Document:

Exhibit 4.2

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES

                                            Date of Issuance: September 26, 2003

                                                                   $[21,000,000]

                            4% CONVERTIBLE DEBENTURE
                               DUE MARCH 31, 2005

      THIS DEBENTURE is one of a series of duly authorized and issued 4%
Convertible Debentures of Pharmos Corporation, a Nevada corporation, having a
principal place of business at 99 Wood Avenue, Suite 311, Iselin, New Jersey
08830 (the "Company"), designated as its 4% Convertible Debenture, due March 31,
2005 (the "Debentures").

      FOR VALUE RECEIVED, the Company promises to pay to _______________________
or its registered assigns (the "Holder"), the principal sum of $[21,000,000] on
March 31, 2005 or such earlier date as the Debentures are required or permitted
to be repaid as provided hereunder (the "Maturity Date"), and to pay interest to
the Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture at the rate of 4% per annum, payable quarterly on March 31, June
30, September 30 and December 31, beginning on the first such date after the
Original Issue Date and on each Conversion Date (as to that principal amount
then being converted) and on the Maturity Date (except that, if any such date is
not a Business Day, then such payment shall be due on the next succeeding
Business Day) (each such date, an "Interest Payment Date") in cash or shares of
Common Stock at the Interest Conversion Rate, or a combination thereof;
provided, however, payment in shares of Common Stock may only occur if: (i)
there is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents, including shares of Common Stock
to be issued in lieu of cash (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (ii) the
Common Stock is listed for trading on a Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading Market
will continue uninterrupted for the foreseeable future), (iii) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, including

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the shares to be issued for interest in lieu of cash and (iv) there is then
existing no Event of Default or event which, with the passage of time or the
giving of notice, would constitute and Event of Default, (v) the issuance of
such shares, when added to the shares issued or issuable upon conversion of the
Debentures in full and issued and issuable upon exercise of the Warrants in full
would not violate the limitations set forth in Section 4(a)(ii) and (vi) the
Interest Conversion Rate is greater than or equal to the Set Price then in
effect, subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the Original Issue Date. Subject to the terms and conditions
herein, the decision whether to pay interest hereunder in shares of Common Stock
or cash shall be at the discretion of the Company. Not less than 10 Trading Days
prior to each Interest Payment Date, the Company shall provide the Holder with
written notice of its election to pay interest hereunder either in cash or
shares of Common Stock (the Company may indicate in such notice that the
election contained in such notice shall continue for later periods until
revised). Within 10 Trading Days prior to an Interest Payment Date, the
Company's election (whether specific to an Interest Payment Date or continuous)
shall be irrevocable as to such Interest Payment Date. Subject to the
aforementioned conditions, failure to timely provide such written notice shall
be deemed an election by the Company to pay the interest on such Interest
Payment Date in cash. Interest shall be calculated on the basis of a 360-day
year and shall accrue daily commencing on the Original Issue Date until payment
in full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Payment of interest
in shares of Common Stock shall otherwise occur pursuant to Section 4(b) and
only for purposes of the payment of interest in shares, the Interest Payment
Date shall be deemed the Conversion Date. Interest shall cease to accrue with
respect to any principal amount converted, provided that the Company in fact
delivers the Underlying Shares within the time period required by Section
4(b)(i). Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of Debentures (the "Debenture Register"). Except as otherwise provided
herein, if at anytime the Company pays interest partially in cash and partially
in shares of Common Stock, then such payment shall be distributed ratably among
the Holders based upon the principal amount of Debentures held by each Holder.
All overdue accrued and unpaid interest to be paid hereunder shall entail a late
fee at the rate of 15% per annum (or such lower maximum amount of interest
permitted to be charged under applicable law) ("Late Fee") which will accrue
daily, from the date such interest is due hereunder through and including the
date of payment. Notwithstanding anything to the contrary contained herein, if
on any Interest Payment Date the Company has elected to pay interest in Common
Stock and is not able to pay accrued interest in the form of Common Stock
because it does not then satisfy the conditions for payment in the form of
Common Stock set forth above (other than as a result of clause (vi) above),
then, at the option of the Holder, the Company, in lieu of delivering either
shares of Common Stock pursuant to Section 4 hereof or paying the regularly
scheduled cash interest payment, shall deliver, within three Trading Days of
each applicable Interest Payment Date, an amount in cash equal to the product of
the number of shares of Common Stock otherwise deliverable to the Holder in
connection with the payment of interest due such Interest Payment Date and the
highest Closing Price during the period commencing on the Interest Payment Date
and ending on the Trading Day prior to the date such payment is made. If on any
Interest Payment Date the Company has elected to pay interest in Common Stock
and is not able to pay accrued interest in the form of Common Stock because it
does not then satisfy the conditions for such form of payment as a result of
clause (vi) above, then the Company, in lieu of delivering shares of Common
Stock pursuant to Section 4 hereof, shall pay the regularly scheduled cash
interest payment. Except as set forth in Section 5, the Company may not prepay
any portion of the principal amount of this Debenture without the prior written
consent of the Holder.

      This Debenture is subject to the following additional provisions:

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      Section 1. This Debenture is exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for such
registration of transfer or exchange.

      Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations. Prior to due
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

      Section 3. Events of Default.

            a) "Event of Default", wherever used herein, means any one of the
      following events (whatever the reason and whether it shall be voluntary or
      involuntary or effected by operation of law or pursuant to any judgment,
      decree or order of any court, or any order, rule or regulation of any
      administrative or governmental body):

                  i) any default in the payment of the principal of, interest
            (including Late Fees) on, or liquidated damages in respect of, any
            Debentures, free of any claim of subordination, as and when the same
            shall become due and payable (whether on a Conversion Date or the
            Maturity Date or by acceleration or otherwise) which default is not
            cured, if possible to cure, within 5 days of notice of such default
            sent by the Holder;

                  ii) the Company shall fail to observe or perform any other
            covenant, agreement or warranty contained in, or otherwise commit
            any breach of any of the Transaction Documents (other than a breach
            by the Company of its obligations to deliver shares of Common Stock
            to the Holder upon conversion or interest payment which breach is
            addressed in clause (x) below) which is not cured, if possible to
            cure, within 10 days of notice of such default sent by the Holder;

                  iii) the Company or any of its subsidiaries shall commence, or
            there shall be commenced against the Company or any such subsidiary
            a case under any applicable bankruptcy or insolvency laws as now or
            hereafter in effect or any successor thereto, or the Company
            commences any other proceeding under any reorganization,
            arrangement, adjustment of debt, relief of debtors, dissolution,
            insolvency or liquidation or similar law of any jurisdiction whether
            now or hereafter in effect relating to the Company or any subsidiary
            thereof or there is commenced against the Company or any subsidiary
            thereof any such bankruptcy, insolvency or other proceeding which
            remains undismissed for a period of 60 days; or the Company or any
            subsidiary thereof is adjudicated insolvent or bankrupt; or any
            order of relief or other order approving any such case or proceeding
            is entered; or the Company or any subsidiary thereof suffers any
            appointment of any custodian or the like for it or any substantial
            part of its property which continues undischarged or unstayed for a
            period of 60 days; or the Company or any subsidiary thereof makes a
            general assignment for the benefit of creditors; or the Company
            shall fail to pay, or shall state that it is unable to pay, or shall
            be unable to pay, its debts generally as they become due; or the
            Company or any subsidiary thereof shall call a meeting of its
            creditors with a view to arranging a composition,

<PAGE>

            adjustment or restructuring of its debts; or the Company or any
            subsidiary thereof shall by any act or failure to act expressly
            indicate its consent to, approval of or acquiescence in any of the
            foregoing; or any corporate or other action is taken by the Company
            or any subsidiary thereof for the purpose of effecting any of the
            foregoing;

                  iv) the Company shall default in any of its obligations under
            any other Debenture or any mortgage, credit agreement or other
            facility, indenture agreement, factoring agreement or other
            instrument under which there may be issued, or by which there may be
            secured or evidenced any indebtedness for borrowed money or money
            due under any long term leasing or factoring arrangement of the
            Company in an amount exceeding $150,000, whether such indebtedness
            now exists or shall hereafter be created and such default shall
            result in such indebtedness becoming or being declared due and
            payable prior to the date on which it would otherwise become due and
            payable;

                  v) the Common Stock shall not be eligible for quotation on or
            quoted for trading on a Trading Market and shall not again be
            eligible for and quoted or listed for trading thereon within five
            Trading Days;

                  vi) the Company shall be a party to any Change of Control
            Transaction, shall agree to sell or dispose of all or in excess of
            50% of its assets in one or more transactions (whether or not such
            sale would constitute a Change of Control Transaction) or shall
            redeem or repurchase more than a de minimis number of its
            outstanding shares of Common Stock or other equity securities of the
            Company (other than redemptions of Conversion Shares and repurchases
            of shares of Common Stock or other equity securities of departing
            officers and directors of the Company; provided no repurchase shall
            exceed $100,000 for any officer or director);

                  vii) a Registration Statement shall not have been declared
            effective by the Commission on or prior to the 150th calendar day
            after the Original Issue Date;

                  viii) if, during the Effectiveness Period (as defined in the
            Registration Rights Agreement), the effectiveness of the
            Registration Statement lapses for any reason or the Holder shall not
            be permitted to resell Registrable Securities (as defined in the
            Registration Rights Agreement) under the Registration Statement, in
            either case, for more than 15 consecutive Trading Days or 25
            non-consecutive Trading Days during any 12 month period;

                  ix) an Event (as defined in the Registration Rights Agreement)
            shall not have been cured to the satisfaction of the Holder prior to
            the expiration of thirty days from the Event Date (as defined in the
            Registration Rights Agreement) relating thereto (other than an Event
            resulting from a failure of an Registration Statement to be declared
            effective by the Commission on or prior to the Effectiveness Date
            (as defined in the Registration Rights Agreement), which shall be
            covered by Section 3(a)(vii));

                  x) the Company shall fail for any reason to deliver
            certificates to a Holder prior to the seventh Trading Day after a
            Conversion Date pursuant to and in accordance with Section
            4(b)(unless the conversion has been rescinded by the Holder pursuant
            to Section 4(b)(i)) or the Company shall provide notice to the
            Holder, including by way of public

