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      exchangeable for, any capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its Subsidiaries or options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
Subsidiaries; (iii)  there are no financing statements securing obligations
in any material amounts, either singly or in the aggregate, filed in connection
with the Company or any of its Subsidiaries; (iv) there are no agreements
or arrangements under which the Company or any of its Subsidiaries is obligated
to register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (v) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vii) the Company does not have any stock appreciation
rights or “phantom stock” plans or agreements or any similar plan or agreement;
and (vii) the Company and its Subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or
in the aggregate, do not or would not have a Material Adverse
Effect.  The Company has made available to the Buyers, through EDGAR,
true, correct and complete copies of the Company’s certificate of incorporation,
as amended and as in effect on the date hereof (the “Certificate of
Incorporation”), and the Company’s bylaws, as amended and as in effect on
the date hereof (the “Bylaws”).

    

     

    (r) Indebtedness and Other
Contracts.  Except as set forth under the agreements or other
arrangements listed on Schedule 3(r), neither the
Company nor any of its Subsidiaries (i) has any outstanding Indebtedness
(as defined below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of
any term of or in default under any contract, agreement or instrument relating
to any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in
accordance with generally accepted accounting principles (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in

    
       

      
        
          
          

        

        
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      the event of default are limited to repossession or sale of such
property), (F) all monetary obligations in excess of $100,000 under any leasing
or similar arrangement which, in connection with generally accepted accounting
principles, consistently applied for the periods covered thereby, is classified
as a capital lease, (G) all indebtedness referred to in clauses (A) through (F)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (H) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.

    

     

    (s) Absence of
Litigation.  There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any
of the Company’s or its Subsidiaries’ officers or directors.

     

    (t) Insurance.  The
Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its Subsidiaries are engaged.  Except as set
forth on Schedule
3(t), neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse
Effect.

     

    (u) Employee
Relations.

     

    (i) Neither
the Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union.  The Company and its
Subsidiaries believe that their relations with their employees are
good.  No executive officer of the Company or any of its Subsidiaries
has notified the Company or any such Subsidiary that such officer intends to
leave the Company or any such Subsidiary or otherwise terminate such officer’s
employment with the Company or any such Subsidiary.  No executive
officer of the Company or any of its Subsidiaries, is, or is now expected to be,
in violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and 

    
       

      
        
          
          

        

        
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      the
continued employment of each such executive officer does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters.

    

     

    (ii) Except as
set forth on Schedule
3(o), the Company and
its Subsidiaries, to their knowledge, are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

     

    (v) Title.  Except
as set forth on Schedule 3(v), the Company
and its Subsidiaries have good and marketable title in fee simple to all real
property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each
case free and clear of all liens, encumbrances and defects  or such as
do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries.  Any real property and facilities
held under lease by the Company and any of its Subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries, except (i) as
limited by applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally, (ii) as limited by laws
relating to specific performance, injunctive relief or other equitable remedies,
and (iii) to the extent any indemnification provisions contained in such
leases may be limited by applicable laws.

     

    (w) Intellectual Property
Rights.  The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, service marks and all
applications and registrations therefor, trade names, patents, patent rights,
copyrights, original works of authorship, inventions, trade secrets and other
intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as conducted on the date of
this Agreement.  Except as set forth on Schedule 3(w), none of the
Company’s registered, or applied for, Intellectual Property Rights have expired
or terminated or have been abandoned, or are expected to expire or terminate or
expected to be abandoned, within three years from the date of this Agreement, in
each case except as have not had and could not reasonably be expected to have a
Material Adverse Effect.  To the knowledge of the Company, no product
or service of the Company or its Subsidiaries infringes the Intellectual
Property Rights of others.  There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company or its Subsidiaries,
being threatened, against the Company or its Subsidiaries regarding (i) its
Intellectual Property Rights, or (ii) that the products or services of the
Company or its Subsidiaries infringe the Intellectual Property Rights of
others.  Neither the Company nor any of its Subsidiaries is aware of
any facts or circumstances which might give rise to any of the foregoing
infringements or claims, actions or proceedings.  The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights, except
where failure to do so could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect.

    
      
        
        

      

      
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    (x) Environmental
Laws.  The Company and its Subsidiaries, to their knowledge,
(i) are in compliance with any and all Environmental Laws (as hereinafter
defined), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any
such permit, license or approval where, in each of the foregoing clauses (i),
(ii) and (iii), the failure to so comply could be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.  The term
“Environmental Laws”
means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

     

    (y) Tax
Status.  The Company and each of its Subsidiaries (i) has made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim.

     

    (z) Internal Accounting and
Disclosure Controls.  The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any
difference.  Except as set forth on Schedule 3(z), the Company
maintains disclosure controls and procedures (as such term is defined in Rule
13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is accumulated and communicated to the Company’s management,
including its principal executive officer or officers and its principal
financial officer or officers, as appropriate, to allow timely decisions
regarding required disclosure.  Except as set forth on Schedule 3(z), during the
twelve months prior to the date hereof neither the Company nor any of its
Subsidiaries have received any notice or correspondence from any accountant
relating to any 

    
       

      
        
          
          

        

        
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      material weakness in any part of the system of internal accounting
controls of the Company or any of its Subsidiaries.

    

     

    (aa) Off Balance Sheet
Arrangements.  There is no transaction, arrangement, or other
relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse
Effect.

     

    (bb) Investment Company
Status.  Neither the Company nor any of its Subsidiaries is,
and upon consummation of the sale of the Securities neither the Company nor any
of its Subsidiaries will be, an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the
Investment Company Act of 1940, as amended.

     

    (cc) Transfer
Taxes.  On the Closing Date, all stock transfer, documentary
stamp taxes or other taxes (other than income or similar taxes) which are
required to be paid in connection with the sale and transfer of the Securities
to be sold to each Buyer hereunder on the Closing Date will be, or will have
been, fully paid or provided for by the Company, and all laws imposing such
taxes will be or will have been complied with.

     

    (dd) Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company.

     

    (ee) Disclosure.  The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Buyers or their agents or counsel, solely in their capacity
as prospective Buyers, with any information that constitutes or could reasonably
be expected to constitute material, nonpublic information.  The
Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in securities of the
Company.  All disclosure provided to the Buyers regarding the Company
or any of its Subsidiaries, their business and the transactions contemplated
hereby, including the Schedules to this Agreement, furnished by or on behalf of
the Company is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading.  Each press release issued by the Company or any
of its Subsidiaries during the twelve (12) months preceding the date of this
Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which

    
       

      
        
          
          

        

        
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      has not been so publicly announced or disclosed in accordance with
such requirements.  The Company acknowledges and agrees that no Buyer
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 2.
Notwithstanding the foregoing, the Company and each Buyer acknowledge that Buyer
has or may have one or more agents serving as a director on the Board of
Directors of the Company and that the receipt or awareness of any information
related to the Company gained by any such director in his or her capacity as a
director of the Company shall not be deemed a violation of this paragraph by the
Company.

    

     

    (ff) Acknowledgement Regarding
Buyers’ Trading Activity.  Anything in this Agreement or
elsewhere herein to the contrary notwithstanding, but subject to compliance by
the Buyers with applicable law and the terms of this Agreement, it is understood
and acknowledged by the Company (i) that none of the Buyers have been asked
by the Company or its Subsidiaries to agree, nor has any Buyer agreed with the
Company or its Subsidiaries, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities
issued by the Company or to hold the Securities for any specified term;
(ii) that past or future open market or other transactions by any Buyer,
including, without limitation, short sales or “derivative” transactions, before
or after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities;
(iii) that any Buyer, and counter parties in “derivative” transactions to
which any such Buyer is a party, directly or indirectly, presently may have a
“short” position in the Common Stock; and (iv) that each Buyer shall not be
deemed to have any affiliation with or control over any arm’s length
counter-party in any “derivative” transaction.  The Company further
understands and acknowledges that (a) one or more Buyers may engage in hedging
and/or trading activities at various times during the period that the Securities
are outstanding, including, without limitation, during the periods that the
value of the Warrant Shares deliverable with respect to Securities are being
determined and (b) such hedging and/or trading activities (if any) could reduce
the value of the existing stockholders’ equity interests in the Company at and
after the time that the hedging and/or trading activities are being
conducted.

     

    (gg) Placement
Agents.  Except as set forth on Schedule 3(gg), neither the
Company nor any of its subsidiaries has engaged any placement agent or other
agent in connection with the placement, offer or sale of the
Securities.

