Document:

Exhibit 4.1

                               AMENDMENT AGREEMENT

     This  Amendment  Agreement  (this  "Agreement")  is being  entered  into on
December 31, 2001 by and among Pharmos  Corporation,  a Nevada  corporation (the
"Company"),  and  Millennium  Partners,  L.P.,  a Delaware  limited  partnership
("Millennium"),  and  St.  Alban's  Partners,  Ltd.  (each  a  "Purchaser,"  and
collectively,  the  "Purchasers").  Terms used herein but not defined shall have
the meaning set forth in that certain  related  Purchase  Agreement  dated as of
September 1, 2000 (the  "Purchase  Agreement")  by and among the Company and the
Purchasers, except where the context expressly indicates to the contrary.

                                    RECITALS:

     WHEREAS, pursuant to the Purchase Agreement, the Company sold and issued to
the   Purchasers  6%   Convertible   Debentures   due  February  28,  2002  (the
"Debentures"),  in the aggregate  principal amount of $6,000,000 at an aggregate
purchase price of $6,000,000, on the terms and conditions set forth therein; and

     WHEREAS,  in connection with the sale and issuance of the  Debentures,  the
Company also issued to the Purchasers warrants (the "Warrants"), exercisable for
shares of common stock, par value $.03, of the Company (the "Common Stock");

     WHEREAS,  pursuant to Section 19 of the  Debentures,  no Debenture  nor any
term thereof may be amended,  waived,  discharged  or  terminated  other than by
written instrument signed by the company and the holder thereof (the "Holder");

     WHEREAS,  in connection  with the Purchase  Agreement,  the Company and the
Purchasers  entered into that certain Escrow Agreement,  dated September 1, 2000
(the "Escrow Agreement,"), whereby each Purchaser deposited 50% of the amount of
its Purchase Price from each purchase of Debentures (the "Escrow Proceeds") into
a separate  escrow  account  maintained  by the Escrow  Agent (as defined in the
Escrow Agreement) for such Purchaser (a "Purchaser Escrow Account"); and

     WHEREAS,  pursuant to Section 12 of the Escrow  Agreement,  no provision of
the Escrow  Agreement may be amended or waived without the prior written consent
of the Company and Purchasers  holding a majority in the principal amount of the
Debentures; and

     WHEREAS,  in connection  with the Purchase  Agreement,  the Company and the
Purchasers  entered  into that  certain  Registration  Rights  Agreement,  dated
September 1, 2000 (the  "Registration  Rights  Agreement," and together with the
Purchase  Agreement,  the  Debentures,  the Warrants (as defined in the Purchase
Agreement),  and the Escrow  Agreement (the "Original  Transaction  Documents"),
whereby the Company  provided the Purchasers  with certain  registration  rights
with  respect  to the  Common  Shares (as  defined  in the  Registration  Rights
Agreement)  and the  Warrant  Shares  (as  defined  in the  Registration  Rights
Agreement); and

     WHEREAS,  the  Company  and  Purchasers  wish to amend  certain  terms  and
conditions  in  connection  with the  Debentures  and  amend  certain  terms and
conditions  of the  Escrow  Agreement  pursuant  to  Section  12 of  the  Escrow
Agreement;

<PAGE>

     NOW THEREFORE, the parties hereto agree as follows:

                                     TERMS:

     1. Conversion of the Debentures. The following changes shall be effected to
the terms and conditions of 50% of the Debentures  held by each Purchaser on the
date hereof (the "Initial Debentures"):

          (a) The term "Maturity Date" shall be defined as June 30, 2003.

          (b) Section  5(c) is hereby  amended to read as  follows,  "Subject to
     adjustments  pursuant  to  Sections  4 and 7,  this  Debenture  will have a
     conversion price (the "Conversion Price") equal to $2.15.

The fully paid,  validly issued and  non-assessable  shares of Common Stock into
which such  Debentures will be convertible  shall be hereinafter  referred to as
the  "Conversion  Shares."  The  remaining  50% of the  Debentures  held  by the
Purchasers on the date hereof shall hereinafter be referred to as the "Remaining
Debentures."  The shares of Common Stock issuable upon exercise of the Remaining
Debentures shall hereinafter be referred to as "Remaining Debenture Shares."