<PAGE>

            announcement, at any time, of its intention not to comply with
            requests for conversions of any Debentures in accordance with the
            terms hereof; or

                  xi) the Company shall fail for any reason to deliver the
            payment in cash pursuant to a Buy-In (as defined herein) within
            seven days after notice thereof is delivered hereunder.

            b) If any Event of Default occurs and is continuing, the full
      principal amount of this Debenture, together with interest and other
      amounts owing in respect thereof, to the date of acceleration shall become
      at the Holder's election, immediately due and payable in cash. The
      aggregate amount payable upon such acceleration following an Event of
      Default shall be equal to the Mandatory Prepayment Amount. Commencing 5
      days after the occurrence of any Event of Default that results in the
      eventual acceleration of this Debenture, the interest rate on this
      Debenture shall accrue at the rate of 15% per annum (or such lower maximum
      amount of interest permitted to be charged under applicable law). All
      Debentures for which the full prepayment price hereunder shall have been
      paid in accordance herewith shall promptly be surrendered to or as
      directed by the Company. The Holder need not provide and the Company
      hereby waives any presentment, demand, protest or other notice of any
      kind, and the Holder may immediately and without expiration of any grace
      period enforce any and all of its rights and remedies hereunder and all
      other remedies available to it under applicable law. Such declaration may
      be rescinded and annulled by Holder at any time prior to payment hereunder
      and the Holder shall have all rights as a Debenture holder until such
      time, if any, as the full payment under this Section shall have been
      received by it. No such rescission or annulment shall affect any
      subsequent Event of Default or impair any right consequent thereon.

      Section 4. Conversion.

            a) i) At any time after the Original Issue Date until this Debenture
            is no longer outstanding, this Debenture shall be convertible into
            shares of Common Stock at the option of the Holder, in whole or in
            part (in increments of at least $100,000 principal amount) at any
            time and from time to time (subject to the limitations on conversion
            set forth in Section 4(a)(ii) hereof). The Holder shall effect
            conversions by delivering to the Company the form of Notice of
            Conversion attached hereto as Annex A (a "Notice of Conversion"),
            specifying therein the principal amount of Debentures to be
            converted and the date on which such conversion is to be effected (a
            "Conversion Date"). If no Conversion Date is specified in a Notice
            of Conversion, the Conversion Date shall be the date that such
            Notice of Conversion is provided hereunder. To effect conversions
            hereunder, the Holder shall not be required to physically surrender
            Debentures to the Company unless the entire principal amount of this
            Debenture plus all accrued and unpaid interest thereon has been so
            converted. Conversions hereunder shall have the effect of lowering
            the outstanding principal amount of this Debenture in an amount
            equal to the applicable conversion. The Holder and the Company shall
            maintain records showing the principal amount converted and the date
            of such conversions. The Company shall deliver any objection to any
            Notice of Conversion within 1 Business Day of receipt of such
            notice. In the event of any dispute or discrepancy, the records of
            the Company shall be controlling and determinative in the absence of
            manifest error. The Holder and any assignee, by acceptance of this
            Debenture, acknowledge and agree that, by reason of the provisions
            of this paragraph, following conversion of a portion of this
            Debenture, the unpaid and unconverted principal amount of this
            Debenture may be less than the amount stated on the face hereof.

<PAGE>

                  ii) Conversion Limitation. The Holder shall not have the right
            to convert any portion of this Debenture, pursuant to Section
            4(a)(i) or otherwise, to the extent that after giving effect to such
            conversion, the Holder (together with the Holder's affiliates), as
            set forth on the applicable Notice of Conversion, would beneficially
            own in excess of 4.99% of the number of shares of the Common Stock
            outstanding immediately after giving effect to such conversion. For
            purposes of the foregoing sentence, the number of shares of Common
            Stock beneficially owned by the Holder and its affiliates shall
            include the number of shares of Common Stock issuable upon
            conversion of this Debenture with respect to which the determination
            of such sentence is being made, but shall exclude the number of
            shares of Common Stock which would be issuable upon (A) conversion
            of the remaining, nonconverted portion of this Debenture
            beneficially owned by the Holder or any of its affiliates and (B)
            exercise or conversion of the unexercised or nonconverted portion of
            any other securities of the Company (including, without limitation,
            any other Debentures or the Warrants) subject to a limitation on
            conversion or exercise analogous to the limitation contained herein
            beneficially owned by the Holder or any of its affiliates. Except as
            set forth in the preceding sentence, for purposes of this Section
            4(a)(ii), beneficial ownership shall be calculated in accordance
            with Section 13(d) of the Exchange Act. To the extent that the
            limitation contained in this section applies, the determination of
            whether this Debenture is convertible (in relation to other
            securities owned by the Holder) and of which a portion of this
            Debenture is convertible shall be in the sole discretion of such
            Holder. To ensure compliance with this restriction, the Holder will
            be deemed to represent to the Company each time it delivers a Notice
            of Conversion that such Notice of Conversion has not violated the
            restrictions set forth in this paragraph and the Company shall have
            no obligation to verify or confirm the accuracy of such
            determination. For purposes of this Section 4(a)(ii), in determining
            the number of outstanding shares of Common Stock, the Holder may
            rely on the number of outstanding shares of Common Stock as
            reflected in (x) the Company's most recent Form 10-Q or Form 10-K,
            as the case may be, (y) a more recent public announcement by the
            Company or (z) any other notice by the Company or the Company's
            Transfer Agent setting forth the number of shares of Common Stock
            outstanding. Upon the written or oral request of the Holder, the
            Company shall within two Trading Days confirm orally and in writing
            to the Holder the number of shares of Common Stock then outstanding.
            In any case, the number of outstanding shares of Common Stock shall
            be determined after giving effect to the conversion or exercise of
            securities of the Company, including this Debenture, by the Holder
            or its affiliates since the date as of which such number of
            outstanding shares of Common Stock was reported. The provisions of
            this Section 4(a)(ii) may be waived by the Holder upon, at the
            election of the Holder, not less than 61 days' prior notice to the
            Company, and the provisions of this Section 4(a)iii) shall continue
            to apply until such 61st day (or such later date, as determined by
            the Holder, as may be specified in such notice of waiver).

                  iii) Conversion Shares Issuable Upon Conversion of Principal
            Amount. The number of shares of Common Stock issuable upon a
            conversion shall be determined by the quotient obtained by dividing
            (x) the outstanding principal amount of this Debenture to be
            converted by (y) the Set Price.

            (b) i) Not later than five Trading Days after any Conversion Date,
            the Company will deliver to the Holder a certificate or certificates
            representing the Conversion Shares which shall be free of
            restrictive legends and trading restrictions (other than those
            required by the Purchase Agreement) representing the number of
            shares of Common Stock being acquired

<PAGE>

            upon the conversion of Debentures (including, if so timely elected
            by the Company, shares of Common Stock representing the payment of
            accrued interest) and (B) a bank check in the amount of accrued and
            unpaid interest (if the Company has timely elected or is required to
            pay accrued interest in cash). The Company shall, if available and
            if allowed under applicable securities laws, use its best efforts to
            deliver any certificate or certificates required to be delivered by
            the Company under this Section electronically through the Depository
            Trust Corporation or another established clearing corporation
            performing similar functions. If in the case of any Notice of
            Conversion such certificate or certificates are not delivered to
            Holder (in the case of paper certificates) or made available under
            the electronic DWAC system by the Company's transfer agent for
            access by the Holder's broker designated in the Notice of Conversion
            as directed by the applicable Holder by the fifth Trading Day after
            a Conversion Date, the Holder shall be entitled by written notice to
            the Company at any time on or before its receipt of such certificate
            or certificates thereafter, to rescind such conversion, in which
            event the Company shall immediately return the certificates
            representing the principal amount of Debentures tendered for
            conversion.

            ii) If the Company fails for any reason to deliver to the Holder
            such certificate or certificates pursuant to Section 4(b)(i) by the
            fifth Trading Day after the Conversion Date, the Company shall pay
            to such Holder, in cash, as liquidated damages and not as a penalty,
            for each $5,000 of principal amount being converted, $50 per Trading
            Day for each Trading Day after such fifth Trading Day until such
            certificates are delivered; provided, however, that such liquidated
            damages payable to any Holder shall not exceed 10% of the aggregate
            principal amount being converted. The Company's obligations to issue
            and deliver the Conversion Shares upon conversion of this Debenture
            in accordance with the terms hereof are absolute and unconditional,
            irrespective of any action or inaction by the Holder to enforce the
            same, any waiver or consent with respect to any provision hereof,
            the recovery of any judgment against any Person or any action to
            enforce the same, or any setoff, counterclaim, recoupment,
            limitation or termination, or any breach or alleged breach by the
            Holder or any other Person of any obligation to the Company or any
            violation or alleged violation of law by the Holder or any other
            person, and irrespective of any other circumstance which might
            otherwise limit such obligation of the Company to the Holder in
            connection with the issuance of such Conversion Shares; provided,
            however, such delivery shall not operate as a waiver by the Company
            of any such action the Company may have against the Holder. In the
            event a Holder of this Debenture shall elect to convert any or all
            of the outstanding principal amount hereof, the Company may not
            refuse conversion based on any claim that the Holder or any one
            associated or affiliated with the Holder of has been engaged in any
            violation of law, agreement or for any other reason, unless, an
            injunction from a court, on notice, restraining and or enjoining
            conversion of all or part of this Debenture shall have been sought
            and obtained and the Company posts a surety bond for the benefit of
            the Holder in the amount of 150% of the principal amount of this
            Debenture outstanding, which is subject to the injunction, which
            bond shall remain in effect until the completion of
            arbitration/litigation of the dispute and the proceeds of which
            shall be payable to such Holder to the extent it obtains judgment.
            In the absence of an injunction precluding the same, the Company
            shall issue Conversion Shares or, if applicable, cash, upon a
            properly noticed conversion. Nothing herein shall limit a Holder's
            right to pursue actual damages or declare an Event of Default
            pursuant to Section 3 herein for the Company's failure to deliver
            Conversion Shares within the period specified herein and such Holder
            shall have the right to pursue all remedies available to it at law
            or in equity including, without limitation, a decree of specific
            performance and/or injunctive relief. The

<PAGE>

            exercise of any such rights shall not prohibit the Holders from
            seeking to enforce damages pursuant to any other Section hereof or
            under applicable law.