     

    4. COVENANTS.

     

    (a) Best
Efforts.  Each party shall use its best efforts to timely
satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

     

    (b) Form D and Blue
Sky.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date.  The
Company shall make all filings and reports relating 

    
       

      
        
          
          

        

        
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      to the offer and sale of the Securities required under applicable
securities or “Blue Sky” laws of the states of the United States following the
Closing Date.

    

     

    (c) Reporting
Status.  Until the date on which the Buyers shall have sold all
the Warrant Shares and none of the Warrants
is outstanding (the “Reporting
Period”), the Company shall timely file (or obtain extensions in respect
thereof and file within the applicable grace period) all reports required to be
filed with the SEC pursuant to the 1934 Act.   As long as any
Buyer owns Securities, if the Company is not required to file reports pursuant
to the 1934 Act, it will prepare and furnish to the Buyers and make publicly
available in accordance with Rule 144(c) such information as is required for the
Buyers to sell the Securities under Rule 144. The Company further covenants that
it will take such further action as any holder of Securities may reasonably
request, to the extent required from time to time to enable such Person to sell
such Securities without registration under the Securities Act within the
requirements of the exemption provided by Rule 144, including, without
limitation, causing the transfer agent for the Common Stock to remove legends
and stop transfer instructions with respect to any Warrant Shares which may be
sold under Rule 144 without regard to the availability of current financial
information.

     

    (d) Use of
Proceeds.  The Company will use the proceeds from the sale of
the Securities for general corporate purposes, and not for (x) the
repayment of any outstanding Indebtedness of the Company or any of its
Subsidiaries at any time prior to the scheduled maturity date thereof or
(y) the redemption or repurchase of any of its or its Subsidiaries’ equity
securities other than the repurchase of equity issued to or held by employees,
officers, directors and consultants of the Company or a Subsidiary upon
termination of their employment or services with the Company or a
Subsidiary.

     

    (e) Financial
Information.  The Company agrees to send the following to each
Buyer (or each transferee thereof as permitted by Section 2(f)) during the
Reporting Period (i) unless the following are filed with the SEC through
EDGAR and are available to the public through the EDGAR system, within one (1)
Business Day after the filing thereof with the SEC, a copy of its Annual Reports
and Quarterly Reports on Form 10-K, 10-Q, any interim reports or any
consolidated balance sheets, income statements, stockholders’ equity statements
and/or cash flow statements for any period other than annual, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act, (ii) on the same day as the release
thereof, facsimile or e-mailed copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to all stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.  As used herein, “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.

     

    (f) Listing.  The
Company shall promptly secure the listing of the Shares and the Warrant Shares
upon each national securities exchange and automated quotation system, if any,
upon which the Common Stock is then listed (subject to official notice of
issuance) and shall maintain such listing of all Shares and Warrant Shares from
time to time issuable under the terms of the Transaction
Documents.  The Company shall maintain the Common Stock’s
authorization for quotation on the Principal Market.  Neither the
Company nor any of its 

    
       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

      Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the
Principal Market.  The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).

    

     

    (g) Expenses.  Subject
to Section 8 below, the
parties hereto shall pay their own costs and expenses in connection herewith,
except that, the Company shall pay the documented, reasonable and customary
third party expenses incurred by the Buyers in connection with the negotiation,
preparation and execution of the Transaction Documents, including the reasonable
fees and expenses of one counsel to the Buyers, which shall be Lowenstein
Sandler PC. Such expenses shall be paid not later than, in the case of fees and
expenses associated with the Closing, five (5) Business Days following the
Closing.

     

    (h) Disclosure of Transactions
and Other Material Information.  On or before 11:30 a.m., New
York City time, on the first Business Day following the date of this Agreement,
the Company shall issue a press release and file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act and attaching the material
Transaction Documents (including, without limitation, this Agreement, the form
of Warrant and the Registration Rights Agreement) as exhibits to such filing
(such filing, including all such attachments, the “8-K Filing”).  From
and after the filing of the 8-K Filing with the SEC, no Buyer shall be in
possession of any material, nonpublic information received from the Company or
any of its Subsidiaries or any of their respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing; provided, however,
that the mere possession of such information by a director of the Company who is
affiliated with a Buyer shall not be required to be disclosed in the 8-K Filing;
and provided further that Buyer may have, or may be deemed to have, material,
non-public information received from the Company or its officers, directors,
employees or agents as a result of Buyer having one or more agents serving as a
director on the Board of Directors of the Company.  The Company shall
not, and shall cause each of its Subsidiaries and its and each of their
respective officers, directors, employees and agents, not to, provide any Buyer,
solely in Buyer’s capacity as a purchaser of Securities hereunder, with any
material, nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the 8-K Filing with the SEC without the express
written consent of such Buyer.  Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with
respect to such transactions (i) in substantial conformity with the 8-K Filing
and contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release).

     

    (i) Reservation of
Shares.  The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, a sufficient
number of shares of Common Stock for the purpose of enabling the Company to
issue that number of shares of Common Stock issuable upon exercise of the
Warrants (without taking into account any limitations on the exercise of the
Warrants set forth in the Warrants).

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    (j) Fundamental
Transactions.  So long as any Buyer beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction (as
defined in the Warrants) unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the
Warrants.

     

    (k) Conduct of
Business.  The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

     

    5. REGISTER; TRANSFER AGENT
INSTRUCTIONS.

     

    (a) Register.  The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Shares and the Warrants in which the Company
shall record the name and address of the Person in whose name the Shares
and the Warrants
have been issued (including the name and address of each transferee), the number
of Shares held by such Person, and the number of Warrant Shares issuable upon
exercise of the Warrants held by such Person.  The Company shall keep
the register open and available at all times during business hours for
inspection of any Buyer or its legal representatives, upon reasonable advance
written notice to the Company.

     

    (b) Transfer Agent
Instructions.  The Company shall issue irrevocable instructions
to its transfer agent, American Stock Transfer and Trust Company, and any subsequent
transfer agent, to issue certificates or credit shares to the applicable balance
accounts at The Depository Trust Company (“DTC”), registered in the name
of each Buyer or its respective nominee(s), for the Shares and the Warrant
Shares issued at the Closing or upon exercise of the Warrants in such amounts as
specified from time to time by each Buyer to the Company upon exercise of the
Warrants in the form of Exhibit C
attached hereto (the “Irrevocable Transfer Agent
Instructions”).  The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and stop
transfer instructions to give effect to Section 2(g) hereof, will
be given by the Company to its transfer agent, and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the other Transaction
Documents.  If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(f), the Company
shall permit the transfer and shall promptly instruct its transfer agent to
issue one or more certificates or credit shares to the applicable balance
accounts at DTC in such name and in such denominations as specified by such
Buyer to effect such sale, transfer or assignment.  In the event that
such sale, assignment or transfer involves Shares or Warrant Shares sold,
assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the
Buyer, assignee or transferee, as the case may be, without any restrictive
legend.  The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to a
Buyer.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5(b)
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5(b), that a Buyer
shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate issuance

    
       

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

      and transfer, without the necessity of showing economic loss and
without any bond or other security being required.

    

     

    6. CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

     

    The
obligation of the Company hereunder to issue and sell the Shares and the related
Warrants to each Buyer at the Closing is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions, provided that
these conditions are for the Company’s sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer participating
in the Closing with prior written notice thereof:

     

    (i) Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

     

    (ii) Such
Buyer and each other Buyer shall have delivered to the Company the applicable
Purchase Price for the Shares and the related Warrants being purchased by such
Buyer at the Closing by wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.

     

    (iii) The
representations and warranties of such Buyer shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date), and such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Buyer at or prior
to the Closing Date.

     

    7. CONDITIONS TO EACH BUYER’S
OBLIGATION TO PURCHASE.

     

    The
obligation of each Buyer hereunder to purchase the Shares and the related Warrants
at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each
Buyer’s sole benefit and may be waived by such Buyer at any time in its sole
discretion by providing the Company with prior written notice
thereof.

     

    (i) The
Company shall have duly executed and delivered to such Buyer (a) the Shares
being purchased by such Buyer at the Closing pursuant to Section 1(a) of this
Agreement, (b) the related Warrants being purchased by such Buyer at the
Closing pursuant to Section 1(a) of this
Agreement, and (c) each of the other Transaction Documents to which the
Company is a party and such other certificates or instruments required to be
delivered by it pursuant to the Transaction Documents in connection with the
Closing.

     

    (ii) The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit C
attached hereto, which instructions shall have been executed by the Company and
delivered to and acknowledged in writing by the Company’s transfer
agent.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    (iii) Such
Buyer shall have received the opinion of Paul, Hastings, Janofsky & Walker
LLP, counsel to the Company, dated as of the Closing Date, in substantially the
form of Exhibit D
attached hereto.

