Document:

EXHIBIT 4.5
                                ESCROW AGREEMENT

     AGREEMENT made and entered into this first day of September, 2000 by and
among PHARMOS CORPORATION, a Nevada corporation, having an address at 99 Wood
Avenue South, Suite 301, Iselin, New Jersey 08830 (the "Company"), MILLENNIUM
PARTNERS, LP, STRONG RIVER INVESTMENTS, INC. and ST. ALBANS PARTNERS, LTD. and
KLEINBERG, KAPLAN, WOLFF & COHEN, P.C., having an address at 551 Fifth Avenue,
18th Floor, New York, New York 10176 ("Escrow Agent").

                               W I T N E S S E T H

     WHEREAS, the Company and the Investors have entered into a Purchase
Agreement dated September 1, 2000 (the "Purchase Agreement") pursuant to which
the Investors are purchasing from the Company, the Company's 6% Convertible
Debentures due February 28, 2002 (the "Debentures");

     NOW, THEREFORE, it is agreed as follows:

     1. Deposit into Escrow Accounts. At the closing of the sale of the
Debentures, each Investor severally shall deposit 50% of the amount of its
Purchase Price from each purchase of Debentures (the "Escrow Proceeds") into a
separate Escrow Account maintained by the Escrow Agent for such Investor (an
"Investor Escrow Account"). Thereafter the Investor Escrow Accounts shall be
maintained by the Escrow Agent in accordance with the terms of this Agreement.
The Escrow Agent, by its execution and delivery of this Agreement, hereby agrees
to accept receipt of the Escrow proceeds.

     2. Release of Escrowed Proceeds upon Conversion of Debentures.

     (a) Upon the conversion by an Investor of, individually or in the
aggregate, 18.75% of the initial principal amount of Debentures held by such
Investor, the Investor and the Company shall promptly thereafter execute a joint
certificate to the Escrow Agent certifying that 18.75% in aggregate principal
amount of such Investor's Debentures have been converted by the Investor (a
"18.75% Conversion Notice"). Upon receipt of an 18.75% Conversion Notice, the
Escrow Agent shall release 12.5% of the Escrowed Proceeds received from such
Investor from the Investor Escrow Account relating to such Investor for each
$18.75% of principal amount of such Investor's Debentures converted.

     (b) If, following the conversion of Debentures referred to above by the
Investor or otherwise, 25% of the initial in principal amount or less remains of
such Investor's Debentures, then, upon the conversion of, individually or in the
aggregate, 6.25% in principal amount of Debentures by such Investor, such
Investor and the Company shall promptly thereafter execute a joint certificate
to the Escrow Agent certifying that 6.25% in aggregate principal amount of such
Investor's Debentures has been converted (a "6.25% Conversion Notice"). Upon
receipt of a 6.25% Conversion Notice, the Escrow Agent shall release to the
Company 12.5% of the Escrowed Proceeds received from such Investor from the
Investor Escrow Account relating to such Investor for each 6.25% in principal
amount of Debentures converted.

<PAGE>

     3. Release of Escrowed Proceeds upon Redemption of Debentures. Upon receipt
by an Investor of payment in full from the Company for its Debentures, whether
pursuant to redemption or otherwise (including, without limitation, following
the redemption of all of the Debentures pursuant to Section 6 of the
Debentures), such Investor and the Company shall execute a joint certificate to
the Escrow Agent certifying that the Investor's Debentures have been paid in
full (a "Redemption Certificate"). Upon receipt of a Redemption Certificate, the
Escrow Agent shall release to the Company all of the Escrowed Proceeds remaining
in the Investor Escrow Account relating to such Investor.

     4. Release of Escrowed Proceeds Upon Events of Default under the
Debentures.

     (a) If, on the maturity of the Debentures, any Debentures shall remain
unpaid, then upon receipt by the Escrow Agent of a written notice from an
Investor holding such Debentures certifying that such Debentures remain unpaid,
the Escrow Agent shall release to such Investor all of the Escrowed Proceeds
remaining in the Investor Escrow Account relating to such Investor, and such
Escrowed Proceeds shall be applied to reduce amounts due and owing to such
Investor with the respect to the Debentures and the Purchase Agreement as
follows: first, to the payment of fees and expenses, second, to interest payable
in cash with respect to the Debentures, and third, to the outstanding principal
under the Debentures.

     (b) Following an Event of Default under the Debentures (other than with
respect to failure to pay principal or interest on maturity), an Investor may,
at its option, deliver a certificate to the Escrow Agent and the Company
specifying the nature of the Event of Default. If within ten days of receipt of
such certificate, the Escrow Agent and the Investor shall not have received
notice from the Company that it disputes the occurrence of an Event of Default
under the Debentures, then the Escrow Agent shall releases to such Investor all
of the Escrowed Proceeds remaining in the Investor Escrow Account relating to
such Investor. In the event that the Company does deliver a timely notice to the
Escrow Agent and the Investor that it disputes such determination, then such
dispute shall be resolved by arbitration conducted as follows: the arbitration
shall be conducted in New York, New York, before an arbitration panel of three
arbitrators, one of whom shall be selected by the Investor, one of whom shall be
selected by the Company, with the remaining arbitrator to be agreed upon by the
first two. The arbitration shall be conducted in accordance with the commercial
arbitration rules of the American Arbitration Association then in effect. Any
arbitration decision or award shall be final and conclusive as to the parties to
this Agreement and their successors and assigns; judgment upon such decision or
award may be entered in any competent Court. In the event that the arbitration
shall be decided in favor of the Investor, then upon written notice by the
Investor to the Escrow Agent of such decision, the Escrow Agent shall
immediately release the remaining Escrow Proceeds to the Investor.

     5. Condition to Escrow Agent's Duties. The acceptance by the Escrow Agent
of its duties as such under this Agreement is subject to the following terms and
conditions, which all of the parties to this Agreement hereby agree shall govern
and control with respect to the rights, duties, liabilities and immunities of
the Escrow Agent:

     (a) The Escrow Agent is not a party to, nor is it bound by, any other
agreement by which the other parties hereto may be bound (whether or not it has
knowledge of such), other than as expressly herein set forth.

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<PAGE>

     (b) The Escrow Agent shall be protected in acting upon any written notice,
request, waiver, consent, receipt or other document which the Escrow Agent, in
good faith, believes to be genuine and what it purports to be.

     (c) The Escrow Agent shall be indemnified and held harmless by the
Investors from and against any and all loss, expense, fees (including attorneys'
fees) and damages that may be incurred by the Escrow Agent as a result of its
agreeing to act in such capacity and its performance of this Agreement. The
Escrow Agent shall not be obligated to any party for any error in judgment or
for any act done or steps taken or omitted by it in good faith, or for any
mistake of fact or law, or for anything which it may do or refrain from doing in
connection therewith, except as a result of its own gross negligence or willful
misconduct. This indemnity includes the costs of enforcing the indemnification
(including attorneys' fees).

     (d) The Escrow Agent may consult with or retain legal counsel in connection
with any dispute or question as to the construction of any of the provisions
hereof or with regard to its duties and shall be held harmless and protected by
the Company and the Investors in acting in good faith in accordance with the
instructions of such counsel. Such counsel's fees and expenses shall be paid as
set forth in Paragraph 6 hereof. The Escrow Agent may represent itself at its
usual rates.

     (e) The Escrow Agent shall not be responsible or liable for the default or
misconduct of its agents, attorneys or employees, if they are selected with
reasonable care.

     (f) The Company and the Investors, jointly and severally, will pay the
Escrow Agent's fees (at the Escrow Agent's customary hourly rate for legal
services) and out-of-pocket disbursements for time spent in performing its
duties under this Agreement.

     (g) No modification of this Agreement shall, without the consent of the
Escrow Agent, modify the provisions of this Agreement relating to the duties,
obligations or rights of the Escrow Agent.

     6. Conflict with Respect to Escrowed Proceeds.

     (a) In the event the Escrow Agent before the termination of the escrow
receives or becomes aware of conflicting demands or claims with respect to this
escrow or the Escrowed Proceeds, the Escrow Agent shall have the right to
discontinue any or all further acts on its part until such conflict is resolved
to its satisfaction.

     (b) The Escrow Agent shall have the further right to commence or defend any
action or proceedings for the determination of such conflict. The Company and
the Investors jointly and severally agree to pay all costs, damages, judgments
and expenses, including reasonable attorneys' fees, suffered or incurred by the
Escrow Agent in connection with or arising out of this escrow in the event of
bona fide conflicting claims or demands with respect to this escrow, including,
but without limiting the generality of the foregoing, a suit in interpleader
brought by the Escrow Agent. In the event the Escrow Agent files a suit in
interpleader, it shall thereupon be fully released and discharged from all
further obligations to perform any and all duties or obligations imposed upon it
by this Agreement.

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<PAGE>

     7. Acknowledgement. All parties hereto agree that the Escrow Agent is
counsel for Investors and shall be entitled to represent the Investors with
respect to the Purchase Agreement and the transactions contemplated thereunder.
The Company hereby waives any right or claim to object to such legal
representation by Escrow Agent of the Investors, and further agrees that nothing
in this Agreement or contemplated hereby shall constitute a waiver of any
attorney-client, work product or other privilege.

     8. Resignation of Escrow Agent. The Escrow Agent may at any time resign
hereunder by giving written notice of its resignation to the Company and the
Investors, at least ten (10) days prior to the date specified for such
resignation to take effect, and upon the effective date of such resignation, all
property then held by the Escrow Agent hereunder shall be delivered by it to
such person as may be designated by the Company and the Investors, in writing,
whereupon all the Escrow Agent's obligations hereunder shall cease and
terminate. If no such person shall have been designated by such date, all
obligations of the Escrow Agent hereunder shall, nevertheless, cease and
terminate. The Escrow Agent's sole responsibility thereafter shall be to keep
safely all property then held by it and to deliver the same to a person
designated by the parties hereto or in accordance with the directions of a final
order or judgment of a court of competent jurisdiction, or to file a suit in
interpleader as provided in Paragraph 5 above.

     9. Interest on Escrow Proceeds. The Escrow Agent shall deposit the Escrow
Proceeds in an interest-bearing account. The interest, if any, shall be paid to
the party receiving the applicable principal.

     10. Successors and Assigns. Investors may assign their rights hereunder in
connection with the transfer of Debentures, provided that: (i) such transfer is
for at least $500,000 in principal amount of Debentures and (ii) the transferee
of Debentures agrees in writing to be bound by the terms of this Agreement. In
such event the Escrowed Proceeds for the transferred Debentures shall be
transferred to a new Investor Escrow Account for the transferee. The Company may
not assign its rights under this Agreement. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and assigns.