            (iii) In addition to any other rights available to the Holder, if
            the Company fails for any reason to deliver to the Holder such
            certificate or certificates pursuant to Section 4(b)(i) by the fifth
            Trading Day after the Conversion Date, and if after such fifth
            Trading Day the Holder is required by its brokerage firm to purchase
            (in an open market transaction or otherwise) Common Stock to deliver
            in satisfaction of a sale by such Holder of the Conversion Shares
            which the Holder anticipated receiving upon such conversion (a
            "Buy-In"), then the Company shall (A) pay in cash to the Holder (in
            addition to any remedies available to or elected by the Holder) the
            amount by which (x) the Holder's total purchase price (including
            brokerage commissions, if any) for the Common Stock so purchased
            exceeds (y) the product of (1) the aggregate number of shares of
            Common Stock that such Holder anticipated receiving from the
            conversion at issue multiplied by (2) the actual sale price of the
            Common Stock at the time of the sale (including brokerage
            commissions, if any) giving rise to such purchase obligation and (B)
            at the option of the Holder, either reissue Debentures in principal
            amount equal to the principal amount of the attempted conversion or
            deliver to the Holder the number of shares of Common Stock that
            would have been issued had the Company timely complied with its
            delivery requirements under Section 4(b)(i). For example, if the
            Holder purchases Common Stock having a total purchase price of
            $11,000 to cover a Buy-In with respect to an attempted conversion of
            Debentures with respect to which the actual sale price of the
            Conversion Shares at the time of the sale (including brokerage
            commissions, if any) giving rise to such purchase obligation was a
            total of $10,000 under clause (A) of the immediately preceding
            sentence, the Company shall be required to pay the Holder $1,000.
            The Holder shall provide the Company written notice indicating the
            amounts payable to the Holder in respect of the Buy-In.
            Notwithstanding anything contained herein to the contrary, if a
            Holder requires the Company to make payment in respect of a Buy-In
            for the failure to timely deliver certificates hereunder and the
            Company timely pays in full such payment, the Company shall not be
            required to pay such Holder liquidated damages under Section
            4(b)(ii) in respect of the certificates resulting in such Buy-In.

            (iv) Notwithstanding anything herein to the contrary, if after the
            Effective Date the Closing Prices for 10 out of any 20 consecutive
            Trading Days (such period not commencing until after the Effective
            Date) exceeds $5.50, subject to adjustment for reverse and forward
            stock splits, stock dividends, stock combinations and other similar
            transactions of the Common Stock that occur after the Original Issue
            Date, the Company may on one occasion, within 3 Trading Days of any
            such period, deliver a notice to the Holder to cause the Holder to
            immediately convert all or part of up to 50% of the original
            aggregate principal amount of the Debentures pursuant to Section
            4(a)(i) ("$5.50 Forced Conversion"). The Company may only effect a
            $5.50 Forced Conversion or notice thereof if each of the Equity
            Conditions have been met with respect to such $5.50 Forced
            Conversion during the 20 Trading Day period relating to such $5.50
            Forced Conversion and until the date of such $5.50 Forced
            Conversion. If the Company elects to exercise its right to a $5.50
            Forced Conversion, it shall exercise such right ratably among all
            holders of Debentures.

            (v) Notwithstanding anything herein to the contrary, if after the
            Effective Date the Closing Prices for 10 out of any 20 consecutive
            Trading Days (such period not commencing until after the Effective
            Date) exceeds $6.50, subject to adjustment for reverse and forward

<PAGE>

            stock splits, stock dividends, stock combinations and other similar
            transactions of the Common Stock that occur after the Original Issue
            Date, the Company may on one occasion, within 3 Trading Days of any
            such period, deliver a notice to the Holder to cause the Holder to
            immediately convert all or part of up to 50% of the original
            aggregate principal amount of the Debenture pursuant to Section
            4(a)(i) ("$6.50 Forced Conversion" and collectively with the $5.50
            Forced Conversion, "Forced Conversions"). The Company may only
            effect a $6.50 Forced Conversion or notice thereof if each of the
            Equity Conditions have been met with respect to such $6.50 Forced
            Conversion during the 20 Trading Day period relating to such $6.50
            Forced Conversion and until the date of such $6.50 Forced
            Conversion. If the Company elects to exercise its right to a $6.50
            Forced Conversion, it shall exercise such right ratably among all
            holders of Debentures.

            (c) i) The conversion price in effect on any Conversion Date shall
            be equal to $4.04(1) (subject to adjustment herein)(the "Set
            Price").

            ii) If the Company, at any time while the Debentures are
            outstanding: (A) shall pay a stock dividend or otherwise make a
            distribution or distributions on shares of its Common Stock or any
            other equity or equity equivalent securities payable in shares of
            Common Stock (which, for avoidance of doubt, shall not include any
            shares of Common Stock issued by the Company pursuant to this
            Debenture, including as interest thereon), (B) subdivide outstanding
            shares of Common Stock into a larger number of shares, (C) combine
            (including by way of reverse stock split) outstanding shares of
            Common Stock into a smaller number of shares, or (D) issue by
            reclassification of shares of the Common Stock any shares of capital
            stock of the Company, then the Set Price shall be multiplied by a
            fraction of which the numerator shall be the number of shares of
            Common Stock (excluding treasury shares, if any) outstanding before
            such event and of which the denominator shall be the number of
            shares of Common Stock outstanding after such event. Any adjustment
            made pursuant to this Section shall become effective immediately
            after the record date for the determination of stockholders entitled
            to receive such dividend or distribution and shall become effective
            immediately after the effective date in the case of a subdivision,
            combination or re-classification.

            iii) [RESERVED]

            iv) [RESERVED]

            v) All calculations under this Section 4 shall be made to the
            nearest cent or the nearest 1/100th of a share, as the case may be.
            For purposes of this Section 4, the number of shares of Common Stock
            outstanding as of a given date shall be the sum of the number of
            shares of Common Stock (excluding treasury shares, if any)
            outstanding.

            vi) Whenever the Set Price is adjusted pursuant to any of Section
            4(c)(ii) - (v), the Company shall promptly mail to each Holder a
            notice setting forth the Set Price after such adjustment and setting
            forth a brief statement of the facts requiring such adjustment.

----------
(1)   205% of the average of the 5 Closing Prices immediately prior to the
      Original Issue Date.

<PAGE>

            vii) If (A) the Company shall declare a dividend (or any other
            distribution) on the Common Stock; (B) the Company shall declare a
            special nonrecurring cash dividend on or a redemption of the Common
            Stock; (C) the Company shall authorize the granting to all holders
            of the Common Stock rights or warrants to subscribe for or purchase
            any shares of capital stock of any class or of any rights; (D) the
            approval of any stockholders of the Company shall be required in
            connection with any reclassification of the Common Stock, any
            consolidation or merger to which the Company is a party, any sale or
            transfer of all or substantially all of the assets of the Company,
            of any compulsory share exchange whereby the Common Stock is
            converted into other securities, cash or property; (E) the Company
            shall authorize the voluntary or involuntary dissolution,
            liquidation or winding up of the affairs of the Company; then, in
            each case, the Company shall cause to be filed at each office or
            agency maintained for the purpose of conversion of the Debentures,
            and shall cause to be mailed to the Holders at their last addresses
            as they shall appear upon the stock books of the Company, at least
            20 calendar days prior to the applicable record or effective date
            hereinafter specified, a notice stating (x) the date on which a
            record is to be taken for the purpose of such dividend,
            distribution, redemption, rights or warrants, or if a record is not
            to be taken, the date as of which the holders of the Common Stock of
            record to be entitled to such dividend, distributions, redemption,
            rights or warrants are to be determined or (y) the date on which
            such reclassification, consolidation, merger, sale, transfer or
            share exchange is expected to become effective or close, and the
            date as of which it is expected that holders of the Common Stock of
            record shall be entitled to exchange their shares of the Common
            Stock for securities, cash or other property deliverable upon such
            reclassification, consolidation, merger, sale, transfer or share
            exchange; provided, that the failure to mail such notice or any
            defect therein or in the mailing thereof shall not affect the
            validity of the corporate action required to be specified in such
            notice. Holders are entitled to convert Debentures during the 20-day
            period commencing the date of such notice to the effective date of
            the event triggering such notice.

            viii) If, at any time while this Debenture is outstanding, (A) the
            Company effects any merger or consolidation of the Company with or
            into another Person, (B) the Company effects any sale of its assets
            in one or a series of related transactions, (C) any tender offer or
            exchange offer (whether by the Company or another Person) is
            completed pursuant to which holders of Common Stock are permitted to
            tender or exchange their shares for other securities, cash or
            property, or (D) the Company effects any reclassification of the
            Common Stock or any compulsory share exchange pursuant to which the
            Common Stock is effectively converted into or exchanged for other
            securities, cash or property (in any such case, a "Fundamental
            Transaction"), then upon any subsequent conversion of this
            Debenture, the Holder shall have the right to receive, for each
            Underlying Share that would have been issuable upon such conversion
            absent such Fundamental Transaction, the same kind and amount of
            securities, cash or property as it would have been entitled to
            receive upon the occurrence of such Fundamental Transaction if it
            had been, immediately prior to such Fundamental Transaction, the
            holder of one share of Common Stock (the "Alternate Consideration").
            For purposes of any such conversion, the determination of the Set
            Price shall be appropriately adjusted to apply to such Alternate
            Consideration based on the amount of Alternate Consideration
            issuable in respect of one share of Common Stock in such Fundamental
            Transaction, and the Company shall apportion the Set Price among the
            Alternate Consideration in a reasonable manner reflecting the
            relative value of any different components of the Alternate
            Consideration. If holders of Common Stock are given any choice as to
            the securities, cash or

<PAGE>

            property to be received in a Fundamental Transaction, then the
            Holder shall be given the same choice as to the Alternate
            Consideration it receives upon any conversion of this Debenture
            following such Fundamental Transaction. To the extent necessary to
            effectuate the foregoing provisions, any successor to the Company or
            surviving entity in such Fundamental Transaction shall issue to the
            Holder a new debenture consistent with the foregoing provisions and
            evidencing the Holder's right to convert such debenture into
            Alternate Consideration. The terms of any agreement pursuant to
            which a Fundamental Transaction is effected shall include terms
            requiring any such successor or surviving entity to comply with the
            provisions of this paragraph (c) and insuring that this Debenture
            (or any such replacement security) will be similarly adjusted upon
            any subsequent transaction analogous to a Fundamental Transaction.
            Additionally, if the Company or any of its subsidiaries, at any time
            while the Debentures are outstanding, shall distribute to all
            holders of Common Stock evidences of its indebtedness or assets or
            cash or rights or warrants to subscribe for or purchase any security
            of the Company or any of its subsidiaries, then concurrently with
            such distributions to holders of Common Stock, the Company shall
            distribute to holders of the Debentures the amount of such
            indebtedness, assets, cash or rights or warrants which the holders
            of Debentures would have received had all their Debentures been
            converted into Common Stock at the lower of the Set Price and the
            Closing Price immediately prior to the record date for such
            distribution.