     

    (iv) The
Company shall have delivered to such Buyer copies of (a) the Certificate of
Incorporation of the Company and (b) the certificate of incorporation of
Aeolus Sciences, Inc., each as certified by the Secretary of State of the State
of Delaware within ten (10) Business Days of the Closing Date.

     

    (v) The
Company shall have delivered to such Buyer copies of certificates of good
standing for each of the Company and Aeolus Sciences, Inc., each as certified by
the Secretary of State of the State of Delaware within five (5) Business Days of
the Closing Date.

     

    (vi) The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as
adopted by the Company’s board of directors in a form reasonably acceptable to
such Buyer, (ii) the Certificate of Incorporation of the Company, (iii) the
certificate of incorporation of Aeolus Sciences, Inc., (iii) the Bylaws of
the Company and (iv) the bylaws of Aeolus Sciences, Inc., each as in effect
at the Closing, which certificate shall be in form and substance acceptable to
the Buyers and shall provide specimen signatures for each of the officers or
directors of the Company who execute and deliver this Agreement or any other
Transaction Document to be delivered at the Closing by or on behalf of the
Company (in each case, pursuant to the authorization of the Company’s board of
directors).

     

    (vii) The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and at all times through and
including as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which shall be
true and correct as of such specified date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing
Date.  Such Buyer shall have received a certificate, executed by the
Chief Executive Officer, President or Vice President of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer, in form and substance acceptable to the
Buyers.

     

    (viii) The
Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Closing Date, by the
SEC or the Principal Market from trading on the Principal Market nor shall
suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by
falling below the minimum listing maintenance requirements of the Principal
Market.

     

    (ix) The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Securities.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    (x) The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

     

    8. TERMINATION.  In
the event that the Closing shall not have occurred with respect to a Buyer on or
before five (5) Business Days from the date hereof due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above (and the
non-breaching party’s failure to waive such unsatisfied condition(s)), the
non-breaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, that if this
Agreement is terminated in its entirety pursuant to this Section 8 solely as a
result of the Company’s failure to satisfy the conditions in Section 7 above, the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above.

     

    9. MISCELLANEOUS.

     

    (a) Governing Law; Jurisdiction;
Jury Trial.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, the borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof.  Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by
law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

    (b) Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    (c) Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    (d) Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

     

    (e) Entire Agreement;
Amendments.  This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the
Company, their affiliates and Persons acting on their behalf with respect to the
matters discussed herein, and this Agreement, the other Transaction Documents
and the instruments referenced herein and therein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds of the aggregate number of Shares
and Warrant Shares issued and issuable under the Warrants, and any amendment to
this Agreement made in conformity with the provisions of this Section 9(e) shall be
binding on all Buyers and holders of Securities as applicable.  No
provision hereof may be waived other than by an instrument in writing signed by
the party against whom enforcement is sought.  No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the applicable Securities then outstanding.  No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of
Shares or holders of the Warrants, as the case may be.

     

    (f) Notices.  Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile numbers for such communications
shall be:

     

    If to the
Company:

     

    Aeolus
Pharmaceuticals, Inc.

    26361
Crown Valley Parkway, Suite 150

    Mission
Viejo, California 92691

    Telephone:                                (949)
481-9825

    Facsimile:                                (949) 481-9829

    Attention:                                John
L. McManus, President

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

    with a
copy to:

     

    Paul,
Hastings, Janofsky & Walker LLP

     4747
Executive Drive, 12th Floor

    San
Diego, California  92121

    Telephone:                                (858)
XXX-XXXX

    Facsimile:                                (858)
XXX-XXXX

    Attention:                                XXXXXXX

    

    If to the
Transfer Agent:

     

    American
Stock Transfer and Trust Company

    6201 15th
Avenue

    Brooklyn,
New York  11219

    Telephone:                                (718)
XXX-XXXX

    Facsimile:                                (718)
XXX-XXX

    Attention:                                XXXXXXX

    

    If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer’s representatives as set forth on the Schedule of
Buyers,

     

    with a
copy (for informational purposes only) to:

     

    Xmark
Opportunity Partners, LLC

    90 Grove
Street, Suite 201

    Ridgefield,
Connecticut  06877

    Telephone:                                (203)
XXX-XXXX

    Facsimile:                                (203)
XXX-XXXX

    Attention:                                Mitchell
D. Kaye

     

    and

     

    Lowenstein
Sandler PC

    1251
Avenue of the Americas, 18th Floor

    New  York,
New York  10020

    Telephone:                                (212)
XXX-XXXX

    Facsimile:                                (973)
XXX-XXXX

    Attention:                                XXXXXX

    

    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

    (g) Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including
any purchasers of the Shares or the Warrants.  The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least two-thirds of the Shares and Warrant
Shares issued and issuable under the Warrants, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Warrants).  Except
as set forth in Section 2(f) above with
respect to the Warrant Shares, a Buyer may assign some or all of its rights
hereunder without the consent of the Company, in which event such assignee shall
be deemed to be a Buyer hereunder with respect to such assigned rights and shall
enter into a joinder to this Agreement and shall become subject to the terms and
conditions of this Agreement applicable to a Buyer with respect to such rights
assigned to it.

     

    (h) No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

     

    (i) Survival.  Unless
this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in Sections 2 and 3, and the
agreements and covenants set forth in Sections 4, 5 and 9 shall survive
the Closing.  Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

     

    (j) Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     

    (k) Indemnification.

     

    (i) In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder of
the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, 

    
       

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

      instrument or document delivered hereby or thereby or (b) any
breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document delivered
hereby or thereby. The amount paid or payable by an Indemnitee as a result any
Indemnified Liability (or action in respect thereof) shall be deemed to include,
for purposes of this Section 9(k), any
reasonable legal or other expenses reasonably and actually incurred by such
Indemnitee in connection with investigating or defending or preparing to defend
any such action or claim.

    

     

    (ii) Promptly
after receipt by an Indemnitee under this Section 9(k) of notice of
any claim or the commencement of any action, such Indemnitee shall, if a claim
in respect thereof is to be made against the indemnifying party under this Section 9(k), notify the Company
in writing of the claim or the commencement of that action; provided, however,
that the failure to notify the Company shall not relieve the Company from any
liability which it may have under this Section 9(k) except to the
extent the Company, in its capacity as the indemnifying party, has been
prejudiced by such failure.  If any such claim or action shall be
brought against an Indemnitee, and it shall notify the Company thereof, the
Company shall be entitled to participate therein and, to the extent that it
wishes, to assume the defense thereof with counsel satisfactory to such
Indemnitee.  After notice from the Company to the applicable
Indemnitee of its election to assume the defense of such claim or action, the
Company shall not be liable to such Indemnitee under this Section 9(k) for any legal
or other expenses subsequently incurred by such Indemnitee in connection with
the defense thereof other than reasonable costs of investigation.  The
Company, in its capacity as indemnifying party, shall not:

     

    (x)           without
the prior written consent of each applicable Indemnitee (which consent shall not
be unreasonably withheld, conditioned or delayed), settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not such Indemnitees are actual
or potential parties to such claim or action) unless such settlement, compromise
or consent includes an unconditional release of each such Indemnitee from all
liability arising out of such claim, action, suit or proceeding, or

     

    (y)           be
liable for any settlement of any such action effected without its written
consent (which consent shall not be unreasonably withheld, conditioned or
delayed), but if settled with its written consent or if there be a final
judgment for the plaintiff in any such action, the Company, in its capacity as
the indemnifying party, agrees to indemnify and hold harmless each applicable
Indemnitee from and against any loss or liability by reason of such settlement
or judgment.

     

    (iii) If the
indemnification provided for in this Section 9(k) shall for any
reason be unavailable or insufficient to hold harmless an Indemnitee in respect
of any Indemnified Liability (or action in respect thereof), the Company, in its
capacity as the indemnifying party, shall, in lieu of indemnifying such
Indemnitee, contribute to the amount paid or payable by such Indemnitee as a
result of such Indemnified Liability (or action in respect thereof), in such
proportion as is appropriate to reflect the relative fault of the Company on the
one hand and each applicable Indemnitee on the other.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    (l) No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    (m) Remedies.  Each
Buyer and each holder of the Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law.  Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.  Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge any
or all of its obligations under the Transaction Documents, any remedy at law may
prove to be inadequate relief to the Buyers.  The Company therefore
agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

     

    (n) Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) the Transaction Documents,
whenever any Buyer exercises a right, election, demand or option under a
Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Buyer may rescind or
withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

     

    (o) Payment Set
Aside.  To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

     

    (p) Independent Nature of
Buyers’ Obligations and Rights.  The obligations of each Buyer
under any Transaction Document are several and not joint with the obligations of
any other Buyer, and no Buyer shall be responsible in any way for the
performance of the obligations of any other Buyer under any Transaction
Document.  Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as, and the Company acknowledges that the Buyers
do not so constitute, a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group, and the Company will not assert any such claim
with respect to such obligations or the transactions contemplated by the
Transaction Documents and the Company acknowledges that the Buyers are not
acting in 

    
       

      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

      

      concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  The Company
acknowledges and each Buyer confirms that it has independently participated in
the negotiation of the transaction contemplated hereby with the advice of its
own counsel and advisors.  Each Buyer shall be entitled to
independently protect and enforce its rights, including, without limitation, the
rights arising out of this Agreement or out of any other Transaction Documents,
and it shall not be necessary for any other Buyer to be joined as an additional
party in any proceeding for such purpose.