     11. Governing Law; Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE
PARTIES AGREE AND CONSENT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS LOCATED IN NEW YORK COUNTY, NEW YORK IN ANY ACTION OR PROCEEDING
HEREUNDER, AND TO SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED
(WHICH SHALL CONSTITUTE "PERSONAL SERVICE").

     12. Amendment. No provision of this Agreement may be amended or waived
without the prior written consent of the Company and Investors holding a
majority in principal amount of the Debentures; provided, that any provision
relating to the duties, obligations and rights of the Escrow Agent shall in
addition require the approval of the Escrow Agent, as provided in paragraph 5(g)
above.

     13. Notices. All notices or other communications between the parties
contemplated under, or relating to, this Agreement shall be in writing, shall be
signed by each person giving

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<PAGE>

such notice or communication, and shall be delivered by hand, reputable
overnight courier or by certified mail, return receipt requested, to the parties
at their respective addresses set forth above or to such other address as to
which the sending party has received written notice in accordance with this
Paragraph 12.

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<PAGE>

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

PHARMOS CORPORATION

By:
   ---------------------------------------

MILLENNIUM PARTNERS, LP

By:
   ---------------------------------------

STRONG RIVER INVESTMENTS, INC.

By:
   ---------------------------------------

ST. ALBANS PARTNERS, LTD.

By:
   ---------------------------------------

KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.,
as Escrow Agent

By:
   ---------------------------------------
     Stephen M. Schultz, Director

                                      -6-EXHIBIT 4.6

                        COMMON STOCK INVESTMENT AGREEMENT

     COMMON STOCK INVESTMENT  AGREEMENT  ("Agreement")  dated as of September 1,
2000 among PHARMOS CORPORATION,  a Nevada corporation (the "Company"),  and each
person or entity listed as an investor on Schedule I attached to this  Agreement
(each individually an "Investor" and collectively the "Investors").

                              W I T N E S S E T H:

     WHEREAS,  the Company  desires to sell and issue to the Investors,  and the
Investors wish to purchase from the Company,  (i) an aggregate  number of shares
of the Company's  Common Stock,  $.03 par value ("Common  Stock")  calculated by
dividing $3,000,000 by the Share Purchase Price (as hereinafter defined) (all of
such shares of Common  Stock  being the  "Initial  Shares"),  (ii) five (5) year
warrants,  in the form attached hereto as Annex A, to purchase 103,597 shares of
Common  Stock at an  initial  exercise  price of $6.08 per share  (the  "Initial
Warrants"),  and  (iii)  warrants,  in the form  attached  hereto as Annex B, to
purchase a number of shares of Common Stock calculated pursuant to a formula set
forth therein (the "Adjustment Warrants"; together with the Initial Warrants and
the Call  Warrants (as defined  below),  the  "Warrants"),  all on the terms and
conditions described below;

     WHEREAS,  pursuant to a Call Warrant in the form attached hereto as Annex C
(the  "Call  Warrants"),  Millennium  Partners,  LP has  the  right  but not the
obligation to purchase certain  additional shares of Common Stock (the "Optional
Shares") and certain additional  warrants (the "Optional  Adjustment  Warrants";
together with the Optional Shares, the "Units",  with the shares of Common Stock
into which the Optional Adjustment Warrants may be exercised being the "Optional
Adjustment Shares") on the terms and conditions set forth herein; and

     WHEREAS,  the Initial  Shares,  the shares of Common Stock  underlying  the
Initial Warrants (the "Warrant  Shares"),  the shares of Common Stock underlying
the Adjustment Warrants (the "Adjustment  Shares");  the Optional Shares and the
Optional  Adjustment Shares  collectively  being the "Registrable  Shares") will
carry registration  rights,  pursuant to the terms of that certain  Registration
Rights  Agreement  to be entered  into  between the  Company  and the  Investors
substantially in the form annexed hereto (the "Registration Rights Agreement").

     NOW,  THEREFORE,  in  consideration  of  the  foregoing  premises  and  the
covenants  contained  herein  and other  good and  valuable  consideration,  the
receipt and  sufficiency  of which are hereby  acknowledged,  the parties hereto
agree as follows:

<PAGE>

                                   ARTICLE I

                    Purchase and Sale of Shares and Warrants

     Section 1.1 Issuance of Initial  Shares and  Warrants.  Upon the  following
terms and conditions, the Company shall issue and sell to the Investors, and the
Investors  shall  purchase  from the Company,  the number of Initial  Shares and
Warrants indicated next to the Investors' names on Schedule I attached hereto.

          (a)  Purchase  Price.  The  aggregate  purchase  price for the Initial
Shares and Warrants to be acquired by each  Investor  (the  "Aggregate  Purchase
Price")  shall be the  Aggregate  Purchase  Price  set  forth  next to each such
Investor's name on Schedule I. The purchase price per share of Common Stock (the
"Share  Purchase  Price")  shall equal the average of the closing bid price of a
share of Common  Stock on the  Principal  Market on the seven (7)  Trading  Days
leading  up to and  ending  on,  and the  seven  (7)  Trading  Days  immediately
following,  Closing Date. For purposes of this  Agreement,  the term  "Principal
Market"  shall  mean the Nasdaq  Small Cap Market or if the Common  Stock is not
quoted thereon, on such exchange or market (which for purposes of this Agreement
shall mean the New York Stock  Exchange,  the  American  Stock  Exchange  or the
Nasdaq National Market System) upon which the Common Stock is principally traded
or quoted, and "Trading Day" shall mean (x) if the Common Stock is listed on the
New York Stock Exchange or the American Stock Exchange,  a day on which there is
trading on such  stock  exchange,  or (y) if the  Common  Stock is not listed on
either of such stock  exchanges but sale prices of the Common Stock are reported
on an  automated  quotation  system,  a day on which  trading is reported on the
principal  automated  quotation  system on which  sales of the Common  Stock are
reported,  or (z) if the foregoing  provisions are inapplicable,  a day on which
quotations are reported by National Quotation Bureau Incorporated.

          (b) The Closing.

               (i) The closing of the  purchase  and sale of the Initial  Shares
          and  Warrants  (the  "Closing")  shall  take  place at the  offices of
          Kleinberg,  Kaplan,  Wolff & Cohen, P.C. ("KKWC"),  on the date hereof
          (the "Closing Date").

               (ii) On the  Closing  Date,  the  Company  shall  deliver  to the
          Investors the Warrants  purchased  hereunder,  each  registered in the
          name of each such  Investor or its  nominee.  On the Closing  Date the
          Investors shall deliver (on a pro-rata basis) by wire transfer,  to an
          account  designated  in  writing  by  the  Company,  an  aggregate  of
          $3,000,000.  On the tenth  (10th)  Trading Day  following  the Closing
          Date, the Company will deliver to the Investors at the offices of KKWC
          all  the  Initial  Shares,   with  the

                                      -2-
<PAGE>

          number and denomination of certificates requested by the Investors. In
          lieu of  delivering  physical  certificates  representing  the Initial
          Shares,  provided the Company's transfer agent is participating in the
          Depository  Trust Company ("DTC") Fast Automated  Securities  Transfer
          ("FAST") program, upon request of the Investor,  the Company shall use
          its best efforts (consistent with the legending  requirements  imposed
          by  the  Transaction   Documents)  to  cause  its  transfer  agent  to
          electronically   transmit  the  Initial  Shares  to  the  Investor  by
          crediting the account of the Investor's  prime broker with DTC through
          its Deposit  Withdrawal  Agent Commission  ("DWAC")  system.  The time
          periods for  delivery  described  above shall apply to the  electronic
          transmittals  described herein. In addition,  each party shall deliver
          all documents,  instruments  and writings  required to be delivered by
          such party  pursuant  to this  Agreement  at or prior to the  Closing.
          Additionally,  at the  Closing the  Company  shall pay (or  Millennium
          Partners,  LP ("MLP")  shall pay for the account of the Company,  with
          such payment being credited  towards MLP's payment of MLP's portion of
          the Aggregate Purchase Price) to KKWC its legal fees and disbursements
          as set forth in Section 3.4.

                                   ARTICLE II

                         Representations and Warranties

     Section 2.1  Representations  and  Warranties  of the Company.  The Company
hereby makes the following representations and warranties to the Investors as of
the date  hereof,  on the  Closing  Date,  on the date the date of any  Optional
Closing (as defined in the Call Warrant), and on the date of any Fill-up Closing
(as defined in the Adjustment Warrant and the Optional Adjustment Warrant):

          (a)  Organization  and  Qualification;  Material  Adverse Effect.  The
Company is a corporation  duly  incorporated and existing in good standing under
the laws of the State of Nevada and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any direct or indirect subsidiaries (defined as any entity of which the
Company owns, directly or indirectly, 50% or more of the equity or voting power)
other than the subsidiaries  listed on Schedule 2.1(a) attached  hereto.  Except
where specifically  indicated to the contrary,  all references in this Agreement
to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries
of the  Company.  Except  where  specifically  indicated  to the  contrary,  all
references  in this  Article II to the  Company  shall be deemed to refer to the
Company  and  its  consolidated  subsidiaries.  Each  of  the  Company  and  its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good  standing  in

                                      -3-
<PAGE>

every  jurisdiction  in which the nature of the  business  conducted or property
owned by it makes  such  qualification  necessary  other than those in which the
failure  so to  qualify  would not have a  Material  Adverse  Effect.  "Material
Adverse Effect" means any adverse effect on the business, operations, properties
or financial condition of the entity with respect to which such term is used and
which is (either alone or together with all other adverse  effects)  material to
such entity and other entities controlling or controlled by such entity taken as
a whole, and any material adverse effect on the transactions  contemplated under
this  Agreement,  the  Registration  Rights  Agreement or any other agreement or
document contemplated hereby or thereby.