            (d) The Company covenants that it will at all times reserve and keep
      available out of its authorized and unissued shares of Common Stock solely
      for the purpose of issuance upon conversion of the Debentures and payment
      of interest on the Debenture, each as herein provided, free from
      preemptive rights or any other actual contingent purchase rights of
      persons other than the Holders, not less than such number of shares of the
      Common Stock as shall (subject to any additional requirements of the
      Company as to reservation of such shares set forth in the Purchase
      Agreement) be issuable (taking into account the adjustments and
      restrictions of Section 4(b)) upon the conversion of the outstanding
      principal amount of the Debentures and payment of interest hereunder. The
      Company covenants that all shares of Common Stock that shall be so
      issuable shall, upon issue, be duly and validly authorized and issued and
      fully paid, nonassessable and, if the Registration Statement is then
      effective under the Securities Act, registered for public sale in
      accordance with such Registration Statement.

            (e) Upon a conversion hereunder the Company shall not be required to
      issue stock certificates representing fractions of shares of the Common
      Stock, but may if otherwise permitted, make a cash payment in respect of
      any final fraction of a share based on the Closing Price at such time. If
      the Company elects not, or is unable, to make such a cash payment, the
      Holder shall be entitled to receive, in lieu of the final fraction of a
      share, one whole share of Common Stock.

            (f) The issuance of certificates for shares of the Common Stock on
      conversion of the Debentures shall be made without charge to the Holders
      thereof for any documentary stamp or similar taxes that may be payable in
      respect of the issue or delivery of such certificate, provided that the
      Company shall not be required to pay any tax that may be payable in
      respect of any transfer involved in the issuance and delivery of any such
      certificate upon conversion in a name other than that of the Holder of
      such Debentures so converted and the Company shall not be required to
      issue or deliver such certificates unless or until the person or persons
      requesting the issuance thereof shall have paid to the Company the amount
      of such tax or shall have established to the satisfaction of the Company
      that such tax has been paid.

<PAGE>

            (g) Any and all notices or other communications or deliveries to be
      provided by the Holders hereunder, including, without limitation, any
      Notice of Conversion, shall be in writing and delivered personally, by
      facsimile, sent by a nationally recognized overnight courier service,
      addressed to the Company, at the address set forth above, facsimile number
      (732) 452-9557, Attn: Robert W. Cook or such other address or facsimile
      number as the Company may specify for such purposes by notice to the
      Holders delivered in accordance with this Section. Any and all notices or
      other communications or deliveries to be provided by the Company hereunder
      shall be in writing and delivered personally, by facsimile, sent by a
      nationally recognized overnight courier service addressed to each Holder
      at the facsimile telephone number or address of such Holder appearing on
      the books of the Company, or if no such facsimile telephone number or
      address appears, at the principal place of business of the Holder. Any
      notice or other communication or deliveries hereunder shall be deemed
      given and effective on the earliest of (i) the date of transmission, if
      such notice or communication is delivered via facsimile at the facsimile
      telephone number specified in this Section prior to 5:30 p.m. (New York
      City time), (ii) the date after the date of transmission, if such notice
      or communication is delivered via facsimile at the facsimile telephone
      number specified in this Section later than 5:30 p.m. (New York City time)
      on any date and earlier than 11:59 p.m. (New York City time) on such date,
      (iii) the second Business Day following the date of mailing, if sent by
      nationally recognized overnight courier service, or (iv) upon actual
      receipt by the party to whom such notice is required to be given.

      Section 5. Redemption; Extension of Maturity Date.

            (a) Monthly Redemption. On each Monthly Redemption Date, the Company
      shall redeem each Holder's Pro Rata Portion of the Monthly Redemption
      Amount plus accrued but unpaid interest plus the sum of all liquidated
      damages and any other amounts then owing to such Holder in respect of the
      Debenture. For purposes of this Section 5(b) only, "Pro Rata Portion" is
      the ration of (x) the principal amount of this Debenture on the Original
      Issue Date and (y) the sum of the aggregate original principal amounts of
      the Debentures issued to all Holders on the Closing Date. If any Holder
      shall no longer holds Debentures or if a Holder's outstanding principal
      amount is less than their Pro Rata Portion of the Monthly Redemption
      Amount, then such Holder's Monthly Redemption Amount shall be such lesser
      amount and the Pro Rata Portion shall be recalculated to exclude such
      Holder's principal amount (or portion thereof no longer outstanding) from
      clause (y) above and the Monthly Redemption Amount shall be allocated
      pro-rata among the remaining Holders. The Monthly Redemption Amount due on
      each Monthly Redemption Date shall, except as provided in this Section, be
      paid in cash. The Holders may convert, pursuant to Section 4(a)(i), any
      principal amount of the Debenture subject to a Monthly Redemption at any
      time prior to the date that the Monthly Redemption Amount and all amounts
      owing thereon are due and paid in full. The Company covenants and agrees
      that it will honor all Conversion Notices tendered up until such amounts
      are paid in full.

            (b) Redemption Procedure. The payment of cash pursuant to a Monthly
      Redemption shall be made on the Monthly Redemption Date. If any portion of
      the cash payment for a Monthly Redemption shall not be paid by the Company
      by the due date, interest shall accrue thereon at the rate of 15% per
      annum (or the maximum rate permitted by applicable law, whichever is less)
      until the payment of the Monthly Redemption Amount, plus all amounts owing
      thereon is paid in full. In addition, if any portion of the Monthly
      Redemption Amount remains unpaid after such date, the Holders subject to
      such redemption may elect, by written notice to the Company given at any
      time thereafter, to invalidate ab initio such redemption, notwithstanding
      anything herein contained to the contrary.

<PAGE>

            (c) Extension of Maturity Date; Modification of Redemption Schedule.
      To the extent that any of the principal represented by this Debenture that
      is held in escrow in accordance with the terms of the Escrow Agreement is
      used by the Company in connection with an acquisition by the Company
      approved by the Holders in accordance with the provisions of the Escrow
      Agreement (the "Acquisition Principal Amount"), (i) the Maturity Date for
      the Acquisition Principal Amount shall be extended for an additional two
      years from the date of the closing of such acquisition, (ii) the first
      Monthly Redemption Date, as provided in Section 5 hereof, for the
      Acquisition Principal Amount shall occur on the first anniversary of the
      date of such acquisition and the Acquisition Principal Amount plus accrued
      and unpaid interest plus the sum of all liquidated damages and any other
      amounts then owing to the Holders in respect of the Acquisition Principal
      Amount shall be paid in twelve equal monthly installments commencing on
      such first anniversary and (iii) the Monthly Redemption Amount relating to
      all principal under the Debentures not constituting Acquisition Principal
      Amount shall be reduced correspondingly.

      Section 6. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement, and (b)
the following terms shall have the following meanings:

            "Business Day" means any day except Saturday, Sunday and any day
      which shall be a federal legal holiday in the United States or a day on
      which banking institutions in the State of New York are authorized or
      required by law or other government action to close.

            "Change of Control Transaction" means the occurrence after the date
      hereof of any of (i) an acquisition after the date hereof by an individual
      or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
      under the Exchange Act) of effective control (whether through legal or
      beneficial ownership of capital stock of the Company, by contract or
      otherwise) of in excess of 40% of the voting securities of the Company, or
      (ii) a replacement at one time or within a three year period of more than
      one-half of the members of the Company's board of directors which is not
      approved by a majority of those individuals who are members of the board
      of directors on the date hereof (or by those individuals who are serving
      as members of the board of directors on any date whose nomination to the
      board of directors was approved by a majority of the members of the board
      of directors who are members on the date hereof), or (iii) the execution
      by the Company of an agreement to which the Company is a party or by which
      it is bound, providing for any of the events set forth above in (i) or
      (ii).

            "Commission" means the Securities and Exchange Commission.

            "Common Stock" means the common stock, $0.03 par value per share, of
      the Company and stock of any other class into which such shares may
      hereafter have been reclassified or changed.

            "Consent" shall mean the vote of the Holders of at least 75% of the
      principal amount of the Debentures then outstanding.

            "Conversion Date" shall have the meaning set forth in Section
      4(a)(i) hereof.

            "Conversion Shares" means the shares of Common Stock issuable upon
      conversion of Debentures in accordance with the terms hereof.