    

     

    [Signature Pages
Follow.]

     

    
      
        
           

        

         

      

      
        29

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

    
      	
               
      

            	
              COMPANY:

            

    

     

    
      	
               
      

            	
              AEOLUS
      PHARMACEUTICALS, INC.

            

    

     

    
      	
               
      

            	
              By:

            	 	
              /s/ Michael P.
      McManus

            	 

    

    
      	
               
      

            	
              Name:

            	
              Michael
      P. McManus

            

    

    
      	
               
      

            	
              Title:

            	
              Chief
      Financial Officer

            

    

     

    
      
        
          Signature
Page to Securities Purchase Agreement

        

         

      

      
         

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

    
      	
               
      

            	
              BUYERS:

            

    

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, L.P.

            

    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY GP, LLC, its General
Partner

            

    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            

    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            

    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 

    

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            

    

    
      	
              Title:

            	
              Co-Managing
      Member

            

    

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, LTD.

            

    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY MANAGER, LLC, its Investment
Manager

            

    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            

    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            

    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 

    

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            

    

    
      	
              Title:

            	
              Co-Managing
      Member

            

    

     

    

     

    
      
        
          Signature
Page to Securities Purchase Agreement

        

         

      

      
         

        
          

        

      

      
         

      

    

    SCHEDULE
OF BUYERS

     

    

    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (6)

            
	
              
                Purchaser

                 

              

            	
              
                Address
      and

                Facsimile
      Number

                (Jurisdiction)

                 

              

            	
              
                Number
      of

                Shares

                 

              

            	
              
                Number
      of

                Warrant
      Shares

                 

              

            	
              
                 

                Purchase
      Price

                 

              

            	
              
                Legal
      Representative’s Address and Facsimile Number

                (if
      different than in column (2))

                 

              

            
	
              Xmark
      Opportunity Fund, L.P.

            	
              c/o
      Xmark Opportunity Partners, LLC

              90
      Grove Street

              Suite
      201

              Ridgefield,
      CT  06877

              Telephone:  (203)
      244-9503

              Facsimile:  (203)
      438-9949

              Attention:  Mitchell
      D. Kaye

              (Delaware)

            	
              1,875,000

            	
              4,687,500

            	
              $525,000.00

            	 
      
	
              Xmark
      Opportunity Fund, Ltd.

            	
              c/o
      Xmark Opportunity Partners, LLC

              90
      Grove Street

              Suite
      201

              Ridgefield,
      CT  06877

              Telephone:  (203)
      244-9503

              Facsimile:  (203)
      438-9949

              Attention:  Mitchell
      D. Kaye

              (Cayman
      Islands)

            	
              3,482,143

            	
              8,705,357

            	
              $975,000.00

            	 
      
	
              Total

            	 
      	
              5,357,143

            	
              13,952,857

            	
              $1,500,000.00

            	 
      
	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (6)

            

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    EXHIBITS

     

    Exhibit
A                      Form
of Warrant

    Exhibit
B                      Form
of Registration Rights Agreement

    Exhibit
C                      Form
of Irrevocable Transfer Agent Instructions

    Exhibit
D                      Form
of Opinion of Company’s Counsel

    

    SCHEDULES

     

    Schedule
3(a)                                Organization
and Qualification

    Schedule
3(b)                                Authorization;
Enforcement; Validity

    Schedule
3(d)                                No
Conflicts

    Schedule
3(e)                                Consents
and Filings

    Schedule
3(k)                                Absence
of Certain Changes

    Schedule
3(o)                                Sarbanes-Oxley
Act

    Schedule
3(p)                                Transactions
with Affiliates

    Schedule
3(q)                                Equity
Capitalization

    Schedule
3(r)                                Indebtedness
and Other Contracts

    Schedule
3(t)                                Insurance

    Schedule
3(u)                                Employee
Relations

    Schedule
3(v)                                Title

    Schedule
3(w)                                Intellectual
Property Rights

    Schedule
3(z)                                Internal
Accounting and Disclosure Controls

    Schedule
3(gg)                                Placement
Agentsex102.htm

    Exhibit 10.2

     

    FORM
OF WARRANT

     

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

     

    AEOLUS
PHARMACEUTICALS, INC.

     

    Warrant
To Purchase Common Stock

     

    

    Warrant
No.: [ ]

    Number of
Shares of Common Stock: [   ]

    Date of
Issuance: March 30, 2009 (“Issuance Date”)

    

    AEOLUS
PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, [     ], the registered holder
hereof or its permitted assigns (the “Holder”), is entitled, subject
to the terms set forth below, to purchase from the Company, at the Exercise
Price (as defined below) then in effect, upon surrender of this Warrant to
Purchase Common Stock (including any Warrants to Purchase Common Stock issued in
exchange, transfer or replacement hereof, the “Warrant”), at any time or
times on or after the date hereof but not after 11:59 p.m., New York time, on
the Expiration Date (as defined below), up to [    ]
(   ) fully paid and nonassessable shares of Common Stock (as
defined below) (as
may be adjusted pursuant to Section 2 or
4 hereof (the
“Warrant Shares”). This
Warrant is one of the Warrants to purchase Common Stock (as may be amended or
restated from time to time, the “SPA Warrants”) issued pursuant
to Section 1 of that certain Securities Purchase Agreement (as may be
amended or restated from time to time, the “Securities Purchase
Agreement”), dated as of March 30, 2009 (the “Subscription Date”), by and
among the Company, as issuer, and the investors listed on the Schedule of Buyers
attached thereto (the “Buyers”). Except as otherwise
defined herein, capitalized terms in this Warrant shall have the meanings set
forth in Section 15.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    1. EXERCISE OF
WARRANT.

     

    (a) Mechanics of
Exercise.  Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)),
this Warrant may be exercised by the Holder on any day on or after the date
hereof, in whole or in part, by (i) delivery of a written notice, in the
form attached hereto as Exhibit A (the “Exercise Notice”), of the
Holder’s election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in
cash or by wire transfer of immediately available funds to an account designated
by the Company in writing on the Subscription Date (or to such other account
designated by the Company in writing by notice to the Holder thereafter) or (B)
by notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 1(d)), provided that
such Cashless Exercise is permitted pursuant to the terms hereof. The Holder
shall not be required to deliver the original Warrant in order to effect an
exercise hereunder. Execution and delivery of the Exercise Notice with respect
to less than all of the Warrant Shares shall have the same effect as
cancellation of the original Warrant and issuance of a new Warrant evidencing
the right to purchase the remaining number of Warrant Shares. On or before the
second (2nd)
Business Day following the date on which the Company has received each of the
fully completed and executed Exercise Notice and the Aggregate Exercise Price
(unless such Exercise Notice indicates exercise pursuant to a Cashless Exercise
and Cashless Exercise is then permitted under the terms hereof) (the “Exercise Delivery Documents”),
the Company shall transmit by email or facsimile an acknowledgment of
confirmation of receipt of the Exercise Delivery Documents to the Holder and the
Company’s transfer agent (the “Transfer Agent”). On or before
the fifth (5th) Trading Day following the date on which the Company has received
all of the Exercise Delivery Documents, the Company shall (X) provided that the
Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, upon the request of the Holder, credit such
aggregate number of Warrant Shares to which the Holder is entitled pursuant to
such exercise to the Holder’s or its designee’s balance account with DTC through
its Deposit Withdrawal Agent Commission system, or (Y) if the Transfer Agent is
not participating in the DTC Fast Automated Securities Transfer Program, issue
and dispatch by overnight courier to the address as specified in the Exercise
Notice, a certificate, registered in the Company’s share register in the name of
the Holder or its designee, for the number of shares of Common Stock to which
the Holder is entitled pursuant to such exercise. Upon receipt by the Company of
the Exercise Delivery Documents, the Holder shall be deemed for all corporate
purposes to have become the holder of record of the Warrant Shares with respect
to which this Warrant has been exercised, irrespective of the date such Warrant
Shares are credited to the Holder’s DTC account or the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant
is submitted in connection with any exercise pursuant to this Section 1(a) and
the number of Warrant Shares represented by this Warrant submitted for exercise
is greater than the number of Warrant Shares being acquired upon an exercise,
then the Company shall as soon as practicable and in no event later than five
(5) Business Days after any exercise (and the receipt of such Warrant) and at
its own expense, issue a new Warrant (in accordance with Section 8(d)) representing the
right to purchase the number of Warrant Shares purchasable immediately prior to
such exercise under this Warrant, less the number of Warrant Shares with respect
to which this Warrant is exercised. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but rather the number of shares of
Common 

    
       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      Stock to be issued shall be rounded down to the nearest whole
number. The Company shall pay any and all transfer taxes which may be payable
with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant (for greater certainty not including any income taxes or capital gains of the Holder or exercising holder or
any liability of the Company to withhold tax).