          (b)  Authorization;  Enforcement.  (i) The Company  has all  requisite
corporate  power and  authority  to enter into and perform this  Agreement,  the
Warrants and the Registration Rights Agreement (the "Transaction Documents") and
to issue the Initial Shares,  the Adjustment  Shares,  the Optional Shares,  the
Optional  Adjustment Shares, the Warrant Shares and the Warrants  (collectively,
the  "Securities")  in  accordance  with the terms hereof and thereof,  (ii) the
execution  and  delivery  of the  Transaction  Documents  by the Company and the
consummation  by  it  of  the  transactions  contemplated  hereby  and  thereby,
including the issuance of the Registrable  Shares,  have been duly authorized by
all necessary  corporate action,  and no further consent or authorization of the
Company or its Board of Directors (or any committee or subcommittee  thereof) or
stockholders  is  required,  (iii)  the  Transaction  Documents  have  been duly
executed  and  delivered  by the  Company  and  (iv) the  Transaction  Documents
constitute valid and binding  obligations of the Company enforceable against the
Company in accordance  with their terms,  except as such  enforceability  may be
limited  by  applicable  bankruptcy,  insolvency,  reorganization,   moratorium,
liquidation or similar laws relating to, or affecting  generally the enforcement
of creditors'  rights and remedies or by other  equitable  principles of general
application.

          (c)  Capitalization.  The  authorized  capital  stock  of the  Company
consists of 80,000,000  shares of Common Stock and 1,250,000 shares of preferred
stock; as of August 29, 2000 there were 52,718,072 shares of Common Stock and no
shares of preferred  stock issued and  outstanding;  and, except as set forth on
Schedule 2.1(c), no shares of Common Stock and no shares of preferred stock were
reserved  for  issuance  to  persons  other  than  the  Investors.  All  of  the
outstanding  shares of the Company's  Common Stock and preferred stock have been
validly issued and are fully paid and non-assessable. No shares of capital stock
are entitled to preemptive  rights and, except as set forth on Schedule  2.1(c),
there are no outstanding  options and outstanding  warrants for shares of Common
Stock (excluding the Warrants). Except as set forth on Schedule 2.1(c)(i), there
are no  other  scrip,  rights  to  subscribe  to,  calls or  commitments  of any
character  whatsoever  relating to, or securities or rights  exchangeable for or
convertible  into,  any shares of capital  stock of the Company,  or  contracts,
commitments,  understandings,  or  arrangements  by which the  Company is or may
become  bound to issue  additional  shares of  capital  stock of the  Company or
options,  warrants, scrip, rights to subscribe to, or commitments to purchase or
acquire,  any shares,  or securities or rights  convertible or exchangeable into
shares, of capital stock of the Company. Attached hereto as Exhibit 2.1(c)(i) is
a true and correct  copy of the  Company's  Certificate  of  Incorporation  (the
"Charter"),  as in effect on the date  hereof,

                                      -4-
<PAGE>

and  attached  hereto as Exhibit  2.1(c)(ii)  is a true and correct  copy of the
Company's By-Laws, as in effect on the date hereof (the "By-Laws").

          (d) Issuance of Registrable  Shares.  The Registrable  Shares are duly
authorized  and reserved for issuance and,  when issued in accordance  with this
Agreement or upon exercise in  accordance  with the  Warrants,  the  Registrable
Securities,  will be validly  issued,  fully paid and  non-assessable,  free and
clear  of any and all  liens,  claims  and  encumbrances,  and  (subject  to the
registration of such shares in accordance with the applicable  provisions of the
Securities Act of 1933, as amended (the  "Securities  Act" of the "Act") and the
Securities  Exchange Act of 1934, as amended (the "Exchange Act") entitled to be
traded on the Nasdaq Small Cap Market (or the American Stock  Exchange,  the New
York Stock Exchange,  or the Nasdaq National Market System collectively with the
Nasdaq  Small Cap  Market,  the  "Approved  Markets"),  and the  holders of such
Registrable Shares shall be entitled to all rights and preferences accorded to a
holder of Common  Stock.  The  outstanding  shares of Common Stock are currently
listed on the Nasdaq Small Cap Market.

          (e) No  Conflicts.  The  execution,  delivery and  performance  of the
Transaction  Documents by the Company and the consummation by the Company of the
transactions  contemplated hereby and thereby and the issuance of the Securities
do not and will not (i)  result  in a  violation  of the  Company's  Charter  or
By-Laws 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, patent, patent license or instrument to which the Company
or any of its subsidiaries is a party (collectively,  "Company Agreements"),  or
(iii) result in a violation of any federal,  state,  local or foreign law, rule,
regulation,  order,  judgment or decree (including  federal and state securities
laws and regulations) 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  (other  than in the case of clause (i) above)  where such
violation  would not reasonably be expected to have a Material  Adverse  Effect.
The  business of the Company and its direct and indirect  subsidiaries  is being
conducted  in material  compliance  with (i) its Charter and  By-Laws,  (ii) all
Company  Agreements and (iii) all applicable laws,  ordinances or regulations of
any  governmental  entity,  except  (other than in the case of clause (i) above)
where such violation would not reasonably be expected to have a Material Adverse
Effect.  Except for filings,  consents and approvals  required under  applicable
state and federal securities laws or the rules and regulations of the applicable
Approved Markets and covered by the Registration  Rights Agreement,  the Company
is not required under federal,  state,  local or foreign law, rule or regulation
to  obtain  any  consent,  authorization  or order  of,  or make any  filing  or
registration with, any court or governmental  agency in order for it to execute,
deliver or perform any of its obligations under the Transaction Documents, or to
issue and sell the Securities,  except for the registration  provisions provided
in the Registration Rights Agreement.

          (f) SEC Documents;  No Non-Public  Information;  Financial Statements.
The Common Stock of the Company is  registered  pursuant to Section 12(g) of the
Exchange  Act and

                                      -5-
<PAGE>

the Company  and its  subsidiaries  have filed all  reports,  schedules,  forms,
statements  and other  documents  required to be filed by it with the Securities
and Exchange  Commission  ("SEC") pursuant to the reporting  requirements of the
Exchange Act, including all such proxy information,  solicitation statements and
registration statements,  and any amendments thereto required to have been filed
(all of the foregoing including filings  incorporated by reference therein being
referred to herein as the "SEC  Documents").  The  Company  has not  directly or
indirectly  provided,  and will  not  directly  or  indirectly  provide,  to the
Investors  any  material  non-public   information  or  any  information  which,
according to applicable  law,  rule or  regulation,  should have been  disclosed
publicly  by the  Company  but  which  has not  been so  disclosed.  As of their
respective  dates, the SEC Documents  complied in all material respects with the
requirements  of the  Exchange  Act and the  rules  and  regulations  of the SEC
promulgated  thereunder  and other  federal,  state and  local  laws,  rules and
regulations  applicable  to such SEC  Documents,  and none of the SEC  Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  The SEC Documents contain all material  information  concerning the
Company and its subsidiaries, and no event or circumstance has occurred prior to
the date hereof or will have  occurred on the Closing  Date which would  require
the  Company  to  disclose  such  event  or  circumstance  in  order to make the
statements in the SEC Documents not  misleading  but which has not, or will have
not, been so disclosed.

          (g) Financial Statements.  The financial statements of the Company and
its  subsidiaries  included in the SEC Documents comply as to form and substance
in all  material  respects  with  applicable  accounting  requirements  and  the
published  rules  and  regulations  of the SEC or  other  applicable  rules  and
regulations with respect thereto.  Such financial  statements have been prepared
in  accordance  with United  States  generally  accepted  accounting  principles
applied on a consistent  basis 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 not include
footnotes,  may be condensed or summary  statements)  and fairly  present in all
material respects the financial  position of the Company and its subsidiaries as
of the dates  thereof  and the  results  of  operations  and cash  flows for the
periods  then ended  (subject,  in the case of unaudited  statements,  to normal
year-end audit  adjustments).  The audited  financial  statements of each of the
Company and its  subsidiaries  for the fiscal year ending December 31, 1999 have
been prepared in accordance  with United States  generally  accepted  accounting
principles applied on a consistent basis 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 not
include footnotes or may be condensed or summary  statements) and fairly present
in all  material  respects  the  financial  position  of  the  Company  and  its
subsidiaries,  as the case may be, as of the dates  thereof  and the  results of
operations  and cash flows for the periods then ended  (subject,  in the case of
unaudited statements, to normal year-end audit adjustments).

                                      -6-
<PAGE>

          (h)  Principal  Exchange/Market.  The  principal  market  on which the
Common Stock is currently traded is the Nasdaq Small Cap Market.

          (i) No  Material  Adverse  Change.  Since June 30,  2000,  no Material
Adverse Effect has occurred or exists, and no event or circumstance has occurred
that with notice or the passage of time or both is  reasonably  likely to result
in a Material Adverse Effect with respect to the Company or its subsidiaries.

          (j) No Undisclosed Liabilities.  The Company and its subsidiaries have
no liabilities or obligations not disclosed in the  Pre-Agreement  SEC Documents
(as defined below), other than those liabilities incurred in the ordinary course
of the Company's or its subsidiaries' respective businesses since June 30, 2000,
which liabilities,  individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company or its direct or indirect subsidiaries.

          (k) No Undisclosed  Events or Circumstances.  To the best knowledge of
the  Company,  no material  event or  circumstance  has  occurred or exists with
respect  to  the  Company  or its  direct  or  indirect  subsidiaries  or  their
respective businesses, properties, prospects, operations or financial condition,
which,  under applicable law, rule or regulation,  requires public disclosure or
announcement  by the  Company but which has not been so  publicly  announced  or
disclosed.

          (l) No  General  Solicitation.  Neither  the  Company,  nor any of its
affiliates,  or, to its knowledge,  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 under the Securities Act in connection with the offer or
sale of the Securities.

          (m) No  Integrated  Offering.  Neither  the  Company,  nor  any of its
affiliates,  nor to its  knowledge any person acting on its or 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 Securities.

          The issuance of the Securities to the Investors will not be integrated
with any other issuance of the Company's  securities  (past,  current or future)
which  requires  stockholder  approval  under the rules of the NASDAQ  Small Cap
Market.

          (n) Form  S-3.  The  Company  is  eligible  to file  the  Registration
Statement (as defined in the  Registration  Rights  Agreement) on Form S-3 under
the Act and rules promulgated  thereunder,  and Form S-3 is permitted to be used
for the  transactions  contemplated  hereby under the Act and rules  promulgated
thereunder.

          (o)  Intellectual   Property.  The  Company  and/or  its  wholly-owned
subsidiaries  owns  or has  licenses  to use  certain  patents,  copyrights  and
trademarks  ("intellectual  property")

                                      -7-
<PAGE>

associated  with  its  business.  The  Company  and its  subsidiaries  have  all
intellectual  property  rights  which are needed to conduct the  business of the
Company and its  subsidiaries  as it is now being conducted or as proposed to be
conducted as disclosed in the SEC  Documents.  The Company and its  subsidiaries
have no reason to believe that the material  intellectual  property rights which
it owns  are  invalid  or  unenforceable  or that  the use of such  intellectual
property by the Company or its subsidiaries infringes upon or conflicts with any
right of any third  party,  and neither the Company nor any of its  subsidiaries
has received notice of any such infringement or conflict,  which individually or
in the  aggregate,  would  reasonably  be  expected  to have a Material  Adverse
Effect.  The Company and its subsidiaries  have no knowledge of any infringement
of its intellectual property by any third party.