<PAGE>

            "Equity Conditions" means each of the following: (i) the Company
      shall have duly honored all conversions occurring by virtue of one or more
      Conversion Notices prior to the applicable Forced Conversion, if any (ii)
      there is an effective Registration Statement pursuant to which the Holder
      is permitted to utilize the prospectus thereunder to resell all of the
      Underlying Shares issued to the Holder and all of the Underlying Shares as
      are issuable to the Holder upon conversion in full of this Debenture
      subject to the applicable Forced Conversion (and the Company believes, in
      good faith, that such effectiveness will continue uninterrupted for the
      foreseeable future), (iii) the Common Stock is listed for trading on a
      Trading Market (and the Company believes, in good faith, that trading of
      the Common Stock on a Trading Market will continue uninterrupted for the
      foreseeable future), (iv) all liquidated damages and other amounts owing
      in respect of the Debentures and Underlying Shares shall have been paid or
      will, concurrently with the issuance of the Underlying Shares, be paid in
      cash; (v) there is a sufficient number of authorized but unissued and
      otherwise unreserved shares of Common Stock for the issuance of all the
      Underlying Shares as are issuable to the Holder upon conversion in full of
      the Debentures subject to the applicable Forced Conversion; (vi) the
      issuance of such shares upon conversion of the Debentures in the
      applicable Forced Conversion would not violate the limitations set forth
      in Section 4(a)(ii), calculated in a manner consistent with the second
      sentence thereof, and (vii) no Event of Default nor any event that with
      the passage of time or notice or both would constitute an Event of Default
      has occurred and is continuing.

            "Exchange Act" means the Securities Exchange Act of 1934, as
      amended.

            "Interest Conversion Rate" means the average of the 5 Closing Prices
      immediately prior to the applicable Interest Payment Date.

            "Late Fees" shall have the meaning set forth in the second paragraph
      to this Debenture.

            "Mandatory Prepayment Amount" for any Debentures shall equal the sum
      of (i) the greater of: (A) 120% of the principal amount of Debentures to
      be prepaid, plus all accrued and unpaid interest thereon and all other
      accrued and unpaid amounts due hereunder, or (B) the principal amount of
      Debentures to be prepaid, plus all other accrued and unpaid interest
      hereon and other amounts due hereunder, divided by the Set Price on (x)
      the date the Mandatory Prepayment Amount is demanded or otherwise due or
      (y) the date the Mandatory Prepayment Amount is paid in full, whichever is
      less, multiplied by the Closing Price on (x) the date the Mandatory
      Prepayment Amount is demanded or otherwise due or (y) the date the
      Mandatory Prepayment Amount is paid in full, whichever is greater, and
      (ii) all other amounts, costs, expenses and liquidated damages due in
      respect of such Debentures.

            "Monthly Redemption" shall mean the redemption of the Debenture
      pursuant to Section 5(a) hereof.

            "Monthly Redemption Amount" shall mean, as to a Monthly Redemption,
      $1,615,384.60(2) in the aggregate among all Holders, or such lesser
      principal amount of the Debentures as is outstanding in the aggregate on
      the Monthly Redemption Date.

            "Monthly Redemption Date" means the last Trading Day of each month,
      commencing on the last Trading Day of March 2004 and ending upon the full
      redemption of this Debenture.

----------
(2)   1/13 of the original aggregate principal amount issued pursuant to the
      Purchase Agreement.

<PAGE>

            "Original Issue Date" shall mean the date of the first issuance of
      the Debentures regardless of the number of transfers of any Debenture and
      regardless of the number of instruments which may be issued to evidence
      such Debenture.

            "Person" means a corporation, an association, a partnership,
      organization, a business, an individual, a government or political
      subdivision thereof or a governmental agency.

            "Purchase Agreement" means the Securities Purchase Agreement, dated
      as of September 26, 2003, to which the Company and the original Holder are
      parties, as amended, modified or supplemented from time to time in
      accordance with its terms.

            "Registration Rights Agreement" means the Registration Rights
      Agreement, dated as of the date of the Purchase Agreement, to which the
      Company and the original Holder are parties, as amended, modified or
      supplemented from time to time in accordance with its terms.

            "Registration Statement" means a registration statement meeting the
      requirements set forth in the Registration Rights Agreement, covering
      among other things the resale of the Conversion Shares and naming the
      Holder as a "selling stockholder" thereunder.

            "Securities Act" means the Securities Act of 1933, as amended, and
      the rules and regulations promulgated thereunder.

            "Set Price" shall have the meaning set forth in Section 4(c)(i).

            "Trading Day" means (a) a day on which the shares of Common Stock
      are traded on a Trading Market on which the shares of Common Stock are
      then listed or quoted, or (b) if the shares of Common Stock are not quoted
      on a Trading Market, a day on which the shares of Common Stock are quoted
      in the over-the-counter market as reported by the National Quotation
      Bureau Incorporated (or any similar organization or agency succeeding its
      functions of reporting prices); provided, that in the event that the
      shares of Common Stock are not listed or quoted as set forth in (a), (b)
      and (c) hereof, then Trading Day shall mean a Business Day.

            "Transaction Documents" shall have the meaning set forth in the
      Purchase Agreement.

      Section 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, interest and liquidated damages (if
any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture is a direct debt obligation of the
Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. As long as this Debenture is
outstanding, the Company shall not and shall cause it subsidiaries not to,
without the Consent of the Holders, (a) amend its certificate of incorporation,
bylaws or other charter documents so as to adversely affect any rights of the
Holders; (b) repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or other
equity securities other than as to the Conversion Shares to the extent permitted
or required under the Transaction Documents or as otherwise permitted by the
Transaction Documents; or (c) enter into any agreement with respect to any of
the foregoing.

      Section 8. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in

<PAGE>

substitution for a lost, stolen or destroyed Debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.

      Section 9. So long as any portion of this Debenture is outstanding, the
Company will not and will not permit any of its subsidiaries to, directly or
indirectly, enter into, create, incur, assume or suffer to exist any
indebtedness or liens of any kind, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom that is senior to, or pari passu with, in any respect, the
Company's obligations under the Debentures without the prior Consent of the
Holders.

      Section 10. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), 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, or such New York Courts are improper or
inconvenient venue for such proceeding. 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 via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its attorneys fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

      Section 11. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.

      Section 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or

<PAGE>

in any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law which would prohibit or forgive the Company
from paying all or any portion of the principal of or interest on this Debenture
as contemplated herein, wherever enacted, now or at any time hereafter in force,
or which may affect the covenants or the performance of this indenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by resort
to any such law, hinder, delay or impeded the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every such as
though no such law has been enacted.

      Section 13. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.

                              *********************

<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to
be duly executed by a duly authorized officer as of the date first above
indicated.

                                    PHARMOS CORPORATION

                                    By:_________________________________________
                                       Name:
                                       Title:

<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

The undersigned hereby elects to convert principal under the 4% Convertible
Debenture of Pharmos Corporation (the "Company"), due on March __, 2005, into
shares of common stock, $0.03 par value per share (the "Common Stock"), of the
Company according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.

By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.

The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

Conversion calculations:

                         Date to Effect Conversion:

                         Principal Amount of Debentures to be Converted:

                         Payment of Interest in Common Stock __ yes  __ no
                               If yes, $_____ of Interest Accrued on Account of
                               Conversion at Issue.

                         Number of shares of Common Stock to be issued:

                         Signature:

                         Name:

                         Address:

<PAGE>

                                   Schedule 1

                               CONVERSION SCHEDULE

4% Convertible Debentures due on March___, 2005, in the aggregate principal
amount of $____________ issued by Pharmos Corporation This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.

                                     Dated:

================================================================================
                                            Aggregate
                                        Principal Amount
                                            Remaining
                                          Subsequent to
  Date of Conversion      Amount of         Conversion         Company Attest
(or for first entry,     Conversion        (or original
Original Issue Date)                         Principal
                                              Amount)
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================================================================================Exhibit 4.3

                          REGISTRATION RIGHTS AGREEMENT

      This Registration Rights Agreement (this "Agreement") is made and entered
into as of September 26, 2003, by and among Pharmos Corporation, a Nevada
corporation (the "Company"), and the purchasers signatory hereto (each a
"Purchaser" and collectively, the "Purchasers").

      This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "Purchase
Agreement").

      The Company and the Purchasers hereby agree as follows:

            1. Definitions. Capitalized terms used and not otherwise defined
      herein that are defined in the Purchase Agreement shall have the meanings
      given such terms in the Purchase Agreement. As used in this Agreement, the
      following terms shall have the following meanings:

            "Effectiveness Date" means, with respect to the Registration
      Statement required to be filed hereunder, the earlier of (a) the 60th
      calendar day following the Closing Date (90th calendar day in the event of
      a full review by the Commission) and (b) the fifth Trading Day following
      the date on which the Company is notified by the Commission that the
      Registration Statement will not be reviewed or is no longer subject to
      further review and comments.

            "Effectiveness Period" shall have the meaning set forth in Section
      2(a).

            "Filing Date" means, with respect to the Registration Statement
      required to be filed hereunder, the 30th calendar day following the
      Closing Date.

            "Holder" or "Holders" means the holder or holders, as the case may
      be, from time to time of Registrable Securities.

            "Indemnified Party" shall have the meaning set forth in Section
      5(c).

            "Indemnifying Party" shall have the meaning set forth in Section
      5(c).

            "Losses" shall have the meaning set forth in Section 5(a).

            "Proceeding" means an action, claim, suit, investigation or
      proceeding (including, without limitation, an investigation or partial
      proceeding, such as a deposition), whether commenced or threatened.

            "Prospectus" means the prospectus included in the Registration
      Statement (including, without limitation, a prospectus that includes any
      information previously omitted from a prospectus filed as part of an
      effective registration statement in reliance upon Rule 430A promulgated
      under the Securities Act), as amended or supplemented by any prospectus
      supplement, with respect to the terms of the offering of any portion of
      the Registrable Securities covered by the Registration Statement, and all
      other amendments and supplements to the Prospectus, including
      post-effective amendments, and all material incorporated by reference or
      deemed to be incorporated by reference in such Prospectus.

            "Registrable Securities" means all of the Underlying Shares and all
      shares issuable upon interest on the Debentures assuming all interest
      payments are made in shares of Common Stock and

<PAGE>

      the Debentures are held until maturity, together with any shares of Common
      Stock issued or issuable upon any stock split, dividend or other
      distribution, recapitalization or similar event with respect to the
      foregoing.