    

     

    (b) Exercise
Price.  For purposes of this Warrant, “Exercise Price” means
Thirty-Five Cents ($0.35), subject to adjustment as provided
herein.

     

    (c) Company’s Failure to Timely
Deliver Securities.  If within five (5) Trading Days after the
Company’s receipt of the Delivery Documents the Company shall fail to issue and
deliver a certificate to the Holder and register such shares of Common Stock on
the Company’s share register or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s exercise hereunder, and if on or after such Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock in
a good faith transaction with an unaffiliated third party (a “Good Faith Purchase”) to
deliver in satisfaction of a sale by the Holder of shares of Common Stock
issuable upon such exercise that the Holder is actually entitled to receive from
the Company, then the Company shall, within five (5) Business Days after the
Holder’s request and in the Holder’s discretion, and after Holder provides the
Company with written evidence of such Good Faith Purchase either (i) pay cash to
the Holder in an amount equal to the Holder’s total purchase price (including
documented brokerage commissions and other out-of-pocket expenses, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at which
point the Company’s obligation to deliver such certificate (and to issue such
Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver
to the Holder a certificate or certificates representing such Warrant Shares and
pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times
(B) the Weighted Average Price on the date of exercise.

     

    (d) Cashless
Exercise.  Notwithstanding anything contained herein to the
contrary, at any time and from time to time on or after the 180-day anniversary
of the Issuance Date, the Holder may, in its sole discretion, exercise this
Warrant in whole or in part and, in lieu of making the cash payment otherwise
contemplated to be made to the Company upon such exercise in payment of the
Aggregate Exercise Price, elect instead to receive upon such exercise the “Net
Number” of shares of Common Stock determined according to the following formula
(a “Cashless
Exercise”):

     

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

    B

    

    For purposes of the foregoing
formula:

     

    
      	
               
      

            	
              A=
      the total number of shares with respect to which this Warrant is then
      being exercised.

            

    

     

    
      	
               
      

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

            

    

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    
      	
               
      

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

            

    

    

    (e) Disputes. In the case
of a dispute as to the determination of the Exercise Price or the arithmetic
calculation of the Warrant Shares, the Company shall promptly issue to the
Holder the number of Warrant Shares that are not disputed and resolve such
dispute in accordance with Section 13.

     

    (f) Limitations on Exercises;
Beneficial Ownership.  Notwithstanding anything herein to the
contrary, the Company shall not effect the exercise of this Warrant, and the
Holder shall not have the right to exercise this Warrant, to the extent that
after giving effect to such exercise, such Person (together with such Person’s
Affiliates) would beneficially own in excess of 9.99% (as may be adjusted, the
“Maximum Percentage”) of
the shares of Common Stock outstanding immediately after giving effect to such
exercise. For purposes of the foregoing sentence, the aggregate number of shares
of Common Stock beneficially owned by such Person and its Affiliates shall
include the number of shares of Common Stock issuable upon exercise of this
Warrant with respect to which the determination of such sentence is being made,
but shall exclude shares of Common Stock which would be issuable upon (x)
exercise of the remaining, unexercised portion of this Warrant beneficially
owned by such Person and its Affiliates and (y) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its Affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For purposes
of this Warrant, in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company’s most recent Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission (“SEC”) as the case may be, (2)
a more recent public announcement by the Company or (3) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written request of the Holder,
the Company shall within two (2) Business Days confirm in writing to the Holder
the number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company by the Holder and its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may from
time to time increase or decrease the Maximum Percentage to any other percentage
specified in such notice; provided that any
such increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company.

     

    (g) Insufficient Authorized
Shares.  If at any time while this Warrant remains outstanding
the Company does not have a sufficient number of authorized and unreserved
shares of Common Stock to satisfy its obligation to reserve for issuance upon
exercise of this Warrant at 

    
       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      least a number of shares of Common Stock equal to 105% (the “Required Reserve Amount”) of
the number of shares of Common Stock as shall from time to time be necessary to
effect the exercise of all of this Warrant and the other SPA Warrants then
outstanding (an “Authorized
Share Failure”), then the Company shall immediately take all action
necessary to increase the Company’s authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for this Warrant then outstanding. Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders or otherwise obtain written consent from its
stockholders without a meeting for the approval of an increase in the number of
authorized shares of Common Stock. In connection with such meeting or written
consent, the Company shall provide each stockholder with a proxy statement or
written information statement (which such proxy or information statement shall
include all of the information specified in Schedule 14C in accordance with
Rule 14c-2 promulgated under the Exchange Act, in each case as may be
amended or restated from time to time), and shall use its best efforts to
solicit its stockholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

    

     

    2. ADJUSTMENT OF EXERCISE PRICE
AND NUMBER OF WARRANT SHARES.  The Exercise Price and the
number of Warrant Shares shall be adjusted from time to time as
follows:

     

    (a) Adjustment upon Issuance of
shares of Common Stock. If and whenever the Company issues or sells,
or in accordance with this Section 2 is
deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock issued or sold or deemed to
have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the “Applicable Price”) less than
the Exercise Price in effect immediately prior to such issuance or sale or
deemed issuance or sale (the foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Exercise Price in effect
immediately prior to such Dilutive Issuance shall be reduced to an amount equal
to the product of (A) the Exercise Price in effect immediately prior to such
Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I)
the product derived by multiplying the lower of (x) the volume weighted average
Closing Sale Price for the ten (10) consecutive Trading Days immediately
preceding such Dilutive Issuance and (y) the Exercise Price in effect
immediately prior to such Dilutive Issuance (such lower amount, the “Adjustment Price”), by the
number of shares of Common Stock Deemed Outstanding immediately prior to such
Dilutive Issuance plus (II) the consideration, if any, received by the Company
upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the
Adjustment Price by (II) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance. Upon each such adjustment of the
Exercise Price pursuant to this Section 2(a), the number of
Warrant Shares shall be adjusted to the number of shares of Common Stock
determined by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares acquirable upon exercise of this
Warrant immediately prior to such adjustment and dividing the product thereof by
the Exercise Price resulting from such adjustment. In the event an
adjustment is required under this Section 2,

    
       

      
        
          
          

        

        
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      then solely for purposes of determining the adjusted Exercise
Price under this Section 2(a), the following
shall be applicable:

    

     

    (i) Issuance of
Options.  If the Company grants any Options and the lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion, exercise or exchange of any
Convertible Securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 2(a)(i),
the “lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion, exercise or exchange of such
Convertible Securities issuable upon exercise of any such Option” shall be equal
to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock upon the
granting or sale of the Option, upon exercise of the Option and upon conversion,
exercise or exchange of any Convertible Security issuable upon exercise of such
Option. No further adjustment of the Exercise Price or number of Warrant Shares
shall be made upon the actual issuance of such shares of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such shares of Common Stock upon conversion, exercise or exchange of
such Convertible Securities.

     

    (ii) Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per share.
For the purposes of this Section 2(a)(ii), the “lowest
price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof” shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to one share of Common Stock upon the issuance or sale of the
Convertible Security and upon conversion, exercise or exchange of such
Convertible Security. No further adjustment of the Exercise Price or number of
Warrant Shares shall be made upon the actual issuance of such shares of Common
Stock upon conversion, exercise or exchange of such Convertible Securities, and
if any such issue or sale of such Convertible Securities is made upon exercise
of any Options for which adjustment of this Warrant has been or is to be made
pursuant to other provisions of this Section 2(a), no
further adjustment of the Exercise Price or number of Warrant Shares shall be
made by reason of such issue or sale.