          (p) Poison  Pill  Provisions.  Neither  Company  nor its  wholly-owned
subsidiaries  have a stockholder  rights plan.  None of the  acquisition  of the
Securities nor the deemed  beneficial  ownership of shares of Common Stock prior
to, or the  acquisition of such shares  pursuant to the exercise of the Warrants
will in any event under any  circumstance  trigger the poison pill provisions of
any other or subsequently adopted plan or agreement,  or a substantially similar
occurrence under any successor or similar plan.

          (q) No  Litigation.  Except as set forth in the  reports or  documents
filed at least 5 Trading Days prior to the Closing Date by the Company  pursuant
to  Section  13(a)  or  15(d)  of  the  Exchange  Act  (the  "Pre-Agreement  SEC
Documents"),  no litigation or claim  (including those for unpaid taxes) against
the  Company  or  any  of its  subsidiaries  is  pending  or,  to the  Company's
knowledge,  threatened,  and no other event has  occurred,  which if  determined
adversely could  reasonably be expected to have a Material Adverse Effect on the
Company or could  reasonably be expected to materially and adversely  affect the
transactions  contemplated hereby. There is no legal proceeding described in the
Pre-Agreement SEC Documents that could reasonably be expected to have a Material
Adverse Effect on the Company.

          (r) Brokers.  The Company has taken no action which would give rise to
any claim by any person, other than Ladenburg Thalmann & Co., Inc. and SmallCaps
Online LLC (collectively,  the "Brokers"),  for brokerage commissions,  finder's
fees or  similar  payments  by the  Company  or any  Investor  relating  to this
Agreement  or  the  transactions  contemplated  hereby.  The  Company  shall  be
responsible for any payments to the Brokers.

          (s) Other Investors. Other than the Securities and except as set forth
on Schedule 2.1(s)(i), there are no outstanding securities issued by the Company
that  are  entitled  to  registration  rights  under  the  Act.  Other  than the
Securities  and  except  as set  forth  on  Schedule  2.1(s)(ii),  there  are no
outstanding  securities  issued by the Company that are  directly or  indirectly
convertible into,  exercisable into, or exchangeable for, shares of Common Stock
of the  Company,  or that have  anti-dilution  or similar  rights  that would be
affected by the  issuance of the Initial  Shares,  the  Adjustment  Shares,  the
Warrants,  the Optional  Adjustment  Shares,  the Warrant Shares or the Optional
Shares.

                                      -8-
<PAGE>

          (t) Certain Transactions. Except as disclosed in the Pre-Agreement SEC
Documents,  none of the officers,  directors, or key employees of the Company is
presently a party to any transaction with the Company or any of its subsidiaries
(other than for services as employees,  officers and  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  officer,  director  or such
employee  or, to the  knowledge of the Company,  any  corporation,  partnership,
trust or other entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.

          (u) Permits;  Compliance.  The Company and each of its subsidiaries is
in possession of all  franchises,  grants,  authorizations,  licenses,  permits,
easements, variances, exemptions,  consents, certificates,  approvals and orders
necessary to own,  lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Company Permits"), except where
failure to possess such Company Permits would not have a Material Adverse Effect
on the  Company  and there is no action  pending  or,  to the  knowledge  of the
Company,  threatened  regarding suspension or cancellation of any of the Company
Permits except for such Company Permits the failure of which to possess,  or the
cancellation  or  suspension  of  which,  would  not,  individually  or  in  the
aggregate,  have a Material  Adverse  Effect on the Company.  To the best of its
knowledge,  neither  the  Company  nor any of its  subsidiaries  is in  material
conflict  with,  or in  material  default or material  violation  of, any of the
Company  Permits.  Since  December 31, 1999,  neither the Company nor any of its
subsidiaries  has received any  notification  with respect to possible  material
conflicts, material defaults or material violations of applicable laws.

          (v) 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 direct and  indirect
subsidiaries  are engaged.  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  without  a
significant increase in cost.

          (w)  Internal  Accounting  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
accountability,  (iii) access to assets is  permitted  only in  accordance  with
management's   general  or  specific   authorization   and  (iv)  the   recorded
accountability  for assets is compared  with the existing  assets at  reasonable
intervals and appropriate action is taken with respect to any differences.

                                      -9-
<PAGE>

          (x)  Environmental  Matters.  Except  as  otherwise  disclosed  in the
Pre-Agreement  SEC  Documents,  the Company and each of its  subsidiaries  is in
compliance in all respects with all applicable  state and federal  environmental
laws except where any such  non-compliance  would not  reasonably be expected to
have a Material  Adverse  Effect on the  Company and no event or  condition  has
occurred  that may  interfere  with the  compliance by the Company or any of its
subsidiaries  with any  environmental law or that may give rise to any liability
under any environmental law that, individually or in the aggregate, would have a
Material Adverse Effect.

          (y) Solvency

               (i) Based on the  financial  condition  of the  Company as of the
          Closing Date,  the Company's fair saleable value of its assets exceeds
          the amount  that will be  required  to be paid on or in respect of the
          Company's  existing  debts  and  other  liabilities  (including  known
          contingent liabilities) as they mature.

               (ii) Based on the  financial  condition  of the Company as of the
          Closing Date,  the  Company's  assets do not  constitute  unreasonably
          small  capital  to carry  out its  business  for the year  2000 as now
          conducted and as proposed to be conducted including the Company's year
          2000  capital  needs  taking  into  account  the  particular   capital
          requirements of the business  conducted by the Company,  and projected
          capital requirements and capital availability thereof.

               (iii) The  Company  does not  intend to incur  debts  beyond  its
          ability to pay such debts as they  mature  (taking  into  account  the
          timing  and  amounts  of cash to be  payable  on or in  respect of its
          debt).  Based on the  financial  condition  of the  Company  as of the
          Closing Date, the current cash flow of the Company,  together with the
          proceeds the Company  would  receive,  were it to liquidate all of its
          assets,  after taking into account all  anticipated  uses of the cash,
          would be  sufficient  to pay all  amounts on or in respect of its debt
          when such amounts are required to be paid.

               (iv) Neither the Company nor any of its  subsidiaries  is subject
          to any bankruptcy, insolvency or similar proceeding.

          (z) Taxes. All federal, state, city and other tax returns, reports and
declarations required to be filed or extended by or on behalf of the Company and
each of its subsidiaries  have been filed or extended and all such filed returns
are complete and  accurate  and disclose all taxes  (whether  based upon income,
operations,   purchases,  sales,  payroll,  licenses,

                                      -10-
<PAGE>

compensation,  business, capital, properties or assets or otherwise) required to
be paid in the periods covered thereby.  All taxes required to be withheld by or
on behalf of the Company or any such  subsidiary in connection with amounts paid
or owing to any employees,  independent contractor, creditor or other party have
been withheld,  and such withheld taxes have either been duly and timely paid to
the proper governmental authorities or set aside in accounts for such purposes.

          (aa) Title to Properties;  Encumbrances.  Schedule  2.1(aa) contains a
complete and accurate list of all material real property,  leaseholds,  or other
interests therein owned by the Company and its subsidiaries. Each of the Company
and its  subsidiaries  owns (with good and marketable  title in the case of real
property) all the properties and assets  (whether real,  personal,  or mixed and
whether  tangible or intangible  ("Company  Property")) that it purports to own.
Other than the leased property,  all material Company Property is free and clear
of all encumbrances  and are not, in the case of real property (which,  for this
purpose,  shall not include  the  Company's  interest as tenant in  leaseholds),
subject to any rights of way, building use restrictions,  exceptions, variances,
reservations  or  limitations  of any nature,  except,  with respect to all such
properties  and assets,  (a)  mortgages,  liens or security  interests  shown on
Schedule 2.1(aa) as securing specified liabilities or obligations,  with respect
to which no default (or event that, with notice or lapse of time or both,  would
constitute a default)  exists,  (b) liens for current taxes not yet due, and (c)
with respect to real property, (i) minor imperfections of title, if any, none of
which is  substantial in amount,  materially  detracts from the value or impairs
the use of the  property  subject  thereto,  or impairs  the  operations  of the
Company  or any of its  subsidiaries,  and (ii)  zoning  laws and other land use
restrictions  (including,  but not limited to, easements of records) that do not
impair the present or  anticipated  use of the  property  subject  thereto.  All
buildings, plans, and structures owned by the Company or any of its subsidiaries
lie wholly within the  boundaries  of the real property  owned by the Company or
such  subsidiaries,  and do not  encroach  upon the  property  of, or  otherwise
conflict with the property rights of, any other person.

          (bb) No Reliance on  Investors.  The Company  acknowledges  and agrees
that each Investor is acting solely in the capacity of an arm's length purchaser
with respect to the Transaction  and the  transactions  contemplated  hereby and
thereby.  The  Company  further  acknowledges  that no  Investor  is acting as a
financial  advisor or fiduciary of the Company (or in any similar capacity) with
respect  to  the  Transaction   Documents  and  the  performance  hereunder  and
thereunder and the  transactions  contemplated  hereby and thereby.  The Company
further represents to the Investor that the Company's decision to enter into the
Transaction  Documents and the  performance  hereunder and  thereunder  has been
based   solely  on  the   independent   evaluation   by  the   Company  and  its
representatives.

          (cc) Foreign  Corrupt  Practices  Act.  Neither the  Company,  nor any
director,  officer,  agent,  employee  or other  person  acting on behalf of the
Company or any subsidiary has, in the course of acting for, or on behalf of, the
Company,  directly  or  indirectly  used any  corporate  funds for any  unlawful
contribution,  gift,  entertainment  or  other  unlawful  expenses  relating  to
political activity;  directly or indirectly made any direct or indirect unlawful
payment

                                      -11-
<PAGE>

to any  foreign or  domestic  government  or party  official  or  employee  from
corporate  funds;  violated  or is in  violation  of any  provision  of the U.S.
Foreign Corrupt  Practices Act of 1977, as amended,  or any similar  treaties of
the United States;  or directly or indirectly  made any bribe,  rebate,  payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government or party official or employee.