     2.  Remaining  Debentures.  The following  changes shall be effected to the
terms and conditions of the Remaining Debentures:

          (a) The term "Maturity Date" shall be defined as June 30, 2003.

          (b) Section  5(c) is hereby  amended to read as  follows,  "Subject to
     adjustments  pursuant  to  Sections  4 and 7,  this  Debenture  will have a
     conversion price (the "Conversion Price") equal to $2.63

     3. Escrow Agreement.

          (a)  Section  2 of the  Escrow  Agreement  is  hereby  amended  in its
     entirety to read as follows:

     "Upon  conversion  by an Investor,  individually  or in the aggregate of at
least  50.00% of the initial  principal  amount of the  Debentures  held by such
Investor plus the interest  that has accrued  thereon since the date of issuance
of the  Debentures,  the  Investor  and the Company  shall  promptly  thereafter
execute a joint  certificate  to the  Escrow  Agent (as  defined  in the  Escrow
Agreement) certifying that at least 50.00% in aggregate principal amount of such
Investor's  Debentures  plus the  interest  that has accrued  thereon  since the
issuance  of the  Debentures  has been  converted  by the  Investor  (a  "50.00%
Conversion  Notice").  Upon receipt of a 50.00%  Conversion  Notice,  the Escrow
Agent,  shall release the Escrowed  Proceeds  received from such Investor to the
Company."

          (b)  The  parties  agree  that  after   execution  of  this  Amendment
     Agreement,  upon receipt by each Purchaser of all of its Conversion  Shares
     (upon conversion of the Initial Debentures) and Remaining  Debentures,  all
     proceeds held in escrow may be released.  The

                                       2
<PAGE>

     parties  acknowledge  that the  Escrow  Agent  may rely  upon  certificates
     executed  by each of  Purchasers  to the effect  that it has  received  its
     Conversion  Shares and  Remaining  Debentures  in  releasing  the  Escrowed
     Proceeds.

     4.  Registration  Rights.  The Company hereby represents that the Company's
Registration  Statement (No.  333-46818) (the "Registration  Statement"),  which
covers the  disposition  of  Registrable  Securities  pursuant  to the  Original
Transaction  Documents,  has  been  declared  effective  by the  Securities  and
Exchange  Commission  and is  effective  as of the  date  hereof,  and  that the
prospectus to be delivered in connection therewith is current and deliverable.

          (a) The  Company  hereby  acknowledges  that all shares  received  and
     issuable  upon  conversion  of the  Debentures,  including  those  issuable
     pursuant to Section 1 of this  Amendment  Agreement and those issuable upon
     conversion of the  Remaining  Debentures,  shall be considered  Registrable
     Securities  for the  purpose  of the  Registration  Rights  Agreement.  The
     Conversion  Shares are registered  pursuant to the Registration  Statement,
     which covers the disposition of Registrable Securities issuable pursuant to
     the Original Transaction  Documents,  and will be issued free of legend and
     stop-order.  The Company acknowledges that the Registration  Statement also
     covers  the  resale of an  additional  1,421,945  shares  of  Common  Stock
     issuable upon conversion of the Remaining Debentures, and such shares, when
     issued  will be issued  free of legend and stop  order.  The  Company  also
     covenants and agrees to register an additional  1,084,519  shares of Common
     Stock on an additional registration statement (the "Additional Registration
     Statement")  in  accordance  with  the  provisions  of  Section  2  of  the
     Registration  Rights  Agreement,  to cover  the  resale  of any  additional
     Remaining Debenture Shares not covered by the Registration  Statement.  Any
     delays  in  obtaining  the  effectiveness  of the  Additional  Registration
     Statement  will  result in the  obligation  of the  Company  to make  Delay
     Payments,  as provided in the  Registration  Rights  Agreement,  as well as
     result in the other  rights  and  remedies  contained  in the  Registration
     Rights Agreement.  Pursuant to Section 3.10 of the Purchase Agreement,  the
     Company  shall be required to reserve and keep  available  for  purposes of
     conversion of the Remaining  Debentures  no less than  1,879,848  shares of
     authorized  but  unissued  shares of Common  Stock,  which  number shall be
     appropriately  adjusted for any stock split,  reverse split, stock dividend
     or  reclassification  of the Common Stock. The parties acknowledge that the
     foregoing use of specific  numbers in this Section 4(a) does not constitute
     any waiver of the  Company's  obligations  to  reserve a greater  number of
     shares  for  purposes  of  conversion  of the  Remaining  Debentures  or to
     register a greater number of Remaining  Debenture  Shares in the event of a
     downward  adjustment in Conversion Price pursuant to Section 4 or Section 7
     of the Remaining Debentures.