     

    (iii) Change in Option Price or
Rate of Conversion. If the purchase price provided for in any Options,
the additional consideration, if any, payable upon the issue, conversion,
exercise or exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or 

    
       

      
        
          
          

        

        
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      exercisable or exchangeable for shares of Common Stock increases
or decreases at any time, the Exercise Price and the number of Warrant Shares in
effect at the time of such increase or decrease shall be adjusted to the
Exercise Price and the number of Warrant Shares which would have been in effect
at such time had such Options or Convertible Securities provided for such
increased or decreased purchase price, additional consideration or increased or
decreased conversion rate, as the case may be, at the time initially granted,
issued or sold. For purposes of this Section 2(a)(iii), if the
terms of any Option or Convertible Security that was outstanding as of the date
of issuance of this Warrant are increased or decreased in the manner described
in the immediately preceding sentence, then such Option or Convertible Security
and the shares of Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
increase or decrease. No adjustment pursuant to this Section 2(a)
shall be made if such adjustment would result in an increase of the Exercise
Price then in effect or a decrease in the number of Warrant Shares.

    

     

    (iv) Calculation of Consideration
Received. In case any Option is issued in connection with the issue or
sale of other securities of the Company, together comprising one integrated
transaction in which no specific consideration is allocated to such Options by
the parties thereto, the Options will be deemed to have been issued for a
consideration of $0.01. If any shares of Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the gross amount
received by the Company therefor. If any shares of Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of such consideration received by the Company will be the fair value
of such consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will be the
Weighted Average Price of such security on the date of receipt. If any shares of
Common Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such shares of Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities will be determined jointly by the Company and the Required
Holders in good faith. If such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders. The determination of such
appraiser shall be final and binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the
Company.

     

    (b) Adjustment upon Subdivision
or Combination of Common Stock.  If the Company at any time on
or after the Subscription Date subdivides (by any stock split, stock

    
       

      
        
          
          

        

        
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      dividend, recapitalization or otherwise) one or more classes of
its outstanding shares of Common Stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision will be
proportionately reduced and the number of Warrant Shares will be proportionately
increased. If the Company at any time on or after the Subscription Date combines
(by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(b)
shall become effective at the close of business on the date the subdivision or
combination becomes effective.

    

     

    (c) Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 2 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features unless such rights qualify as Excluded Securities), then
the Company’s Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of Warrant Shares so as to protect the rights of
the Holder under this Warrant; provided that no such
adjustment pursuant to this Section 2(c)
will increase the Exercise Price or decrease the number of Warrant Shares except
as otherwise determined pursuant to this Warrant.

     

    (d) De Minimis
Adjustments.  No adjustment in
the Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least $0.01 in such price; provided, however, that any adjustment which by reason of this
Section 2(d) is not required to be made shall be carried forward and
taken into account in any subsequent adjustments under this Section 2. All calculations under this Section 2 shall be made by the Company in good faith and shall be
made to the nearest cent or to the nearest one hundredth of a share, as
applicable, provided that the
Company shall not be required to issue any fractional shares pursuant to this
Warrant. No adjustment need be made for a change
in the par value or no par value of the Common Stock.

     

    3. RIGHTS UPON CASH DIVIDENDS
AND DISTRIBUTIONS.  Notwithstanding anything contained herein
to the contrary, if the Company at any time on or after the Subscription Date
and prior to the termination, cancellation or full satisfaction of this Warrant,
pays a cash dividend, or makes any other cash distribution to its stockholders
(in each case other than in connection with the issuance, exercise, exchange or
conversion of Excluded Securities), then:

     

    (a) the
Exercise Price in effect immediately prior to such payment or dividend will be
reduced to $0.01 (there shall not be any adjustment of the number of Warrant
Shares in connection with an adjustment of the Exercise Price pursuant to this
Section 3;
provided; however, that upon the occurrence of an event described in Section 4, the
number of Warrant Shares shall be adjusted as set forth in Section 4);
and

     

    (b) the
Holder shall receive, for each Warrant Share that has not been issued under
this Warrant as of the record date for such payment or distribution or, in the
absence of a record date, as of immediately prior to such payment or
distribution (each, an “Unissued Warrant Share”), the
amount of the cash dividend or cash distribution the Holder would have

    
       

      
        
          
          

        

        
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      received had it exercised this Warrant in full for all such
Unissued Warrant Shares immediately prior to the record date for such payment or
distribution or, in the absence of a record date, as of immediately prior to
such payment or distribution.

    

     

    4. RIGHTS UPON DISTRIBUTION OF
ASSETS.  Except as set forth in Section 3 above,
if the Company shall make any dividend or other distribution of its assets (or
rights to acquire its assets) to holders of shares of Common Stock (other than
in connection with the issuance, exercise, exchange or conversion of Excluded
Securities), by way of return of capital or otherwise (including, without
limitation, any distribution of cash, stock or other securities, property or
options by way of a dividend, spin off, reclassification, corporate
rearrangement, scheme of arrangement or other similar transaction)
(a “Distribution”),
at any time prior to the termination, cancellation or full satisfaction of this
Warrant, then, in each such case:

     

    (a) any
Exercise Price in effect immediately prior to the close of business on the date
of Distribution shall be reduced, effective as of the close of business on the
date of Distribution, to a price determined by multiplying such Exercise Price
by a fraction of which (i) the numerator shall be the Weighted Average Price of
the shares of Common Stock on the Trading Day immediately preceding such date of
Distribution minus the value of the Distribution (as determined in good faith by
the Company’s Board of Directors) applicable to one share of Common Stock, and
(ii) the denominator shall be the Weighted Average Price of the shares of Common
Stock on the Trading Day immediately preceding such date of Distribution;
and

     

    (b) the
number of Warrant Shares shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the date of Distribution multiplied by the reciprocal of the
fraction set forth in the immediately preceding paragraph (a).

     

    5. FUNDAMENTAL
TRANSACTIONS.

     

    (a) Fundamental
Transactions.  The Company shall not enter into or be party to
a Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Warrant and the other Transaction
Documents (as defined in the Securities Purchase Agreement) in accordance with
the provisions of this Section 5(a)
pursuant to written agreements in form and substance reasonably satisfactory to
the Required Holders and approved by the Required Holders prior to such
Fundamental Transaction, including agreements to deliver to each holder of the
SPA Warrants in exchange for such Warrants a security of the Successor Entity
evidenced by a written instrument substantially similar in form and substance to
this Warrant, including, without limitation, an adjusted exercise price equal to
the value for the shares of Common Stock reflected by the terms of such
Fundamental Transaction, and exercisable for a corresponding number of shares of
capital stock equivalent to the shares of Common Stock acquirable and receivable
upon exercise of this Warrant (without regard to any limitations on the exercise
of this Warrant) prior to such Fundamental Transaction, and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant 

    
       

      
        
          
          

        

        
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      referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall
assume all of the obligations of the Company under this Warrant with the same
effect as if such Successor Entity had been named as the Company herein. Upon
consummation of the Fundamental Transaction, the Successor Entity shall deliver
to the Holder confirmation that there shall be issued upon exercise of this
Warrant at any time after the consummation of the Fundamental Transaction, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) issuable upon the exercise of the Warrant prior to such
Fundamental Transaction, such shares of the publicly traded Common Stock (or its
equivalent) of the Successor Entity (including its Parent Entity) which the
Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had this Warrant been exercised immediately prior to
such Fundamental Transaction, as adjusted in accordance with the provisions of
this Warrant. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon an exercise of this Warrant at any time after the
consummation of the Fundamental Transaction but prior to the Expiration Date, in
lieu of the shares of the Common Stock (or other securities, cash, assets or
other property) issuable upon the exercise of this Warrant prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Warrant been exercised immediately
prior to such Fundamental Transaction. Provision made pursuant to the preceding
sentence shall be in a form and substance reasonably satisfactory to the Holder.
The provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and Corporate Events and shall be applied without
regard to any limitations on the exercise of this Warrant.

    

     

    (b) Black-Scholes Redemption
Offer.  Notwithstanding the foregoing, the Company may
enter into a Fundamental Transaction where the Successor Entity (including its
Parent Entity) is not a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market if the Holder shall receive a
written offer from the Company to exchange for cancellation this Warrant for an
amount in cash determined in accordance with the Black-Scholes Option Pricing
Method (with volatility being determined, for purposes of such pricing method,
by reference to the trading prices of the Common Stock on the Principal Market
during the 100 trading days immediately preceding the date of the first public
announcement of the Fundamental Transaction).