          (dd) Application of Takeover Protections. The Company and its board of
directors  have  taken  all  necessary  action,  if  any,  in  order  to  render
inapplicable  anti-takeover  provision contained in the Company's Certificate of
Incorporation  or By-Laws or Nevada law which is or could become  applicable  to
the Investors as a result of the  transactions  contemplated  by the Transaction
Documents,  including,  without limitation, the Company's issuance of the Common
Stock and the Investors' ownership of Common Stock.

          (ee) Acknowledgement of Dilution. The number of shares of Common Stock
constituting Initial Shares,  Adjustment Shares, Warrant Shares, Optional Shares
or  Optional   Adjustment   Shares  may   increase   substantially   in  certain
circumstances.  The Company  acknowledges that its obligation to issue shares of
Common  Stock in  accordance  with the  Transaction  Documents  is absolute  and
unconditional,  regardless  of the dilution that such issuance may have on other
shareholders of the Company.

          (ff) MFN and Variable Rate  Transactions.  The Company has not entered
into any MFN Transaction or Variable Rate Transaction  (other than  transactions
entered into with the Investors), pursuant to which: (1) securities or potential
obligations  to issue  securities  are still  outstanding or (2) the issuance or
exercise,  as the case may be, of the Securities  trigger,  or may in the future
trigger, an adjustment.

          The term  "MFN  Transaction"  shall  mean a  transaction  in which the
Company  issues or sells any  securities  in a capital  raising  transaction  or
series of related  transactions (the "MFN Offering") which grants to an investor
(the "MFN Investor") the right to receive  additional shares (including  without
limitation  as a result of a lower  conversion,  exchange or exercise  price but
excluding customary antidilution protections) based upon subsequent transactions
of the Company on terms more  favorable  than those granted to such MFN Investor
in such MFN Offering. As used herein, the term "Variable Rate Transaction" shall
mean a transaction  in which the Company  issues or sells (i) any debt or equity
securities  that are  convertible  into,  exchangeable  or  exercisable  for, or
include the right to receive  additional shares of, Common Stock either (x) at a
conversion,  exercise or exchange  rate or other price that is based upon and/or
varies with the trading prices of or quotations for the Common Stock at any time
after the  initial  issuance  of such debt or equity  securities,  or (y) with a
fixed  conversion,  exercise or exchange price that is subject to being reset at
some future date after the initial  issuance of such debt or equity  security or
upon the  occurrence  of specified or contingent  events  directly or indirectly
related to the  business of the Company or the market for the Common  Stock (but
excluding standard stock split anti-dilution provisions), or (ii) any

                                      -12-
<PAGE>

securities of the Company  pursuant to an "equity line" structure which provides
for the  sale,  from  time to time,  of  securities  of the  Company  which  are
registered for resale under the Act.

     Section 2.2 Representations and Warranties of the Investors.  Each Investor
hereby makes the following  representations  and warranties to the Company as of
the date hereof as to itself, on the Closing Date:

          (a) Organization and  Qualification.  Such Investor is duly organized,
validly  existing and in good standing under the laws of the jurisdiction of its
organization  and is duly  qualified to do business and in good standing in each
jurisdiction  in which the  nature of the  business  conducted  by it makes such
qualification  necessary  except where the failure to be so qualified or in good
standing would not  reasonably be expected to have a Material  Adverse Effect on
such Investor.

          (b)  Authorization;  Enforcement.  (i) Such Investor has the requisite
power and authority to enter into and perform the  Transaction  Documents and to
purchase the  Securities  being sold to it  hereunder,  (ii) the  execution  and
delivery of the Transaction  Documents by such Investor and the  consummation by
it of the  transactions  contemplated  thereby have been duly  authorized by all
necessary corporate or partnership  action, and (iii) the Transaction  Documents
constitute valid and binding  obligations of such Investor  enforceable  against
such Investor in accordance with their terms,  except as such enforceability may
be limited by applicable  bankruptcy,  insolvency,  reorganization,  moratorium,
liquidation or similar laws relating to, or affecting  generally the enforcement
of creditors'  rights and remedies or by other  equitable  principles of general
application.

          (c) No  Conflicts.  The  execution,  delivery and  performance  of the
Transaction  Documents and the consummation by such Investor of the transactions
contemplated  thereby  do not and will not (i)  result  in a  violation  of such
Investor's organizational documents, (ii) conflict with any agreement, indenture
or instrument  to which such Investor is a party,  or (iii) result in a material
violation of any law, rule, or regulation,  or any order,  judgment or decree of
any court or governmental  agency applicable to such Investor.  Such Investor is
not required to obtain any consent or authorization  of any governmental  agency
in order for it to perform its obligations under the Transaction Documents.

          (d) Investment Representations.

               (i) Access to Other Information.  Such Investor acknowledges that
          the Company has made  available to such  Investor the  opportunity  to
          examine  such  additional  documents  from  the  Company  and  to  ask
          questions of, and receive full answers from,  the Company  concerning,
          among  other  things,  the  Company,  its  financial  condition,   its
          management,  its prior

                                      -13-
<PAGE>

          activities  and any other  information  which such Investor  considers
          relevant  or  appropriate  in  connection   with  entering  into  this
          Agreement.

               (ii) Risks of  Investment.  Such Investor  acknowledges  that the
          Securities  have not been  registered  under the Act. Such Investor is
          familiar with the provisions of Rule 144 and  understands  that in the
          event  all  of  the  applicable  requirements  of  Rule  144  are  not
          satisfied, registration under the Act or some other exemption from the
          registration  requirements  of the Act  will be  required  in order to
          dispose  of the  Registrable  Shares,  and that such  Investor  may be
          required to hold the  Registrable  Shares for a significant  period of
          time prior to  reselling  them,  subject to the  Company  successfully
          registering the Registrable Shares pursuant to the Registration Rights
          Agreement.  Such  Investor  is  capable of  assessing  the risks of an
          investment  in the  Registrable  Shares  and  is  fully  aware  of the
          economic risks thereof.

               (iii) Investment Representation.  Such Investor is purchasing the
          Initial Shares and Warrants,  and may purchase the Adjustment  Shares,
          Optional Shares and Optional  Adjustment  Shares in each case, for its
          own account and not with a view to  distribution  in  violation of any
          securities  laws.  Such Investor has no present  intention to sell the
          Warrants,  Initial Shares or Warrant Shares in violation of federal or
          state  securities  laws and such  Investor has no present  arrangement
          (whether or not legally binding) to sell the Warrants,  Initial Shares
          or  Warrant  Shares to or  through  any  person or  entity;  provided,
          however, that by making the representations herein, such Investor does
          not agree to hold the Warrants,  Initial  Shares or Warrant Shares for
          any minimum or other  specific  term and reserves the right to dispose
          of the  Warrants,  Initial  Shares  or  Warrant  Shares at any time in
          accordance  with federal and state  securities laws applicable to such
          disposition.

               (iv) Restricted Securities.  It acknowledges and understands that
          the  terms of  issuance  have not been  reviewed  by the SEC or by any
          state securities  authorities and that the Securities have been issued
          in reliance on the certain  exemptions for non-public  offerings under
          the Act,  which  exemptions  depend  upon,  among  other  things,  the
          representations  made  and  information  furnished  by such  Investor,
          including the bona fide nature of such Investor's investment intent as
          expressed above.

                                      -14-
<PAGE>

               (v) Ability to Bear Economic Risk. It is an "accredited" investor
          as defined in Rule 501 of Regulation D, as amended, under the Act, and
          that it (i) is able to bear the economic risk of its investment in the
          Securities,  (ii) is able to hold  the  Securities  for an  indefinite
          period of time,  (iii) can afford a complete loss of its investment in
          the  Securities  and (iv) has  adequate  means  of  providing  for its
          current needs.

               (vi)  No  Public  Solicitation.  At no  time  was  such  Investor
          presented with or solicited by any general  mailing,  leaflet,  public
          promotional   meeting,   newspaper  or  magazine  article,   radio  or
          television advertisement,  or any other form of general advertising or
          general solicitation in connection with the issuance.

               (vii) Reliance by the Company. Such Investor understands that the
          Securities  are being or will be, as the case may be, offered and sold
          and will be issued, in reliance on a transactional exemptions from the
          registration  requirements  of federal and state  securities  laws and
          that the  Company  is  relying  upon the  truth  and  accuracy  of the
          representations,    warranties,   agreements,    acknowledgments   and
          understandings of such Investor set forth herein in order to determine
          the  applicability  of such  exemptions  and the  suitability  of such
          Investor to acquire the Securities.

          (e) Brokers.  Such  Investor  has taken no written  action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar  payments by the Company  relating to the  Transaction  Documents or the
transactions  contemplated  thereby. All fees and amounts payable to the Brokers
shall be solely the responsibility of the Company.

                                      -15-
<PAGE>

                                  ARTICLE III

                                    Covenants

     Section 3.1 Registration and Listing;  Effective Registration.  For so long
as the  Securities  are  outstanding,  the Company  will cause the Common  Stock
issuable  upon the  exercise  of the  Warrants,  to  continue at all times to be
registered under Section 12(b) or Section 12(g) of the Exchange Act, will comply
in all respects  with its reporting  and filing  obligations  under the Exchange
Act, and will not take any action or file any document (whether or not permitted
by the  Exchange  Act or the rules  thereunder)  to  terminate  or suspend  such
reporting  and  filing  obligations.  Until  such  time  as  no  Securities  are
outstanding,  the Company  shall  continue  the listing or trading of the Common
Stock on the Nasdaq  Small Cap Market or one of the other  Approved  Markets and
comply  in  all  respects  with  the  Company's  reporting,   filing  and  other
obligations under the bylaws or rules of the Approved Market on which the Common
Stock is listed.  The Company  shall cause the Common  Stock to be listed on the
Nasdaq Small Cap Market no later than the registration of the Common Stock under
the Act, and at all times shall continue such  listing(s) on one of the Approved
Markets.  As used  herein  and in the  other  Transaction  Documents,  the  term
"Effective  Registration"  shall mean: (i) the Company is in compliance with the
Transaction Documents;  (ii) the resale of Registrable Securities (as defined in
the  Registration  Rights  Agreement)  is covered by an  effective  registration
statement and such  registration  statement is not subject to any  suspension or
stop orders;  (iii) the resale of such securities may be effected  pursuant to a
current  and  deliverable  prospectus  that is not  subject to any  blackout  or
similar  circumstance;  (iv) the securities are listed on an Approved Market and
are  not  subject  to any  trading  suspension;  (v) no  Interfering  Event  (as
described in the Registration  Rights  Agreement) then exists;  and (vi) none of
the  Company or any direct or indirect  subsidiary  of the Company is subject to
any bankruptcy, insolvency or similar proceeding.