            "Registration Statement" means the registration statements required
      to be filed hereunder, including (in each case) the Prospectus, amendments
      and supplements to the registration statement or Prospectus, including
      pre- and post-effective amendments, all exhibits thereto, and all material
      incorporated by reference or deemed to be incorporated by reference in the
      registration statement.

            "Rule 415" means Rule 415 promulgated by the Commission pursuant to
      the Securities Act, as such Rule may be amended from time to time, or any
      similar rule or regulation hereafter adopted by the Commission having
      substantially the same effect as such Rule.

            "Rule 424" means Rule 424 promulgated by the Commission pursuant to
      the Securities Act, as such Rule may be amended from time to time, or any
      similar rule or regulation hereafter adopted by the Commission having
      substantially the same effect as such Rule.

            "Securities Act" means the Securities Act of 1933, as amended.

            "Underlying Shares" means the shares of Common Stock issuable upon
      conversion of the Debentures and exercise of the Warrant Shares.

            "Warrant" means the warrants issuable pursuant to the Purchase
      Agreement.

            "Warrant Shares" means the shares of Common Stock issuable upon
      exercise of the Warrant.

      2. Registration.

            (a) On or prior to the Filing Date, the Company shall prepare and
      file with the Commission the Registration Statement covering the resale of
      all of the Registrable Securities for an offering to be made on a
      continuous basis pursuant to Rule 415. The Registration Statement required
      hereunder shall be on Form S-3 (except if the Company is not then eligible
      to register for resale the Registrable Securities on Form S-3, in which
      case the Registration shall be on another appropriate form in accordance
      herewith). The Registration Statement required hereunder shall contain
      (except if otherwise directed by the Holders) the "Plan of Distribution"
      attached hereto as Annex A. The Company shall cause the Registration
      Statement to become effective and remain effective as provided herein. The
      Company shall use its commercially reasonable efforts to cause the
      Registration Statement to be declared effective under the Securities Act
      as promptly as possible after the filing thereof, but in any event not
      later than the Effectiveness Date, and shall use its commercially
      reasonable efforts to keep the Registration Statement continuously
      effective under the Securities Act until the date which is two years after
      the Closing Date or such earlier date when all Registrable Securities
      covered by the Registration Statement have been sold or may be sold
      without volume restrictions pursuant to Rule 144(k) as determined by the
      counsel to the Company pursuant to a written opinion letter to such
      effect, addressed and acceptable to the Company's transfer agent and the
      affected Holders (the "Effectiveness Period").

            (b) If: (i) a Registration Statement is not filed on or prior to its
      Filing Date (if the Company files a Registration Statement without
      affording the Holder the opportunity to review and comment on the same as
      required by Section 3(a), the Company shall not be deemed to have
      satisfied this clause (i)), or (ii) a Registration Statement filed or
      required to be filed hereunder is not declared effective by

<PAGE>

      the Commission on or before the Effectiveness Date, or (iii) after a
      Registration Statement is first declared effective by the Commission, it
      ceases for any reason to remain continuously effective as to all
      Registrable Securities for which it is required to be effective, or the
      Holders are not permitted to utilize the Prospectus therein to resell such
      Registrable Securities, for in any such cases fifteen Trading Days (which
      need not be consecutive days) in the aggregate during any 12-month period
      (any such failure or breach being referred to as an "Event," and for
      purposes of clause (i) or (ii) the date on which such Event occurs, or for
      purposes of clause (iii) the date on which such fifteen Trading Day period
      is exceeded being referred to as "Event Date"), then in addition to any
      other rights the Holders may have hereunder or under applicable law: (x)
      on each such Event Date the Company shall pay to each Holder an amount in
      cash, as liquidated damages and not as a penalty, equal to 1% of the
      aggregate purchase price paid by such Holder pursuant to the Purchase
      Agreement for any Registrable Securities then held by such Holder; and (y)
      on each monthly anniversary of each such Event Date (if the applicable
      Event shall not have been cured by such date) until the applicable Event
      is cured, the Company shall pay to each Holder an amount in cash, as
      liquidated damages and not as a penalty, equal to 2% of the aggregate
      purchase price paid by such Holder pursuant to the Purchase Agreement for
      such Holder's Debentures and Warrants then outstanding; provided, however,
      liquidated damages payable to any Purchaser hereunder shall not exceed 15%
      of the aggregate purchase price paid by such Purchaser pursuant to the
      Purchase Agreement for the Holder's Debentures and Warrants then
      outsanding.

      3. Registration Procedures

      In connection with the Company's registration obligations hereunder, the
Company shall:

            (a) Not less than two Trading Days prior to the filing of the
      Registration Statement or any related Prospectus or any amendment or
      supplement thereto, the Company shall, (i) furnish to the Holders copies
      of all such documents proposed to be filed (including documents
      incorporated or deemed incorporated by reference to the extent requested
      by such Person) which documents will be subject to the review of such
      Holders, and (ii) cause its officers and directors, counsel and
      independent certified public accountants to respond to such inquiries as
      shall be necessary, in the reasonable opinion of respective counsel to
      conduct a reasonable investigation within the meaning of the Securities
      Act. The Company shall not file the Registration Statement or any such
      Prospectus or any amendments or supplements thereto to which the Holders
      of a majority of the Registrable Securities shall reasonably object in
      good faith.

            (b) (i) Prepare and file with the Commission such amendments,
      including post-effective amendments, to the Registration Statement and the
      Prospectus used in connection therewith as may be necessary to keep the
      Registration Statement continuously effective as to the applicable
      Registrable Securities for the Effectiveness Period and prepare and file
      with the Commission such additional Registration Statements in order to
      register for resale under the Securities Act all of the Registrable
      Securities; (ii) cause the related Prospectus to be amended or
      supplemented by any required Prospectus supplement, and as so supplemented
      or amended to be filed pursuant to Rule 424; (iii) respond as promptly as
      reasonably possible to any comments received from the Commission with
      respect to the Registration Statement or any amendment thereto and, as
      promptly as reasonably possible, upon request, provide the Holders true
      and complete copies of all correspondence from and to the Commission
      relating to the Registration Statement; and (iv) comply in all material
      respects with the provisions of the Securities Act and the Exchange Act
      with respect to the disposition of all Registrable Securities covered by
      the Registration Statement during the applicable period in

<PAGE>

      accordance with the intended methods of disposition by the Holders thereof
      set forth in the Registration Statement as so amended or in such
      Prospectus as so supplemented.

            (c) Notify the Holders of Registrable Securities to be sold as
      promptly as reasonably possible (and, in the case of (i)(A) below, not
      less than two Trading Days prior to such filing) and (if requested by any
      such Person) confirm such notice in writing promptly following the day
      (i)(A) when a Prospectus or any Prospectus supplement or post-effective
      amendment to the Registration Statement is proposed to be filed; (B) when
      the Commission notifies the Company whether there will be a "review" of
      the Registration Statement and whenever the Commission comments in writing
      on the Registration Statement (the Company shall upon request provide true
      and complete copies thereof and all written responses thereto to each of
      the Holders); and (C) with respect to the Registration Statement or any
      post-effective amendment, when the same has become effective; (ii) of any
      request by the Commission or any other Federal or state governmental
      authority during the period of effectiveness of the Registration Statement
      for amendments or supplements to the Registration Statement or Prospectus
      or for additional information; (iii) of the issuance by the Commission or
      any other federal or state governmental authority of any stop order
      suspending the effectiveness of the Registration Statement covering any or
      all of the Registrable Securities or the initiation of any Proceedings for
      that purpose; (iv) of the receipt by the Company of any notification with
      respect to the suspension of the qualification or exemption from
      qualification of any of the Registrable Securities for sale in any
      jurisdiction, or the initiation or threatening of any Proceeding for such
      purpose; and (v) of the occurrence of any event or passage of time that
      makes the financial statements included in the Registration Statement
      ineligible for inclusion therein or any statement made in the Registration
      Statement or Prospectus or any document incorporated or deemed to be
      incorporated therein by reference untrue in any material respect or that
      requires any revisions to the Registration Statement, Prospectus or other
      documents so that, in the case of the Registration Statement or the
      Prospectus, as the case may be, it will not contain any untrue statement
      of a material fact or omit to state any material fact required to be
      stated therein or necessary to make the statements therein, in light of
      the circumstances under which they were made, not misleading.

            (d) Use its commercially reasonable efforts to avoid the issuance
      of, or, if issued, obtain the withdrawal of (i) any order suspending the
      effectiveness of the Registration Statement, or (ii) any suspension of the
      qualification (or exemption from qualification) of any of the Registrable
      Securities for sale in any jurisdiction, at the earliest practicable
      moment.

            (e) Furnish to each Holder, without charge, at least one conformed
      copy of the Registration Statement and each amendment thereto, including
      financial statements and schedules, all documents incorporated or deemed
      to be incorporated therein by reference to the extent requested by such
      Person, and all exhibits to the extent requested by such Person (including
      those previously furnished or incorporated by reference) promptly after
      the filing of such documents with the Commission.

            (f) Promptly deliver to each Holder, without charge, as many copies
      of the Prospectus or Prospectuses (including each form of prospectus) and
      each amendment or supplement thereto as such Persons may reasonably
      request in connection with resales by the Holder of Registrable
      Securities. The Company hereby consents to the use of such Prospectus and
      each amendment or supplement thereto by each of the selling Holders in
      connection with the offering and sale of the Registrable Securities
      covered by such Prospectus and any amendment or supplement thereto, except
      after the giving on any notice pursuant to Section 3(c).

            (g) Prior to any resale of Registrable Securities by a Holder, use
      its commercially reasonable efforts to register or qualify or cooperate
      with the selling Holders in connection with the registration or
      qualification (or exemption from the Registration or

<PAGE>

      qualification) of such Registrable Securities for the resale by the Holder
      under the securities or Blue Sky laws of such jurisdictions within the
      United States as any Holder reasonably requests in writing, to keep each
      the Registration or qualification (or exemption therefrom) effective
      during the Effectiveness Period and to do any and all other acts or things
      reasonably necessary to enable the disposition in such jurisdictions of
      the Registrable Securities covered by the Registration Statement;
      provided, that the Company shall not be required to qualify generally to
      do business in any jurisdiction where it is not then so qualified, subject
      the Company to any material tax in any such jurisdiction where it is not
      then so subject or file a general consent to service of process in any
      such jurisdiction.