          (b) The Company shall, as expeditiously  as reasonably  possible after
     the date  hereof,  and in any event within 30 days  hereafter,  prepare and
     file the Additional Registration Statement on Form S-3 under the Securities
     Act of 1933,  as  amended  (the  "Act"),  or in the  event the  Company  is
     ineligible to use such form,  such other form as the Company is eligible to
     use under the Act. The  Additional  Registration  Statement,  to the extent
     allowable  under the Act and the rules  promulgated  thereunder  (including
     Rule 416),  shall state that the  Additional  Registration  Statement  also
     covers  such  number of  Additional  Shares of Common  Stock as may  become
     issuable to prevent dilution  resulting from stock splits,  stock dividends
     or similar  events.  The  Company  shall use its best  efforts to cause the
     Additional  Registration  Statement  to be  declared  effective  as soon as
     practicable, and in any event prior to the earlier of (i) 75 days

                                       3
<PAGE>

     following  the date  hereof  or, in the event the  Additional  Registration
     Statement  is  reviewed by the SEC,  by April 15,  2002,  or (ii) five days
     after SEC clearance to request acceleration.  The earlier of such two dates
     shall be deemed the  Effectiveness  Deadline for purposes of the rights and
     remedies contained in the Registration Rights Agreement.  The Company shall
     provide the holders of Remaining  Debenture  Shares and their legal counsel
     reasonable  opportunity to review the Additional  Registration Statement or
     any amendment or supplement thereto prior to filing.

          (c) Notwithstanding  paragraph 4(b) above, the Company's obligation to
     file  the  Additional  Registration  Statement  shall be  suspended  if the
     Company  complies  in  full,  from  the date  hereof,  with  the  following
     covenant:

               (i) From the date hereof until March 1, 2002,  the Company  shall
          not  effect any  transactions  or reprice  any  existing  instruments,
          resulting  in the  issuance  or sale of  shares  of  Common  Stock  or
          Convertible  Securities  where the Per Share Selling Price (as defined
          in the  Debentures)  is less than $2.63 (as such price may be adjusted
          for subsequent stock-splits, reverse splits and consolidations), other
          than financings involving Millennium Partners, L.P.

     If the foregoing  covenant is not complied with in full, the obligation set
forth in paragraph 4(b) shall apply as of the date hereof.

          (d) The Company hereby  acknowledges  that for purposes of Rule 144 of
     the Act,  the  holding  period  of shares of  Common  Stock  issuable  upon
     conversion  of the  Debentures,  including  the  Conversion  Shares and the
     Remaining Debenture Shares, shall date from September 1, 2000.

          (e)  Neither  the  Company,  nor  any  of its  affiliates,  nor to its
     knowledge any person acting on its behalf has,  directly or indirectly made
     any  offers or sales of any  security  or  solicited  any offers to buy any
     security,  under  circumstances  that  would  require  registration  of the
     Debentures (including the Initial Debentures and Remaining Debentures), the
     Warrants,  the Common Shares,  the Warrant Shares, the Conversion Shares or
     the  Remaining  Debentures  Shares  under  the  Act.  The  issuance  of the
     Debentures  (including the Initial  Debentures  and Remaining  Debentures),
     Warrants, Common Shares, Warrant Shares, Conversion Shares or the Remaining
     Debentures  Shares to the Purchasers  will not be integrated with any other
     issuance of the Company's securities (past, current or future) for purposes
     of any rule that requires stockholder approval,  including the rules of the
     NASD.