     Section 3.2 Warrants on Exercise.  Upon any partial exercise by an Investor
(or then holder of the  Warrants) of the  Warrants,  the Company shall issue and
deliver to such Investor (or holder)  within three (3) days of the date on which
such Warrants are exercised,  a new Warrant or Warrants  representing the number
of adjusted Warrant Shares, Adjustment Shares and/or Optional Adjustment Shares,
as the case may be, in accordance with the terms of such Warrants.

     Section 3.3 Replacement Certificates.  The certificate(s)  representing the
Securities  held by any  Investor  (or  then  holder)  may be  exchanged  by the
Investor  (or such  holder)  at any time and from time to time for  certificates
with  different   denominations   representing  an  equal  aggregate  number  of
Securities as requested by the Investor (or such holder) upon  surrendering  the
same. The Company will deliver such substitute certificates within three trading
days.  No service  charge  will be made for such  registration  or  transfer  or
exchange.

                                      -16-
<PAGE>

     Section  3.4  Expenses.  The  Company  shall  pay to  KKWC  in  immediately
available  funds,  at the  Closing  the  sum of  $15,000  ($20,000  less  $5,000
previously paid) for the payment of expenses  (including legal fees) incurred by
the  Investors  in  connection  with  the  transactions   contemplated  by  this
Agreement.  In lieu  thereof,  MLP may  allocate  $15,000 of its  payment of its
Aggregate  Purchase  Price to the payment of such  counsel,  and such payment to
KKWC shall be credited  towards the payment of the Aggregate  Purchase Price due
from MLP.

     Section 3.5  Securities  Compliance.  The Company  shall notify the SEC, in
accordance  with  their  requirements,   of  the  transactions  contemplated  by
Transaction Documents, and shall take all other necessary action and proceedings
as may be required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Securities.

     Section 3.6  Dividends or  Distributions;  Purchases of Equity  Securities.
Except as set forth in Schedule 3.6 hereof,  and as provided in this Section 3.6
to the contrary,  for so long as any Warrants  remain  outstanding,  the Company
agrees  that  it  shall  not  (a)  declare  or pay any  dividends  or  make  any
distributions  to any holder or holders of Common  Stock  (other than  dividends
payable in Common Stock) in their capacity as  shareholders,  or (b) purchase or
otherwise acquire for value, directly or indirectly,  any shares of Common Stock
or other equity security of the Company;  provided that the Company may purchase
or  acquire  shares of  Common  Stock  that are  hereafter  issued to  employees
pursuant to employment, stock repurchase or other similar agreements.

     Section 3.7 Notices.  The Company agrees to provide all holders of Warrants
with copies of all notices and information, including without limitation notices
and proxy  statements in connection with any meetings,  that are provided to the
holders of shares of Common Stock,  contemporaneously  with the delivery of such
notices or information to such Common Stock holders.

     Section 3.8 Use of Proceeds.  The Company agrees that the proceeds received
by the Company from the sale of the Initial Shares and Warrants  hereunder shall
be used for the late stage  development of Dexanabinol  and for working  capital
purposes.

     Section 3.9 Additional Financing.  If, during the period of time commencing
on the date hereof and ending on the third month following the  effectiveness of
the registration  statement filed pursuant to the Registration Rights Agreement,
the Company shall seek to enter into any financing transaction whatsoever, other
than a financing transaction for gross proceeds of at least $40 million, with at
least 20 investors  unaffiliated  with the Company,  the Company shall not enter
into such transaction without the prior written consent of the Investors.

     Section  3.10  Reservation  of  Optional  Shares  and Stock  Issuable  Upon
Exercise  of the  Warrants.  The  Company  shall at all times  reserve  and keep
available out of its authorized but unissued shares of Common Stock,  solely for
the purpose of effecting the issuance of Optional Shares and the exercise of the
Warrants,  such number of its shares of Common  Stock as shall

                                      -17-
<PAGE>

from time to time be  sufficient  to effect the issuance of Optional  Shares and
the full  exercise of the Warrants  and if at any time the number of  authorized
but  unissued  shares of Common  Stock  shall not be  sufficient  to effect  the
issuance of Optional  Shares and the full exercise of the Warrants,  the Company
will take such  corporate  action as may,  in the  opinion  of its  counsel,  be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be  sufficient  for such  purpose,  including  without
limitation  engaging  in  best  efforts  to  obtain  the  requisite  shareholder
approval.  Without in any way  limiting  the  foregoing,  the Company  agrees to
reserve and at all times keep  available  solely for purposes of issuance of the
Optional  Shares and the exercise of the Warrants such number of authorized  but
unissued  shares of Common Stock that is at least equal to 160% of the aggregate
shares  issuable  upon purchase of the Units,  and 100% of the aggregate  shares
issuable  on  exercise  of the  Warrant,  which  number  shall be  appropriately
adjusted for any stock split,  reverse split, stock dividend or reclassification
of the Common Stock.  If the Company  falls below the reserves  specified in the
immediately  preceding sentence and does not cure such non-compliance  within 30
days of its start,  then the  Investors  will be  entitled  to the  compensatory
payments specified in Section  2(b)(i)(A) of the Registration  Rights Agreement.
If at any time the number of authorized  but unissued  shares of Common Stock is
not  sufficient  to  effect  the  issuance  of the  Optional  Shares or the full
exercise of the Warrants,  the Investors  shall be entitled to, inter alia,  the
premium price redemption rights provided in the Registration Rights Agreement.

     Section  3.11 Best  Efforts.  The parties  shall use their best  efforts to
satisfy timely each of the conditions described in Article 3 of this Agreement.

     Section 3.12 Limitations on Debt, Liens and Transfers.

          (a) So long as any Warrants  remain  outstanding,  the Company  agrees
that neither the Company nor any of its  subsidiaries  shall (i) create,  incur,
assume, guarantee,  secure or in any manner become liable in respect of any debt
financing (other than purchase money financing,  not to exceed $1,000,000 in the
aggregate),  which is senior to the Warrants; or (ii) create, incur or permit to
exist any security interest, lien or other encumbrance on or with respect to any
of the assets of the Company or its  subsidiaries  other than (i) in  connection
with the purchase money financings referred to above and (ii) (A) liens, arising
by operation of law, securing tax obligations,  worker's  compensation and lease
obligations;  (B) non-consensual  statutory liens (other than liens securing the
payment of taxes)  arising in the ordinary  course of the Company's  business to
the extent: (I) such liens secure indebtedness which is not overdue or (II) such
liens  secure  indebtedness  relating to claims or  liabilities  which are fully
insured and being  defended at the sole cost and expense and at the sole risk of
the  insurer  or  being  contested  in good  faith  by  appropriate  proceedings
diligently  pursued  and  available  to the  Company,  in each case prior to the
commencement  of  foreclosure or other similar  proceedings  and with respect to
which  adequate   reserves  have  been  set  aside  on  its  books;  (C)  zoning
restrictions,  easements,  licenses,  covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with the
use of such real property or ordinary  conduct of the business of the Company as
presently  conducted thereon or materially impair the value of the

                                      -18-
<PAGE>

real property which may be subject  thereto.  No subsidiary of the Company shall
have any liability for any obligations under any debt financing.

          (b) The  Company  shall not  contribute  or  transfer,  in one or more
transactions, a material portion of its assets to any of its subsidiaries, other
than a subsidiary  that has delivered its guarantee to the Investors in form and
substance satisfactory to the Investors.

     Section  3.13 Form D; Blue Sky Laws.  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 Investor promptly after such filing.  The Company shall, on
or before  each  Closing  Date,  take  such  action as the  Company  shall  have
reasonably determined is necessary to qualify the applicable Securities for sale
to the  Investors 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 each Investor on the Closing Date.

     Section  3.14 Nasdaq  Rule.  The  Investors  shall,  in the  aggregate,  be
entitled  to  exercise  for  Adjustment  Shares  resulting  in a total  of up to
10,538,342  shares of Common  Stock  (19.99%  of the  Common  Stock  issued  and
outstanding  on the date hereof,  which number shall be subject to  readjustment
for any stock split,  stock  dividend or  reclassification  of the Common Stock)
(the "20% Cap").  Each Investor shall be entitled to receive  Adjustment  Shares
such that,  together with its Initial  Shares,  it will own such total number of
shares of Common Stock equal to such  Investor's  pro rata share of the 20% Cap.
Once an Investor has received its total pro rata share of Adjustment  Shares, it
may request that the Company  redeem its remaining  Securities at the applicable
Premium  Redemption Price. If an Investor has received its Adjustment Shares but
has not  depleted  the total  number of pro rata  shares  allocated  to it,  its
remaining pro rata shares shall be  reallocated  amongst the Investors  still to
receive  Adjustment  Shares on a pro rata basis. The restrictions and redemption
obligations  set  forth in this  Section  3.14  shall  cease to apply if (a) the
Company obtains written shareholder approval to issue Common Shares in excess of
the 20% Cap  pursuant  to  Nasdaq  Rule  4460 or (b) the  Company  provides  the
Investors with irrevocable written notice, based upon the advice of its counsel,
that any such  issuance of Common  Shares is not subject to the 20% Cap pursuant
to Nasdaq  Rule  4460.  If the number of Initial  Shares and  Adjustment  Shares
exceeds 75% of the 20% Cap, the Company  will use its best  efforts  promptly to
obtain either the shareholder  approval or the irrevocable  notice  described in
the preceding sentence and to provide the Investors with a copy of same. Without
limiting the foregoing, the Company shall solicit the aforementioned shareholder
approval  at the next  shareholders  meeting  (for  whatever  purpose  it may be
called)  which,  in any event,  shall not be later than 75 days of such event in
which the Company will solicit the  aforementioned  shareholder  approval,  will
solicit  proxies in favor of issuing  Common Shares in excess of the 20% Cap and
will use its best  efforts to have all  affiliates  of the Company  which own or
control shares of Common Stock to vote their shares in favor of such resolution.

                                      -19-
<PAGE>

     Section 3.15  Transactions  With  Affiliates.  The Company  agrees that any
transaction  or  arrangement  between  it or  any of its  subsidiaries  and  any
affiliate or employee of the Company  shall be effected on an arms' length basis
in accordance  with customary  commercial  practice and,  except with respect to
grants of options and stock to service providers,  including employees, shall be
approved by a majority of the Company's outside directors.