            (h) If requested by the Holders, cooperate with the Holders to
      facilitate the timely preparation and delivery of certificates
      representing Registrable Securities to be delivered to a transferee
      pursuant to the Registration Statement, which certificates shall be free,
      to the extent permitted by the Purchase Agreement, of all restrictive
      legends, and to enable such Registrable Securities to be in such
      denominations and registered in such names as any such Holders may
      request.

            (i) Upon the occurrence of any event contemplated by Section
      3(c)(v), as promptly as reasonably possible, prepare a supplement or
      amendment, including a post-effective amendment, to the Registration
      Statement or a supplement to the related Prospectus or any document
      incorporated or deemed to be incorporated therein by reference, and file
      any other required document so that, as thereafter delivered, neither the
      Registration Statement nor such Prospectus will contain an untrue
      statement of a material fact or omit to state a material fact required to
      be stated therein or necessary to make the statements therein, in light of
      the circumstances under which they were made, not misleading.

            (j) Comply with all applicable rules and regulations of the
      Commission.

            (k) The Company may require each selling Holder to furnish to the
      Company a certified statement as to the number of shares of Common Stock
      beneficially owned by such Holder and, if required by the Commission, the
      person thereof that has voting and dispositive control over the Shares.

      4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Trading Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing prospectuses
if the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable Securities included in the Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.

<PAGE>

      5. Indemnification

            (a) Indemnification by the Company. The Company shall,
      notwithstanding any termination of this Agreement, indemnify and hold
      harmless each Holder, the officers, directors, agents and employees of
      each of them, each Person who controls any such Holder (within the meaning
      of Section 15 of the Securities Act or Section 20 of the Exchange Act) and
      the officers, directors, agents and employees of each such controlling
      Person, to the fullest extent permitted by applicable law, from and
      against any and all losses, claims, damages, liabilities, costs
      (including, without limitation, reasonable attorneys' fees) and expenses
      (collectively, "Losses"), as incurred, to the extent arising out of or
      relating to any untrue or alleged untrue statement of a material fact
      contained in the Registration Statement, any Prospectus or any form of
      prospectus or in any amendment or supplement thereto or in any preliminary
      prospectus, or arising out of or relating to any omission or alleged
      omission of a material fact required to be stated therein or necessary to
      make the statements therein (in the case of any Prospectus or form of
      prospectus or supplement thereto, in light of the circumstances under
      which they were made) not misleading, except to the extent, but only to
      the extent, that (1) such untrue statements or omissions are based solely
      upon information regarding such Holder furnished in writing to the Company
      by such Holder expressly for use therein, or to the extent that such
      information relates to such Holder or such Holder's proposed method of
      distribution of Registrable Securities and was reviewed and expressly
      approved in writing by such Holder expressly for use in the Registration
      Statement, such Prospectus or such form of Prospectus or in any amendment
      or supplement thereto (it being understood that the Holder has approved
      Annex A hereto for this purpose) or (2) in the case of an occurrence of an
      event of the type specified in Section 3(c)(ii)-(v), the use by such
      Holder of an outdated or defective Prospectus after the Company has
      notified such Holder in writing that the Prospectus is outdated or
      defective and prior to the receipt by such Holder of the Advice
      contemplated in Section 6(c). The Company shall notify the Holders
      promptly of the institution, threat or assertion of any Proceeding of
      which the Company is aware in connection with the transactions
      contemplated by this Agreement.

            (b) Indemnification by Holders. Each Holder shall, severally and not
      jointly, indemnify and hold harmless the Company, its directors, officers,
      agents and employees, each Person who controls the Company (within the
      meaning of Section 15 of the Securities Act and Section 20 of the Exchange
      Act), and the directors, officers, agents or employees of such controlling
      Persons, to the fullest extent permitted by applicable law, from and
      against all Losses, as incurred, to the extent arising out of or based
      upon: (x) such Holder's failure to comply with the prospectus delivery
      requirements of the Securities Act or (y) any untrue or alleged untrue
      statement of a material fact contained in any Registration Statement, any
      Prospectus, or any form of prospectus, or in any amendment or supplement
      thereto or in any preliminary prospectus, or arising out of or relating to
      any omission or alleged omission of a material fact required to be stated
      therein or necessary to make the statements therein not misleading (i) to
      the extent, but only to the extent, that such untrue statement or omission
      is contained in any information so furnished in writing by such Holder to
      the Company specifically for inclusion in the Registration Statement or
      such Prospectus or (ii) to the extent that (1) such untrue statements or
      omissions are based solely upon information regarding such Holder
      furnished in writing to the Company by such Holder expressly for use
      therein, or to the extent that such information relates to such Holder or
      such Holder's proposed method of distribution of Registrable Securities
      and was reviewed and expressly approved in writing by such Holder
      expressly for use in the Registration Statement (it being understood that
      the Holder has approved Annex A hereto for this purpose), such Prospectus
      or such form of Prospectus or in any amendment or supplement thereto or
      (2) in the case of an

<PAGE>

      occurrence of an event of the type specified in Section 3(c)(ii)-(v), the
      use by such Holder of an outdated or defective Prospectus after the
      Company has notified such Holder in writing that the Prospectus is
      outdated or defective and prior to the receipt by such Holder of the
      Advice contemplated in Section 6(c). In no event shall the liability of
      any selling Holder hereunder be greater in amount than the dollar amount
      of the net proceeds received by such Holder upon the sale of the
      Registrable Securities giving rise to such indemnification obligation.

            (c) Conduct of Indemnification Proceedings. If any Proceeding shall
      be brought or asserted against any Person entitled to indemnity hereunder
      (an "Indemnified Party"), such Indemnified Party shall promptly notify the
      Person from whom indemnity is sought (the "Indemnifying Party") in
      writing, and the Indemnifying Party shall have the right to assume the
      defense thereof, including the employment of counsel reasonably
      satisfactory to the Indemnified Party and the payment of all fees and
      expenses incurred in connection with defense thereof; provided, that the
      failure of any Indemnified Party to give such notice shall not relieve the
      Indemnifying Party of its obligations or liabilities pursuant to this
      Agreement, except (and only) to the extent that it shall be finally
      determined by a court of competent jurisdiction (which determination is
      not subject to appeal or further review) that such failure shall have
      prejudiced the Indemnifying Party.

            An Indemnified Party shall have the right to employ separate counsel
      in any such Proceeding and to participate in the defense thereof, but the
      fees and expenses of such counsel shall be at the expense of such
      Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed
      in writing to pay such fees and expenses; (2) the Indemnifying Party shall
      have failed promptly to assume the defense of such Proceeding and to
      employ counsel reasonably satisfactory to such Indemnified Party in any
      such Proceeding; or (3) the named parties to any such Proceeding
      (including any impleaded parties) include both such Indemnified Party and
      the Indemnifying Party, and such Indemnified Party shall have been advised
      by counsel that a conflict of interest is likely to exist if the same
      counsel were to represent such Indemnified Party and the Indemnifying
      Party (in which case, if such Indemnified Party notifies the Indemnifying
      Party in writing that it elects to employ separate counsel at the expense
      of the Indemnifying Party, the Indemnifying Party shall not have the right
      to assume the defense thereof and the reasonable fees and expenses of one
      separate counsel shall be at the expense of the Indemnifying Party). The
      Indemnifying Party shall not be liable for any settlement of any such
      Proceeding effected without its written consent, which consent shall not
      be unreasonably withheld. No Indemnifying Party shall, without the prior
      written consent of the Indemnified Party, effect any settlement of any
      pending Proceeding in respect of which any Indemnified Party is a party,
      unless such settlement includes an unconditional release of such
      Indemnified Party from all liability on claims that are the subject matter
      of such Proceeding.

            All reasonable fees and expenses of the Indemnified Party (including
      reasonable fees and expenses to the extent incurred in connection with
      investigating or preparing to defend such Proceeding in a manner not
      inconsistent with this Section) shall be paid to the Indemnified Party, as
      incurred, within ten Trading Days of written notice thereof to the
      Indemnifying Party; provided, that the Indemnified Party shall promptly
      reimburse the Indemnifying Party for that portion of such fees and
      expenses applicable to such actions for which such Indemnified Party is
      not entitled to indemnification hereunder, determined based upon the
      relative faults of the parties.

            (d) Contribution. If a claim for indemnification under Section 5(a)
      or 5(b) is unavailable to an Indemnified Party (by reason of public policy
      or otherwise), then each Indemnifying Party, in lieu of indemnifying such
      Indemnified Party, shall contribute to the amount paid or payable by such
      Indemnified Party as a result of such Losses, in such proportion as is
      appropriate to reflect the

<PAGE>

      relative fault of the Indemnifying Party and Indemnified Party in
      connection with the actions, statements or omissions that resulted in such
      Losses as well as any other relevant equitable considerations. The
      relative fault of such Indemnifying Party and Indemnified Party shall be
      determined by reference to, among other things, whether any action in
      question, including any untrue or alleged untrue statement of a material
      fact or omission or alleged omission of a material fact, has been taken or
      made by, or relates to information supplied by, such Indemnifying Party or
      Indemnified Party, and the parties' relative intent, knowledge, access to
      information and opportunity to correct or prevent such action, statement
      or omission. The amount paid or payable by a party as a result of any
      Losses shall be deemed to include, subject to the limitations set forth in
      Section 5(c), any reasonable attorneys' or other reasonable fees or
      expenses incurred by such party in connection with any Proceeding to the
      extent such party would have been indemnified for such fees or expenses if
      the indemnification provided for in this Section was available to such
      party in accordance with its terms.