     5. Press Release and Form 8-K. As soon as practicable  but in no event more
than two (2) Trading Days  following the execution of this  Amendment  Agreement
and the  satisfaction of the conditions in Section 8 by all of the parties,  the
Company  shall  issue a  press  release  in a form  mutually  agreeable  to both
parties.  If the Company fails to issue the press release within two (2) Trading
Days following such date, the Purchasers may issue a press release  covering the
transaction  and  complying  with  any  legal  requirement   applicable  to  the
Purchasers.  In addition,  within two (2) Trading Days  following such date, the
Company shall file a Form 8-K with the SEC,  which  discloses  the  transactions
related  to this  Amendment  Agreement,  in a form  mutually  agreeable  to both
parties. The Purchasers shall have the opportunity to review such Form 8-K prior
to its filing.

                                       4
<PAGE>

     6. Due Authorization. The Company hereby represents and warrants to each of
the  Purchasers  as of the  date  hereof  that  the  Company  has all  requisite
corporate power and authority to enter into and perform this Amendment Agreement
and the  transactions  contemplated  hereby and  thereby.  The  Company  further
represents  and warrants that this Amendment  Agreement  constitutes a valid and
binding obligation of the Company  enforceable against the Company in accordance
with its terms,  except as such  enforceability  may be  limited  by  applicable
bankruptcy, insolvency, reorganization,  moratorium, liquidation or similar laws
relating to, or affecting  generally the enforcement of,  creditors'  rights and
remedies or by other equitable principles of general application.

     7. Expenses. The Company and the Purchasers shall each bear their own legal
expenses in connection with their entry into this transaction.

     8. Closing Documents;  Conditions. (a) Contemporaneously with the execution
and delivery of this Amendment Agreement,  the Company shall deliver each of the
Closing Documents (as defined below) to the Purchasers.  The obligations of each
Purchaser  hereunder  are  subject to the  Purchasers'  receipt of such  Closing
Documents.  The requirement that the Purchasers receive the Closing Documents is
for each Purchaser's  benefit and may be waived by each Purchaser at any time in
writing  in its sole  discretion.  "Closing  Documents"  means (v) an opinion of
independent counsel of the Company, in the form annexed hereto as Exhibit A; (w)
an executed copy of the  officer's  certificate  in the form attached  hereto as
Exhibit B; (x) the Initial  Debentures  issued by the Company in accordance with
this Amendment Agreement; and (y) the Remaining Debentures issued by the Company
in accordance with this Amendment  Agreement.  Promptly  following the execution
and delivery of this Amendment  Agreement,  the  Purchasers  shall tender to the
Company their respective certificates representing the Debentures prior to their
amendment pursuant to this Amendment Agreement.

          (b) The  obligations of both the Company and the  Purchasers  shall be
     subject to the receipt by the Company, by no later than January 4, 2002, of
     a waiver  from  Strong  River  Investments,  Inc.,  in form  and  substance
     satisfactory to the Company and the Purchasers,  waiving its  anti-dilution
     rights under Section 7(a) of its Debenture with respect to the  adjustments
     on  Conversion  Prices  effectuated  pursuant  to  Sections 1 and 2 of this
     Agreement.

     9. Miscellaneous.

          (a) Article 7 of the Purchase Agreement is hereby  incorporated herein
     by  reference  with such changes as may be  necessary  mutatis  mutandis to
     conform to this Amendment Agreement.

          (b) Except as set forth above, the Original Transaction  Documents and
     the terms thereof shall remain unmodified and in full force and effect.

          (c)  The  Company  hereby   represents   that  all  of  the  Company's
     representations  and  warranties  contained  in  the  Original  Transaction
     Documents were true and correct as of September 1, 2000 and,  except as set
     forth on  Schedule 1 hereto,  are true and  correct  as of the date  hereof
     (except for  representations  and  warranties  made as of an earlier  date,
     which shall be true and correct as of such date).

                                       5
<PAGE>

          (d) The Company hereby represents that it has performed all agreements
     and satisfied all conditions required to be performed or satisfied prior to
     the date hereof by the Original Transaction Documents when and as required.

