diff --git a/dotnet/nuget/nuget-package.props b/dotnet/nuget/nuget-package.props
index 6d1c657fa8..2cbd1356bc 100644
--- a/dotnet/nuget/nuget-package.props
+++ b/dotnet/nuget/nuget-package.props
@@ -8,7 +8,7 @@
     <PackageVersion Condition="'$(IsReleaseCandidate)' != 'true' AND '$(VersionSuffix)' == ''">$(VersionPrefix)-preview.260402.1</PackageVersion>
     <PackageVersion Condition="'$(IsReleased)' == 'true'">$(VersionPrefix)</PackageVersion>
     <!-- Branch-specific override to distinguish from mainline packages -->
-    <PackageVersion>0.9.0-hosted.260403.1</PackageVersion>
+    <PackageVersion>0.9.0-hosted.260403.2</PackageVersion>
     <GitTag>1.0.0</GitTag>
 
     <Configurations>Debug;Release;Publish</Configurations>
diff --git a/dotnet/samples/04-hosting/FoundryResponsesHosting/FoundryResponsesHosting.csproj b/dotnet/samples/04-hosting/FoundryResponsesHosting/FoundryResponsesHosting.csproj
index 3dfab4ad48..269754203d 100644
--- a/dotnet/samples/04-hosting/FoundryResponsesHosting/FoundryResponsesHosting.csproj
+++ b/dotnet/samples/04-hosting/FoundryResponsesHosting/FoundryResponsesHosting.csproj
@@ -6,7 +6,7 @@
     <Nullable>enable</Nullable>
     <ImplicitUsings>enable</ImplicitUsings>
     <CentralPackageTransitivePinningEnabled>false</CentralPackageTransitivePinningEnabled>
-    <NoWarn>$(NoWarn);NU1903;NU1605</NoWarn>
+    <NoWarn>$(NoWarn);NU1903;NU1605;MAAIW001</NoWarn>
   </PropertyGroup>
 
   <ItemGroup>
diff --git a/dotnet/src/Microsoft.Agents.AI.Foundry/Hosting/AgentFrameworkResponseHandler.cs b/dotnet/src/Microsoft.Agents.AI.Foundry/Hosting/AgentFrameworkResponseHandler.cs
index 3423a0b4a3..eaacbc67a3 100644
--- a/dotnet/src/Microsoft.Agents.AI.Foundry/Hosting/AgentFrameworkResponseHandler.cs
+++ b/dotnet/src/Microsoft.Agents.AI.Foundry/Hosting/AgentFrameworkResponseHandler.cs
@@ -95,6 +95,7 @@ public class AgentFrameworkResponseHandler : ResponseHandler
             while (true)
             {
                 bool shutdownDetected = false;
+                ResponseStreamEvent? failedEvent = null;
                 ResponseStreamEvent? evt = null;
                 try
                 {
@@ -109,6 +110,26 @@ public class AgentFrameworkResponseHandler : ResponseHandler
                 {
                     shutdownDetected = true;
                 }
+                catch (Exception ex) when (ex is not OperationCanceledException && !emittedTerminal)
+                {
+                    // Catch agent execution errors and emit a proper failed event
+                    // with the real error message instead of letting the SDK emit
+                    // a generic "An internal server error occurred."
+                    if (this._logger.IsEnabled(LogLevel.Error))
+                    {
+                        this._logger.LogError(ex, "Agent execution failed for response {ResponseId}.", context.ResponseId);
+                    }
+
+                    failedEvent = stream.EmitFailed(
+                        ResponseErrorCode.ServerError,
+                        ex.Message);
+                }
+
+                if (failedEvent is not null)
+                {
+                    yield return failedEvent;
+                    yield break;
+                }
 
                 if (shutdownDetected)
                 {
diff --git a/dotnet/tests/Microsoft.Agents.AI.Foundry.UnitTests/Hosting/AgentFrameworkResponseHandlerTests.cs b/dotnet/tests/Microsoft.Agents.AI.Foundry.UnitTests/Hosting/AgentFrameworkResponseHandlerTests.cs
index dc38c42739..b1bdd31916 100644
--- a/dotnet/tests/Microsoft.Agents.AI.Foundry.UnitTests/Hosting/AgentFrameworkResponseHandlerTests.cs
+++ b/dotnet/tests/Microsoft.Agents.AI.Foundry.UnitTests/Hosting/AgentFrameworkResponseHandlerTests.cs
@@ -538,7 +538,7 @@ public class AgentFrameworkResponseHandlerTests
     }
 
     [Fact]
-    public async Task CreateAsync_AgentThrows_ExceptionPropagates()
+    public async Task CreateAsync_AgentThrows_EmitsFailedEventWithErrorMessage()
     {
         // Arrange
         var agent = new ThrowingAgent(new InvalidOperationException("Agent crashed"));
@@ -561,13 +561,18 @@ public class AgentFrameworkResponseHandlerTests
         mockContext.Setup(x => x.GetInputItemsAsync(It.IsAny<CancellationToken>()))
             .ReturnsAsync(Array.Empty<OutputItem>());
 
-        // Act & Assert
-        await Assert.ThrowsAsync<InvalidOperationException>(async () =>
+        // Act — collect all events
+        var events = new List<ResponseStreamEvent>();
+        await foreach (var evt in handler.CreateAsync(request, mockContext.Object, CancellationToken.None))
         {
-            await foreach (var _ in handler.CreateAsync(request, mockContext.Object, CancellationToken.None))
-            {
-            }
-        });
+            events.Add(evt);
+        }
+
+        // Assert — should contain created, in_progress, and failed (with real error message)
+        Assert.Contains(events, e => e is ResponseCreatedEvent);
+        Assert.Contains(events, e => e is ResponseInProgressEvent);
+        var failedEvent = Assert.Single(events.OfType<ResponseFailedEvent>());
+        Assert.Contains("Agent crashed", failedEvent.Response.Error.Message);
     }
 
     [Fact]