     

    6. NONCIRCUMVENTION.  The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith carry out all the provisions of this Warrant and take all
action as it believes may be required to protect the rights of the Holder in
accordance with the terms of this Warrant. Without limiting the generality of
the foregoing, the Company (i) shall not increase the par value of any
shares of Common Stock receivable upon the exercise of this Warrant above the
Exercise Price then in effect, 

    
       

      
        
          
          

        

        
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      (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant and
(iii) shall, so long as any of the SPA Warrants are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
shares of Common Stock, solely for the purpose of effecting the exercise of the
SPA Warrants, 105% of the number of shares of Common Stock as shall from time to
time be necessary to effect the exercise of the SPA Warrants then outstanding
(without regard to any limitations on exercise).

    

     

    7. WARRANT HOLDER NOT DEEMED A
STOCKHOLDER.  Except as set forth in Section 3 above
and as otherwise specifically provided herein, the Holder, solely in such
Person’s capacity as a holder of this Warrant, shall not be entitled to vote or
receive dividends or be deemed the holder of share capital of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer
upon the Holder, solely in such Person’s capacity as the Holder of this Warrant,
any of the rights of a stockholder of the Company or any right to vote, give or
withhold consent to any corporate action (whether any reorganization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares
which such Person is then entitled to receive upon the due exercise of this
Warrant. In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on the Holder to purchase any securities (upon exercise
of this Warrant or otherwise) or as a stockholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the
Company.

     

    8. REISSUANCE OF
WARRANTS.

     

    (a) Transfer of
Warrant.  This Warrant may be offered for sale, sold,
transferred or assigned without the consent of the Company, except as may
otherwise be required by Section 2(f) of the Securities Purchase Agreement.
If this Warrant is to be transferred, the Holder shall surrender this Warrant to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the Holder a new Warrant (in accordance with Section 8(d)),
registered as the Holder may request, representing the right to purchase the
number of Warrant Shares being transferred by the Holder and, if less than the
total number of Warrant Shares then underlying this Warrant is being
transferred, a new Warrant (in accordance with Section 8(d)) to
the Holder representing the right to purchase the number of Warrant Shares not
being transferred.

     

    (b) Lost, Stolen or Mutilated
Warrant.  Upon receipt by the Company of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Warrant, the
Company shall execute and deliver to the Holder a new Warrant (in accordance
with Section 8(d))
representing the right to purchase the Warrant Shares then underlying this
Warrant.

     

    (c) Exchangeable for Multiple
Warrants. This Warrant is exchangeable, upon the surrender hereof by the
Holder at the principal office of the Company, for a new Warrant or Warrants (in
accordance with Section 8(d))
representing in the aggregate the right to purchase 

    
       

      
        
          
          

        

        
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      the number of Warrant Shares then underlying this Warrant, and
each such new Warrant will represent the right to purchase such portion of such
Warrant Shares as is designated by the Holder at the time of such surrender;
provided, however, that no
Warrants for fractional shares of Common Stock shall be given.

    

     

    (d) Issuance of New
Warrants.  Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 8(a) or
Section 8(c),
the Warrant Shares designated by the Holder which, when added to the number of
shares of Common Stock underlying the other new Warrants issued in connection
with such issuance, does not exceed the number of Warrant Shares then underlying
this Warrant), (iii) shall have an issuance date, as indicated on the face of
such new Warrant which is the same as the Issuance Date, and (iv) shall have the
same rights and conditions as this Warrant.

     

    9. NOTICES.  Whenever
notice is required to be given under this Warrant, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in
reasonable detail a description of such action and the reason therefore. Without
limiting the generality of the foregoing, the Company will give written notice
to the Holder (i) within three (3) Business Days following any adjustment of the
Exercise Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least ten (10) days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the shares of Common Stock, (B) with respect to
any grants, issuances or sales of any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property to all holders of
shares of Common Stock (other than Excluded Securities) or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case
that such information has been made known to the public prior to or in
conjunction with such notice being provided to the Holder.

     

    10. AMENDMENT AND
WAIVER.  Except as otherwise provided herein, the provisions of
this Warrant may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Required Holders;
provided, however, that without
the prior written consent of the Holder, no such action may be taken that (x)
would increase the exercise price of any SPA Warrant or decrease the number of
shares or class of stock obtainable upon exercise of any SPA Warrant (except in
connection with recapitalizations, reclassifications, stock dividends, stock
splits and the like), (y) has or would reasonably be expected to have a material
adverse effect upon the rights of the Holder under this Warrant or (z) would
modify this Section 10; provided that,
notwithstanding the foregoing, none of a Dilutive Issuance, a Distribution or a
Fundamental Transaction shall require the prior written consent of the Holder
(solely in its capacity as a holder of this Warrant) under this Section 10. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the SPA Warrants then outstanding unless consented to in
writing by the Holder and each other holder of the SPA Warrants then
outstanding.

     

    
      
        
        

      

      
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    11. GOVERNING
LAW.  This Warrant shall be governed by and construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Warrant shall be governed by,
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

     

    12. CONSTRUCTION; HEADINGS;
REFERENCES.  This Warrant shall be deemed to be jointly drafted
by the Company and all the Buyers and shall not be construed against any person
as the drafter hereof. The headings of this Warrant are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Warrant. Unless otherwise provided, each reference to a “Section” herein shall
be deemed a reference to such section of this Warrant.

     

    13. DISPUTE
RESOLUTION.  In the case of a dispute as to the determination
of the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within five (5) Business Days of receipt of the Exercise Notice giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within two (2) Business Days submit via facsimile (a) the
disputed determination of the Exercise Price to an independent, reputable
investment bank selected by the Company and approved by the Holder, which
approval shall not be unreasonably withheld, conditioned or delayed, or (b) the
disputed arithmetic calculation of the Warrant Shares to the Company’s
independent, outside accountant. The Company shall use its best efforts to cause
at its expense the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the Holder
of the results no later than ten Business Days from the time it receives the
disputed determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

     

    14. REMEDIES, OTHER OBLIGATIONS,
BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this
Warrant shall be cumulative and in addition to all other remedies available
under this Warrant and the other Transaction Documents, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the right of the Holder right to pursue actual
damages for any failure by the Company to comply with the terms of this Warrant.
The Company acknowledges that a breach by it of its obligations hereunder may
cause irreparable harm to the Holder and that the remedy at law for any such
breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach, without
the necessity of showing economic loss and without any bond or other security
being required.

     

    15. CERTAIN
DEFINITIONS.  For purposes of this Warrant, the following terms
shall have the following meanings:

     

    (a) “1933 Act” means the Securities
Act of 1933, as amended.

     

    
      
        
        

      

      
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    (b) “Affiliate” means with
respect to a specified Person, any other Person who or which is (a) directly or
indirectly controlling, controlled by or under common control with the specified
Person, or (b) any member, stockholder, director, officer, manager, or
comparable principal of, or relative or spouse of, the specified Person. For
purposes of this definition, “control”, “controlling”, and “controlled” mean the
right to exercise, directly or indirectly, more than fifty percent of the voting
power of the stockholders, members or owners and, with respect to any
individual, partnership, trust or other entity or association, the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of the controlled entity.

     

    (c) “Approved Stock Plan” means
any employee benefit plan which has been or hereafter is approved by the board
of directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, consultant, officer or director for services provided to
the Company.

     

    (d) “Bloomberg” means Bloomberg
Financial Markets.

     

    (e) “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.

     

    (f) “Closing Sale Price” means, as
of any date, the last closing trade price for the Common Stock on the Principal
Market, as reported by Bloomberg, or, if the Principal Market begins to operate
on an extended hours basis and does not designate the closing trade price then
the last trade price of such security prior to 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last trade price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last trade price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no last trade price is reported for such security by Bloomberg, the average
of the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the “pink sheets”. If the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Sale Price on such date shall be the fair
market value of the Common Stock as mutually determined by the Company and the
Holder in good faith. If the Company and the Holder are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Section 13. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the
applicable calculation period.

     

    (g) “Common Stock” means
(i) the Company’s shares of common stock, par value $0.01 per share, and
(ii) any share capital into which such common stock shall have been changed
or any share capital resulting from a reclassification of such common
stock.

     

    (h) “Common Stock Deemed
Outstanding” means, at any given time, the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding pursuant to Sections 2(a)(i) and 2(a)(ii)

    
       

      
        
          
          

        

        
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      hereof regardless of whether the Options or Convertible Securities
are actually exercisable at such time, but excluding any shares of Common Stock
owned or held by or for the account of the Company or issuable upon exercise of
the SPA Warrants.

    

     

    (i) “Convertible Securities” means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.