            The parties hereto agree that it would not be just and equitable if
      contribution pursuant to this Section 5(d) were determined by pro rata
      allocation or by any other method of allocation that does not take into
      account the equitable considerations referred to in the immediately
      preceding paragraph. Notwithstanding the provisions of this Section 5(d),
      no Holder shall be required to contribute, in the aggregate, any amount in
      excess of the amount by which the proceeds actually received by such
      Holder from the sale of the Registrable Securities subject to the
      Proceeding exceeds the amount of any damages that such Holder has
      otherwise been required to pay by reason of such untrue or alleged untrue
      statement or omission or alleged omission, except in the case of fraud by
      such Holder.

            The indemnity and contribution agreements contained in this Section
      are in addition to any liability that the Indemnifying Parties may have to
      the Indemnified Parties.

      6. Miscellaneous

            (a) Remedies. In the event of a breach by the Company or by a
      Holder, of any of their obligations under this Agreement, each Holder or
      the Company, as the case may be, in addition to being entitled to exercise
      all rights granted by law and under this Agreement, including recovery of
      damages, will be entitled to specific performance of its rights under this
      Agreement. The Company and each Holder agree that monetary damages would
      not provide adequate compensation for any losses incurred by reason of a
      breach by it of any of the provisions of this Agreement and hereby further
      agrees that, in the event of any action for specific performance in
      respect of such breach, it shall waive the defense that a remedy at law
      would be adequate.

            (b) No Piggyback on Registrations. Neither the Company nor any of
      its security holders (other than the Holders in such capacity pursuant
      hereto) may include securities of the Company in a Registration Statement
      other than the Registrable Securities, and the Company shall not after the
      date hereof enter into any agreement providing any such right to any of
      its security holders. The Company shall not file any other registration
      statement until after the Effective Date.

            (c) Compliance. Each Holder covenants and agrees that it will comply
      with the prospectus delivery requirements of the Securities Act as
      applicable to it in connection with sales of Registrable Securities
      pursuant to the Registration Statement.

            (d) Discontinued Disposition. Each Holder agrees by its acquisition
      of such Registrable Securities that, upon receipt of a notice from the
      Company of the occurrence of any event of the kind

<PAGE>

      described in Section 3(c), such Holder will forthwith discontinue
      disposition of such Registrable Securities under the Registration
      Statement until such Holder's receipt of the copies of the supplemented
      Prospectus and/or amended Registration Statement or until it is advised in
      writing (the "Advice") by the Company that the use of the applicable
      Prospectus may be resumed, and, in either case, has received copies of any
      additional or supplemental filings that are incorporated or deemed to be
      incorporated by reference in such Prospectus or Registration Statement.
      The Company may provide appropriate stop orders to enforce the provisions
      of this paragraph. The Company agrees and acknowledges that any period
      during which the Holder is required to discontinue the disposition of the
      Registrable Securities hereunder shall be subject to the provisions of
      Section 2(b).

            (e) Piggy-Back Registrations. If at any time during the
      Effectiveness Period there is not an effective Registration Statement
      covering all of the Registrable Securities and the Company shall determine
      to prepare and file with the Commission a registration statement relating
      to an offering for its own account or the account of others under the
      Securities Act of any of its equity securities, other than on Form S-4 or
      Form S-8 (each as promulgated under the Securities Act) or their then
      equivalents relating to equity securities to be issued solely in
      connection with any acquisition of any entity or business or equity
      securities issuable in connection with the stock option or other employee
      benefit plans, then the Company shall send to each Holder a written notice
      of such determination and, if within fifteen days after the date of such
      notice, any such Holder shall so request in writing, the Company shall
      include in such registration statement all or any part of such Registrable
      Securities such Holder requests to be registered, subject to customary
      underwriter cutbacks applicable to all holders of registration rights.

            (f) Amendments and Waivers. The provisions of this Agreement,
      including the provisions of this sentence, may not be amended, modified or
      supplemented, and waivers or consents to departures from the provisions
      hereof may not be given, unless the same shall be in writing and signed by
      the Company and the Holders of 75% of the principal amount of Debentures
      and Warrant Shares (issued or issuable) then outstanding Registrable
      Securities not yet sold under the Registration Statement or pursuant to
      Rule 144 under the Securities Act.

            (g) Notices. Any and all notices or other communications or
      deliveries required or permitted to be provided hereunder shall be in
      writing and shall be deemed given and effective on the earliest of (i) the
      date of transmission, if such notice or communication is delivered via
      facsimile at the facsimile number provided for below prior to 6:30 p.m.
      (New York City time) on a Trading Day, (ii) the Trading Day after the date
      of transmission, if such notice or communication is delivered via
      facsimile at the facsimile number provided for below later than 6:30 p.m.
      (New York City time) on any date and earlier than 11:59 p.m. (New York
      City time) on such date, (iii) the Trading Day following the date of
      mailing, if sent by nationally recognized overnight courier service, or
      (iv) upon actual receipt by the party to whom such notice is required to
      be given. The address for such notices and communications shall be
      delivered and addressed as set forth in the Purchase Agreement

            (h) Successors and Assigns. This Agreement shall inure to the
      benefit of and be binding upon the successors and permitted assigns of
      each of the parties and shall inure to the benefit of each Holder. Each
      Holder may assign their respective rights hereunder in the manner and to
      the Persons as permitted under the Purchase Agreement.

            (i) Execution and Counterparts. This Agreement may be executed in
      any number of counterparts, each of which when so executed shall be deemed
      to be an original and, all of which taken together shall constitute one
      and the same Agreement. In the event that any signature is delivered by
      facsimile transmission, such signature shall create a valid binding
      obligation of the party

<PAGE>

      executing (or on whose behalf such signature is executed) the same with
      the same force and effect as if such facsimile signature were the original
      thereof.

            (j) Governing Law. All questions concerning the construction,
      validity, enforcement and interpretation of this Agreement shall be
      governed by and construed and enforced in accordance with the internal
      laws of the State of New York, without regard to the principles of
      conflicts of law thereof. Each party agrees that all legal proceedings
      concerning the interpretations, enforcement and defense of the
      transactions contemplated by this Agreement (whether brought against a
      party hereto or its respective affiliates, directors, officers,
      shareholders, employees or agents) shall be commenced exclusively in the
      state and federal courts sitting in the City of New York, New York. Each
      party hereto hereby irrevocably submits to the exclusive jurisdiction of
      the state and federal courts sitting in the City of New York, New York for
      the adjudication of any dispute hereunder or in connection herewith or
      with any transaction contemplated hereby or discussed herein (including
      with respect to the enforcement of the any of this Agreement), 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
      improper. Each party hereto 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 via registered or certified mail or
      overnight delivery (with evidence of delivery) to such party at the
      address in effect for notices to it under this Agreement and agrees that
      such service shall constitute good and sufficient service of process and
      notice thereof. Nothing contained herein shall be deemed to limit in any
      way any right to serve process in any manner permitted by law. Each party
      hereto hereby irrevocably waives, to the fullest extent permitted by
      applicable law, any and all right to trial by jury in any legal proceeding
      arising out of or relating to this Agreement or the transactions
      contemplated hereby.

            (k) Cumulative Remedies. The remedies provided herein are cumulative
      and not exclusive of any remedies provided by law.

            (l) Severability. If any term, provision, covenant or restriction of
      this Agreement is held by a court of competent jurisdiction to be invalid,
      illegal, void or unenforceable, the remainder of the terms, provisions,
      covenants and restrictions set forth herein shall remain in full force and
      effect and shall in no way be affected, impaired or invalidated, and the
      parties hereto shall use their commercially reasonable efforts to find and
      employ an alternative means to achieve the same or substantially the same
      result as that contemplated by such term, provision, covenant or
      restriction. It is hereby stipulated and declared to be the intention of
      the parties that they would have executed the remaining terms, provisions,
      covenants and restrictions without including any of such that may be
      hereafter declared invalid, illegal, void or unenforceable.

            (m) Headings. The headings in this Agreement are for convenience of
      reference only and shall not limit or otherwise affect the meaning hereof.

            (n) Independent Nature of Purchasers' Obligations and Rights. The
      obligations of each Purchaser hereunder is several and not joint with the
      obligations of any other Purchaser hereunder, and no Purchaser shall be
      responsible in any way for the performance of the obligations of any other
      Purchaser hereunder. Nothing contained herein or in any other agreement or
      document delivered at any closing, and no action taken by any Purchaser
      pursuant hereto or thereto, shall be deemed to constitute the Purchasers
      as a partnership, an association, a joint venture or any other kind of
      entity, or create a presumption that the Purchasers are in any way acting
      in concert with respect to such obligations or the transactions
      contemplated by this Agreement. Each Purchaser shall be entitled to
      protect and enforce its rights, including without limitation the rights
      arising out of this Agreement, and

<PAGE>

      it shall not be necessary for any other Purchaser to be joined as an
      additional party in any proceeding for such purpose.

                            *************************

<PAGE>

      IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

                                PHARMOS CORPORATION

                                By: /S/ ROBERT W. COOK
                                    ------------------
                                        Name:  Robert W. Cook
                                        Title: Executive Vice President and
                                               Chief Financial Officer

                      [PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

                                     ANNEX A
                              Plan of Distribution

      The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:

            o     ordinary brokerage transactions and transactions in which the
                  broker-dealer solicits purchasers;

            o     block trades in which the broker-dealer will attempt to sell
                  the shares as agent but may position and resell a portion of
                  the block as principal to facilitate the transaction;

            o     purchases by a broker-dealer as principal and resale by the
                  broker-dealer for its account;

            o     an exchange distribution in accordance with the rules of the
                  applicable exchange;

            o     privately negotiated transactions;

            o     settlement of short sales;

            o     broker-dealers may agree with the Selling Stockholders to sell
                  a specified number of such shares at a stipulated price per
                  share;

            o     a combination of any such methods of sale; and

            o     any other method permitted pursuant to applicable law.

      The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

      Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

      The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act of 1933 amending the list of
Selling Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this prospectus.

      The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under

<PAGE>

the Securities Act. The Selling Stockholders have informed the Company that it
does not have any agreement or understanding, directly or indirectly, with any
person to distribute the Common Stock.

The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.

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