     Section 3.16 Press Release.  Immediately following the Closing, the Company
shall  issue a press  release  in the form set forth in  Schedule  3.16  hereto.
Investors  shall have the  opportunity to review such press release prior to its
issuance.  No press release shall name the Investors except as shall be required
by law. If the Company fails to issue a press  release  within 1 business day of
the Closing,  the Investors  may issue a press release  covering the Closing and
complying with any legal requirement applicable to the Investors.

     Section 3.17 Form 8-K. Within 15 calendar days of the Closing,  the Company
shall file a Form 8-K with the SEC which discloses the transactions contemplated
by the  Transaction  Documents.  Investors  shall have the opportunity to review
such Form 8-K prior to its filing.

     Section 3.18  Reporting Lack of Effective  Registration.  The Company shall
promptly  notify  each  Investor  in  writing  if there  shall ever be a lack of
Effective   Registration,   as   well   as  when   Effective   Registration   is
re-established.

     Section 3.19  Limitation on Sales.  Notwithstanding  any other provision of
this  Agreement,  the  Company  shall not,  for as long as any  Warrants  remain
outstanding,   sell  any  Common  Stock  (or  securities   convertible  into  or
exchangeable  for,  Common Stock) during any 30 calendar day period in an amount
that would exceed (on a fully converted or exercised  basis) in excess of 10% of
real average trading volume (determined as 50% of the trading volume reported by
Bloomberg,  LP) for the immediately preceding 30 calendar day period;  provided,
that the foregoing limitation shall not apply to sales by the Company, after the
three  month  anniversary  of the  Closing  Date,  to  purchasers  who  are  not
"underwriters"  (within the meaning of the  Securities  Act) pursuant to a shelf
registration  pursuant to Rule 415 under the Act, and which transactions are not
Variable  Rate  Transactions.  This  provision  shall be of no further  force or
effect, if following and during Effective  Registration,  the price per share of
Common Stock shall have closed above $5.00 for 20 consecutive Trading Days.

                                   ARTICLE IV

                             Conditions to Closings

     Section 4.1 Conditions  Precedent to the Obligation of the Company to Sell.
The obligation  hereunder of the Company to issue and/or sell the Initial Shares
and Warrants to the Investors at the Closing is subject to the satisfaction,  at
or before the  closing of each of the

                                      -20-
<PAGE>

applicable  conditions set forth below.  These  conditions are for the Company's
sole  benefit  and  may  be  waived  by the  Company  at any  time  in its  sole
discretion.

          (a) Accuracy of the Investors'  Representations  and  Warranties.  The
representations  and  warranties of the Investors will be true and correct as of
the date when made and as of the Closing Date.

          (b)  Performance by the Investors.  The Investors shall have performed
all  agreements  and  satisfied  all  conditions  required  to be  performed  or
satisfied by the Investors at or prior to the Closing,  including payment of the
applicable purchase price.

          (c) No Injunction.  No statute,  rule,  regulation,  executive  order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent jurisdiction which
prohibits  the  consummation  of  any of the  transactions  contemplated  by the
Transaction Documents.

     Section 4.2  Conditions  Precedent to the  Obligation  of the  Investors to
Purchase.  The obligation  hereunder of the Investors to acquire and pay for the
Initial  Shares and  Warrants at the Closing is subject to the  satisfaction  of
each of the applicable  conditions set forth below. These conditions are for the
Investors'  benefit and may be waived by the Investors at any time in their sole
discretion.

          (a) Accuracy of the  Company's  Representations  and  Warranties.  The
representations  and  warranties  of the Company shall be true and correct as of
the date when made and as of the applicable  closing date as though made at that
time (except for representations and warranties expressly as of an earlier date,
which shall be true and correct in all material respects as of such date).

          (b)  Performance by the Company.  The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the  Company  at  or  prior  to  the  applicable  closing,  including,   without
limitation, delivery of certificates representing the applicable Securities.

          (c) Nasdaq  Trading.  Trading in the Company's  Common Stock shall not
have been  suspended by the SEC and trading in securities  generally as reported
by the Principal Market (or other Approved Market) shall not have been suspended
or limited, and the Common Stock shall be listed on an Approved Market.

          (d) No Injunction. No statute, rule, regulation,  executive,  judicial
or administrative  order, decree,  ruling or injunction shall have been enacted,
entered,  promulgated  or endorsed  by any court or  governmental  authority  of
competent   jurisdiction   which  prohibits  the  consummation  of  any  of  the
transactions  contemplated  by  Transaction  Documents.  The NASD

                                      -21-
<PAGE>

shall not have objected or indicated that it may object to the  consummation  of
any of the transactions contemplated by this Agreement.

          (e) Opinion of Counsel.  The Investors  shall have received an opinion
of counsel to the  Company in the  applicable  form  attached  hereto as Exhibit
4.2(e) and such other opinions,  certificates  and documents as the Investors or
their counsel shall reasonably require incident to the closing.

          (f) Registration Rights Agreement. The Company and the Investors shall
have executed and delivered the  Registration  Rights  Agreement in the form and
substance of Exhibit 4.2(f) attached hereto.

          (g) Officer's  Certificate.  The Company  shall have  delivered to the
Investors a certificate in form and substance  satisfactory to the Investors and
the Investors' counsel, executed by an officer of the Company,  certifying as to
satisfaction of applicable closing  conditions,  incumbency of signing officers,
and the true,  correct and complete nature of the Certificate of  Incorporation,
By-laws, good standing and authorizing resolutions of the Company.

          (h)  Miscellaneous.  The Company shall have delivered to the Investors
such other documents relating to the transactions contemplated by this Agreement
as the Investors or their counsel may reasonable request.

     Section 4.3 Closing Date Deliveries.

          (a) On the Closing Date, the Company shall deliver to the Investor:

               (i)  Warrants in the form  attached as Annex A, Annex B and Annex
          C;

               (ii) The certificate referred to in Section 4.2(g) above;

               (iii) The evidence of blue sky filing  required by Section  3.13,
          to the extent filing is required on or prior to the Closing Date;

               (iv) The executed Registration Rights Agreement; and

               (v) The opinion of counsel referred to in Section 4.2(e) above.

          (b) On the Closing Date, the Investors shall deliver to the Company:

               (i) The Purchase Price set forth on Schedule I hereto; and

                                      -22-
<PAGE>

               (ii) The executed Registration Rights Agreement.

                                   ARTICLE V

                                Legend and Stock

     Each  certificate  representing  the Common Stock issued hereunder shall be
stamped or otherwise  imprinted  with a legend  substantially  in the  following
form:

     THESE  SECURITIES  HAVE NOT BEEN  REGISTERED  FOR  OFFER OR SALE  UNDER THE
SECURITIES  ACT OF 1933 OR ANY STATE  SECURITIES  LAWS.  THEY MAY NOT BE SOLD OR
OFFERED FOR SALE EXCEPT  PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.

     The Company agrees to reissue within 3 trading days certificates for Common
Stock  without the legend set forth above at such time as such Common  Stock (i)
is sold to a  purchaser  or  purchasers  who (in the  opinion  of counsel to the
seller or such purchaser(s),  in form and substance  reasonably  satisfactory to
the Company and its counsel) are able to dispose of such shares publicly without
registration  under  the  Act,  (ii) are  registered  pursuant  to an  effective
registration statement, or (iii) may be sold pursuant to Rule 144.

     Any Common  Stock  issued  pursuant to  exercise  of Warrants  shall bear a
legend in the same form as the legend indicated above; provided that such legend
shall be  removed  from  the  Common  Stock  and the  Company  shall  issue  new
certificates  without such legend if such Common Stock is registered  for resale
under  the 1933  Act,  or (iii)  such  Common  Stock is sold to a  purchaser  or
purchasers who (in the opinion of counsel to the seller or such purchaser(s), in
form and substance  reasonably  satisfactory  to the Company and it counsel) are
able to dispose of such shares publicly without registration under the 1933 Act.
Upon the  applicable  trade date of each such sale,  the Company agrees to issue
within 3 trading days new  certificates  representing  such Common Stock without
such legend. The Investor agrees to sell the Common Stock represented by the new
certificates in accordance with the applicable  prospectus delivery requirements
(if copies of a current prospectus are provided to the Investors by the Company)
or in accordance  with an exemption from the  registration  requirements  of the
1933 Act.

     Nothing  herein  shall  limit  the  right of any  holder  to  pledge  these
securities pursuant to a bona fide margin account or lending arrangement entered
into in compliance with law, including applicable securities laws.

                                      -23-
<PAGE>

                                   ARTICLE VI

                                 Indemnification

     In  consideration  of  the  Investors'   execution  and  delivery  of  this
Agreement, the Warrants and the Registration Rights Agreement and in addition to
all of the Company's  other  obligations  under the Transaction  Documents,  the
Company shall defend, protect, indemnify and hold harmless the Investors and all
of their  partners,  officers,  directors,  employees,  members  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  or  document
contemplated  hereby or thereby,  (b) any breach of any  covenant,  agreement or
obligation of the Company  contained in the  Transaction  Documents or any other
certificate or document contemplated hereby or thereby, (c) any cause of action,
suit or claim  brought or made  against  such  Indemnitee  by a third  party and
arising  out of or  resulting  from (i) the  execution,  delivery,  performance,
breach by the Company or enforcement of the  Transaction  Documents or any other
certificate,  instrument or document  contemplated  hereby or thereby,  (ii) any
transaction  financed  or to be  financed  in  whole  or in  part,  directly  or
indirectly,  with the  proceeds of the issuance of the  Securities  or (iii) the
status of the Investor or holder of the  Securities  or Warrants as investors in
the  Company,  and (d) the  enforcement  of this  Section.  Notwithstanding  the
foregoing,  Indemnified  Liabilities  shall not  include  any  liability  of any
Indemnitee  arising  solely  out of  such  Indemnitee's  willful  misconduct  or
fraudulent  action(s).  To the  extent  that the  foregoing  undertaking  by the
Company may be unenforceable for any reason,  the Company shall make the maximum
contribution  to the  payment  and  satisfaction  of  each  of  the  Indemnified
Liabilities  which is permissible  under applicable law. Except as otherwise set
forth  herein,  the  mechanics  and  procedures  with  respect to the rights and
obligations  under  this  Article  VIII  shall be the same as those set forth in
Section  6 (other  than  Section  6(b)) of the  Registration  Rights  Agreement,
including,  without limitation,  those procedures with respect to the settlement
of claims and Company's right to assume the defense of claims.