     

    (j) “Eligible Market” means The New
York Stock Exchange, Inc., NYSE Alternext US LLC, The NASDAQ Global Market, The
NASDAQ Global Select Market, The NASDAQ Capital Market or the OTC Bulletin
Board.

     

    (k) “Excluded Securities” means any
(I) Common Stock issued or issuable, directly or indirectly: (i) in
connection with any Approved Stock Plan or with respect to any shares of Common
Stock reserved as employee shares (or for consultants, officers or directors of
the Company and its Subsidiaries) as of the date immediately preceding the
Issuance Date; (ii) upon conversion or exercise of any senior convertible
note (each a “Note”) or
warrant (each a “Prior
Warrant”) issued or issuable pursuant to that certain Securities Purchase
Agreement, dated as of August 1, 2008, by and among the Company and the
investors listed on the Schedule of Buyers attached thereto, as may be amended
or restated from time to time (the “Prior Purchase Agreement”);
(iii) pursuant to a bona fide firm commitment underwritten public offering
with a nationally recognized underwriter which generates gross proceeds to the
Company in excess of $10,000,000 (other than an
“at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act,
and “equity lines”); (iv) upon conversion of any Options or Convertible
Securities which are outstanding on the day immediately preceding the Issuance
Date, provided that the exercise or conversion price of such Options or
Convertible Securities are not reduced on or after the Issuance Date (except in
connection with recapitalizations, reclassifications, stock dividends, stock
splits and the like); (v) in connection with any merger, consolidation,
acquisition, or similar business combination approved by the board of directors
of the Company; (vi) pursuant to any equipment loan or leasing arrangement,
real property leasing arrangement or debt financing from a bank or similar
financial institution approved by the board of directors of the Company;
(vii) pursuant to Section 4(m) of the Prior Purchase Agreement;
(viii) in connection with the payment of interest, penalties, premiums or
other liquidated damages on the Notes or under any registration rights agreement
of the Company in effect prior to the Issuance Date (provided that such
registration rights agreement was disclosed to the Buyers on or prior to the
Issuance Date or an exhibit to a Current Report, Quarterly Report or Annual
Report of the Company filed with the SEC at least two (2) Business Days prior to
the Issuance Date); (ix) upon conversion of any Series B nonredeemable
convertible preferred stock, par value $0.01 per share, of the Company (“Series B Preferred”),
outstanding as of the Issuance Date; or (x) under the Securities Purchase
Agreement or under any SPA Warrants, including this Warrant; (II) any Series B
preferred issued or issuable upon conversion of the convertible promissory note
originally issued on February 8, 2007 by the Company to Elan Pharma
International Limited and any replacements thereof (the “Elan Note”) (provided,
however, that the terms relating to the conversion of such note shall not be
materially modified and the principal amount of such note, after deducting for
amounts converted, repaid, redeemed or prepaid, shall not have been increased)
(the “Elan Note Series B
Preferred”); (III) any Common Stock issued or issuable upon conversion of
any of the Elan Note Series B Preferred; 

    
       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      (IV) any warrant issued or issuable pursuant to the terms of the
Elan Note (an “Elan
Warrant”); (V) any Series B Preferred issued or issuable upon exercise of
any Elan Warrant (the “Elan
Warrant Series B”); (VI) any Common Stock issued or issuable upon
conversion of any Elan Warrant Series B; (VII) any Note and any Prior
Warrant; and (VIII) any Common Stock issued or issuable pursuant to a stock
split, stock dividend, recapitalization, exchange or similar event or otherwise
relating to any of the securities referred to in clauses (I) through (VII)
hereof.

    

     

    (l) “Expiration Date” means the
date five (5) years after the Issuance Date or, if such date falls on a day
other than a Business Day or on which trading does not take place on the
Principal Market (a “Holiday”), the first date
thereafter that is not a Holiday.

     

    (m) “Fundamental Transaction”
means any of the following transactions, in which the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person or Persons, and the holders of the Voting Stock (not
including any shares of Voting Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
consolidation or merger) immediately prior to such consolidation or merger
hold or have the right to direct the voting of less than 50% of the Voting Stock
or such voting securities of such other surviving Person immediately following
such transaction, or (ii) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to another
Person, or (iii) be the subject of a purchase, tender or exchange offer
that is accepted by the holders of more than 50% of the outstanding shares of
Voting Stock (not including any shares of Voting Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person other than Goodnow Capital, L.L.C., Xmark
Opportunity Partners, LLC or an Affiliate of either of the foregoing whereby
such other Person acquires more than 50% of the outstanding shares of Voting
Stock (not including any shares of Voting Stock held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock purchase agreement or other business
combination), or (v) be the subject of a change in ownership such that any
“person” or “group” (as these terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act) other than Goodnow Capital, L.L.C., Xmark Opportunity
Partners, LLC or an Affiliate of either of the foregoing is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 50% of the aggregate ordinary voting power represented by
issued and outstanding Common Stock.

     

    (n) “Options” means any rights,
warrants or options to subscribe for or purchase shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common
Stock.

     

    (o) “Parent Entity” of a Person
means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    (p) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.

     

    (q) “Principal Market” means the
Eligible Market the Common Stock is then listed on.

     

    (r) “Required Holders” means the
holders of the SPA Warrants representing at least fifty and one-tenth percent
(50.1%) of the shares of Common Stock underlying the SPA Warrants then
outstanding.

     

    (s) “Subsidiary” means each
“Significant Subsidiary” (as such term is defined in Rule 1-02 of Regulation S-X
of the 1933 Act) of the Company.

     

    (t) “Successor Entity” means the
Person, which may be the Company, formed by, resulting from or surviving any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person’s Parent Entity.

     

    (u) “Trading Day” means any day on
which the Common Stock are traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the
principal securities exchange or securities market on which the Common Stock are
then traded; provided that
“Trading Day” shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

     

    (v) “Voting Stock” of a Person
means capital stock of such Person of the class or classes pursuant to which the
holders thereof have the general voting power to elect, or the general power to
appoint, at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

     

    (w) “Weighted Average Price” means,
for any security as of any date, the dollar volume-weighted average price for
such security on the Principal Market during the period beginning at 9:30:01
a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as
reported by Bloomberg through its “Volume at Price” function or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York City time,
and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg, or, if
no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as
reported in the “pink sheets”. If the Weighted Average Price cannot be
calculated for such security on such date on any of the 

    
       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

      foregoing bases, the Weighted Average Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the Required Holders in good faith; provided that if the
Company and the Required Holders are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 13 with
the term “Weighted Average Price” being substituted for the term “Exercise
Price.” All such determinations shall be appropriately adjusted for any share
dividend, share split or other similar transaction during such
period.

    

     

    [Signature Page Follows.]

    

    
      
        
          
             

          

           

        

        
          18

          
            

          

        

        
           

        

      

    

    

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

     

    

    AEOLUS
PHARMACEUTICALS, INC.

    

    

    

    By:           /s/ Michael P.
McManus                                                      

    Name:                      Michael
P. McManus

    Title:                      Chief
Financial Officer

    

    
      
        
          
            Signature
Page to Warrant to Purchase Common Stock 

          

           

        

        
           

          
            

          

        

        
           

          
            EXHIBIT
A 

            

          

        

      

    

    

    EXERCISE
NOTICE

    TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

    WARRANT
TO PURCHASE COMMON STOCK

    

    AEOLUS
PHARMACEUTICALS, INC.

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

     

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

     

    
      	
               
      

            	
              ____________

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

            

    

     

    
      	
               
      

            	
              ____________

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

            

    

     

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

     

    3.           Maximum Exercise
Percentage.  The Holder represents and warrants to the Company
that the Holder, together with the Holder’s affiliates, will not beneficially
own in excess of [9.99]%1 of the shares of Common Stock of the Company
outstanding immediately after giving effect to the exercise of the Warrant for
the number of Warrant Shares to be issued pursuant to this Exercise
Notice.

     

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

     

    

    Date:
_______________ __, ______

    

    

    

     Name
of Registered Holder

    

    

    By:           

    Name:

    Title:

    

      

    

      
      1 Such
amount to be the Maximum Percentages.

       

    

    

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    

    ACKNOWLEDGMENT

    

    

    The
Company hereby acknowledges this Exercise Notice and hereby directs American
Stock Transfer and Trust Company to issue the above indicated number of shares
of Common Stock in accordance with the Irrevocable Transfer Agent Instructions
dated March 30, 2009 from the Company and acknowledged and agreed to by American
Stock Transfer and Trust Company.

     

    

    AEOLUS
PHARMACEUTICALS, INC.

    

    

    

    By:                                                                

    Name:

    Title:

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