                                      -24-
<PAGE>

                                  ARTICLE VII

                           [INTENTIONALLY LEFT BLANK]

                                      -25-
<PAGE>

                                  ARTICLE VIII

                          Governing Law; Miscellaneous.

     Section  8.1  Governing  Law.  THIS  AGREEMENT  SHALL  BE  GOVERNED  BY AND
INTERPRETED IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK  APPLICABLE TO
CONTRACTS  TO BE EXECUTED  AND  PERFORMED  EXCLUSIVELY  IN NEW YORK.  EACH PARTY
HEREBY  IRREVOCABLY  SUBMITS  TO THE  EXCLUSIVE  JURISDICTION  OF THE  STATE AND
FEDERAL  COURTS SITTING IN THE CITY OF NEW YORK,  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.  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.
EACH PARTY HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY.

     Section 8.2  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.

     Section 8.3 Headings. The headings of this Agreement are for convenience of
reference  and shall not form part of, or affect  the  interpretation  of,  this
Agreement.

                                      -26-
<PAGE>

     Section 8.4  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.

     Section 8.5 Entire Agreement; Amendments; Waivers.

          (a)  This  Agreement  supersedes  all  other  prior  oral  or  written
agreements  between the  Investors,  the Company,  their  affiliates and persons
acting on their behalf with respect to the matters  discussed  herein,  and this
Agreement and the instruments referenced herein (including the other Transaction
Documents)  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 the  Investors  make any  representation,
warranty,  covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended except by a written instrument signed by
the Company and Investors  holding at least a majority of the Initial Shares. No
provision  of this  Agreement  may be  amended  other than by an  instrument  in
writing signed by the Company and the Investor,  and no provision  hereof may be
waived other than by an instrument  in writing  signed by the party against whom
enforcement is sought.

          (b) The Investors may at any time elect, by notice to the Company,  to
waive (whether  permanently or temporarily,  and subject to such conditions,  if
any, as the Investors may specify in such notice) any of their respective rights
(but not obligations)  under any of the Transaction  Documents to acquire shares
of Common  Stock from the  Company,  in which event such waiver shall be binding
against the Investors in accordance with its terms.

     Section 8.6 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this  Agreement  must be in
writing,  must be  delivered  by (i)  courier,  mail or  hand  delivery  or (ii)
facsimile, and will be deemed to have been delivered upon receipt. The addresses
and facsimile numbers for such communications shall be:

     If to the Company:

                                      -27-
<PAGE>

                           Pharmos Corporation
                           99 Wood Avenue South
                           Suite 301
                           Iselin, New Jersey  08830

                           Telephone:  (732) 452-9556
                           Facsimile:
                           Attention:  Robert W. Cook, Chief Financial Officer

         With a copy to:

                           Ehrenreich Eilenberg & Krause LLP
                           11 East 44th Street, 17th Floor
                           New York, New York 10017
                           Attention:  Adam D. Eilenberg, Esq.
                           Phone:   (212) 986-9700
                           Fax:     (212) 986-2399

         If to the Investors:

                           To each Investor at the address and/or fax number set
                           forth in Schedule I of this Agreement.

         With a copy to:

                           Kleinberg, Kaplan, Wolff & Cohen, P.C.
                           551 Fifth Avenue, 18th Floor
                           New York, New York 10176
                           Telephone:   212-986-6000
                           Facsimile:   212-986-8866
                           Attention:   Stephen M. Schultz, Esq. and
                                        Christopher P. Davis, Esq.

     Each party shall  provide five (5) days prior  written  notice to the other
party of any change in address,  telephone number or facsimile  number.  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 a
nationally recognized overnight delivery service shall be rebuttable evidence of
personal service,  receipt by facsimile or receipt from a nationally  recognized
overnight  delivery  service in accordance with clause (i), (ii) or (iii) above,
respectively.

     Section 8.7 Successors and Assigns.  Except as otherwise  provided  herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their respective

                                      -28-
<PAGE>

successors and assigns, including any Permitted Assignee (as defined below). The
Company shall not assign this Agreement or any rights or  obligations  hereunder
without  the prior  written  consent  of the  Investor,  including  by merger or
consolidation. The Investors may assign some or all of their rights hereunder to
the other  Investor,  to an affiliate of either Investor or to an entity or fund
which has the same principal investment adviser as either Investor,  without the
consent of the Company,  and to others,  with the written consent of the Company
(in  each  case,  a  "Permitted  Assignee");  provided,  however,  that any such
assignment  shall not release the  Investors  from their  obligations  hereunder
unless  such  obligations  are  assumed by such  assignee  and the  Company  has
consented to such  assignment and  assumption.  Notwithstanding  anything to the
contrary contained in the Transaction Documents,  the Investor shall be entitled
to pledge the  Securities  or  Warrants  in  connection  with a bona fide margin
account.

     Section 8.8 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.

     Section 8.9 Survival. The representations, warranties and agreements of the
Company and the Investors  contained in the Agreement  shall survive each of the
Closing and to the extent  applicable,  each Optional Closing (as defined in the
Call Warrant) and each  Closing,  in each case for a period which expires on the
second anniversary of the Closing Date.

     Section 8.10 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 the 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.

     Section 8.11 Remedies. Each Investor and each Permitted Assignee shall have
all  rights and  remedies  set forth in this  Agreement,  the  Warrants  and the
Registration  Rights  Agreement  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. Each Investor and each Permitted  Assignee  without
prejudice may withdraw,  revoke or suspend its pursuit of any remedy at any time
prior to its complete recovery as a result of such remedy.

     Section 8.12 Days. Unless the context refers to "business days" or "trading
days," all references herein to "days" shall mean calendar days.

     Section 8.13 Rescission and Withdrawal Right.  Notwithstanding  anything to
the contrary  contained in (and without limiting any similar  provisions of) the
Transaction Documents, wherever the Investors exercise a right, election, demand
or option under a

                                      -29-
<PAGE>

Transaction  Document  and the  Company  does not  timely  perform  its  related
obligations within the periods therein provided,  then the Investors may rescind
or withdraw,  in their 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.

     Section 8.14  Obligations  Absolute.  The Company's  obligations  under the
Transaction  Documents  are  unconditional  and  absolute and not subject to any
right of set off, counterclaim, delay or reduction.

     Section 8.15 Publicity.  The Company agrees that it will not disclose,  and
will not include in any public  announcement,  the name of any Investor  without
the express written agreement of such Investor, unless and until such disclosure
is required by law or applicable regulation, and then only to the extent of such
requirement.  The  Company  agrees  that it will  deliver  a copy of any  public
announcement  regarding the matters  covered by this  Agreement or any agreement
and document  executed  herewith to each  Investor  and any public  announcement
including the name of an Investor to such Investor, reasonably in advance of the
release of such announcements.

     Section 8.16 Like  Treatment of Investors and Holders.  Neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be paid
any consideration  (immediate or contingent),  whether by way of interest,  fee,
payment for the redemption,  or exercise of the Securities, or otherwise, to any
Investor or holder of  Securities,  for or as an inducement to, or in connection
with the  solicitation  of, any  consent,  waiver or  amendment  of any terms or
provisions of the Transaction  Documents,  unless such consideration is required
to be paid to all  Investors  or holders of  Securities  bound by such  consent,
waiver or amendment  whether or not such Investors or holders so consent,  waive
or agree to amend and  whether or not such  Investors  or holders  tender  their
Securities  for  redemption,  conversion  or  exercise.  The Company  shall not,
directly or indirectly, redeem any Securities unless such offer of redemption is
made pro rata to all Investors or holders of Securities,  as the case may be, on
identical terms.

                                    * * * * *

                            [Signature Page Follows]

                                      -30-
<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto  have  caused  this Common  Stock
Investment  Agreement  to be duly  executed  as of the date and year first above
written.

                                            PHARMOS CORPORATION

                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

                                    INVESTORS:

                                            MILLENNIUM PARTNERS, L.P.

                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

                                            LATERMAN & CO., L.P.

                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

                                            STRONG RIVER INVESTMENTS, INC.

                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

               Signature page to Common Stock Investment Agreement

<PAGE>

List of Schedules
-----------------

Schedule 1                List of Investors

Exhibit 1.1A              Form of Debenture

Exhibit 1.1B              Form of Warrant

Exhibit 1.3               Form of Option Warrant

Schedule 2.1(a)           List of Subsidiaries

Schedule 2.1(c)           Capitalization

Schedule 2.1(c)(i)        Capitalization

Exhibit 2.1(c)(i)         Certificate of Incorporation of the Company

Exhibit 2.1(c)(ii)        By-Laws of the Company

Schedule 2.1 (s)(i)       Outstanding securities entitled to registration rights

Schedule 2.1 (s)(ii)      Outstanding securities affected by the issuance of
                          Debentures, etc.

Schedule 2.1(aa)          Real Property

List of Exhibits
----------------

Exhibit 4.2(e)                  Opinion of Counsel
Exhibit 4.2(f)                  Registration Rights Agreement
Exhibit 4.2(g)                  Officers' Certificate

Annexes
-------

Annex A                         Initial Warrant

Annex B                         Adjustment Warrant

Annex C                         Call Warrant

                                      -32-
<PAGE>

                                   SCHEDULE 1

<TABLE>
<CAPTION>
                                                                       Number of              Number of
Investor                                   Residence                Initial Shares         Initial Warrants          Purchase Price
--------                                   ---------                --------------         ----------------          --------------
<S>                                  <C>                                                        <C>                    <C>
Millennium Partners, L.P.*                 New York
666 Fifth Avenue
New York, New York 10103
Fax: (212) 841-6302
Attn: Dan Cardella
                                     British Virgin Islands                                     69,065                 $2,000,000
Strong River Investments, Inc.
C/o Icaza, Gonzalez-Ruiz &
Aleman (BV1) Ltd.
Vanterpool Plaza, 2nd Floor
Wickhams Cay 1, Road Town
Tortala, British Virgin Islands
W/copies to: Cavallo Capital
Corp.
660 Madison Avenue
18th Floor
New York, New York 10021
Phone: (212) 651-9000
Fax: (212) 651-9010
Attn: Mor Sagi

Laterman & Co., L.P.                                                                            34,532                 $1,000,000
5 East 59th Street
New York, New York 10022
Phone: (212) 593-4222
Fax: (212) 593-4976
Attn: Bernard Laterman
</TABLE>

----------

* Investor for purposes of Call Warrant only

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