          (e) The Company hereby  acknowledges and agrees that it has no pending
     claims  against  any of the  Purchasers  and hereby  releases,  acquits and
     forever discharges each of the Purchasers from any and all actions,  causes
     of action, claims, demands,  damages,  judgments,  debts, dues and suits of
     every kind, nature and description whatsoever,  which the Company ever had,
     now has or may have  against any  Purchaser  on or by reason of any matter,
     cause or thing whatsoever through the date hereof.

          (f) The Company hereby represents that no Event of Default (as defined
     in the Debentures) has occurred,  is likely to occur or is threatened,  and
     no event has occurred  which  constitutes  or would  constitute an Event of
     Default with notice or the passage of time or both, as of the date hereof.

          (g)  This  Amendment   Agreement  may  be  executed  in  two  or  more
     counterparts,  all of which when taken together shall be considered one and
     the same Amendment  Agreement and shall become effective when  counterparts
     have been signed by each party and delivered to the other parties, it being
     understood  that all  parties  need not sign the same  counterpart.  In the
     event that any  signature  is delivered  by  facsimile  transmission,  such
     signature  shall  create a valid and binding  obligation  of the  executing
     party with the same force and effect as if such  facsimile  signature  page
     were an original thereof.

          (h) In consideration of the Purchasers' execution and delivery of this
     Amendment  Agreement,  and  in  addition  to all  of  the  Company's  other
     obligations  under the Original  Transaction  Documents,  the Company shall
     defend,  protect,  indemnify  and hold harmless the  Purchasers  and all of
     their  partners,  officers,  directors,  employees,  members  and direct or
     indirect  investors  and any of the  foregoing  persons'  agents  or  other
     representatives   (including,   without   limitation,   those  retained  in
     connection with the transactions  contemplated by this Amendment Agreement)
     (collectively,  the  "Indemnitees")  from and against any and all  actions,
     causes  of  action,  suits,  claims,   losses,  costs,   penalties,   fees,
     liabilities and damages, and expenses in connection therewith (irrespective
     of  whether  any  such  Indemnitee  is a  party  to the  action  for  which
     indemnification  hereunder is sought), and including reasonable  attorneys'
     fees and  disbursements  (the "Indemnified  Liabilities"),  incurred by any
     Indemnitee  as a result  of,  or  arising  out of, or  relating  to (a) any
     misrepresentation  or breach of any  representation or warranty made by the
     Company in this  Amendment  Agreement or any other  certificate or document
     contemplated hereby or thereby,  (b) any breach of any covenant,  agreement
     or obligation of the Company  contained in this Amendment  Agreement or any
     other certificate or document contemplated hereby or thereby, (c) any cause
     of action, suit or claim brought or made against such Indemnitee by a third
     party and arising out of or  resulting  from (i) the  execution,  delivery,
     performance,  breach  by the  Company  or  enforcement  of  this  Amendment
     Agreement or any other  certificate,  instrument  or document  contemplated
     hereby or thereby, (ii) any transaction financed or to be financed in whole
     or in part,  directly or  indirectly,  with the proceeds of the issuance of
     the Debentures (including the

                                       6
<PAGE>

     Initial  Debentures  and Remaining  Debentures),  the Warrants,  the Common
     Shares,  the  Warrant  Shares,  the  Conversion  Shares  or  the  Remaining
     Debentures  Shares or (iii) the  status of the  Purchaser  or holder of the
     Debentures (including the Initial Debentures and Remaining Debentures), the
     Warrants,  the Common Shares,  the Warrant Shares, the Conversion Shares or
     the Remaining  Debentures  Shares as investors in the Company,  and (d) the
     enforcement of this Section.  Notwithstanding  the  foregoing,  Indemnified
     Liabilities shall not include any liability of any Indemnitee to the extent
     it arises out of such Indemnitee's willful misconduct, gross negligence, or
     fraudulent  action(s).  To the extent that the foregoing undertaking by the
     Company may be  unenforceable  for any reason,  the Company  shall make the
     maximum  contribution  to the  payment  and  satisfaction  of  each  of the
     Indemnified Liabilities which is permissible under applicable law.

          (i) For the  avoidance  of doubt,  the  parties  acknowledge  that the
     Conversion  Shares and the Remaining  Debentures Shares shall be considered
     to be Common Shares, as defined in the Original  Transaction  Documents and
     Registrable Securities as defined in the Registration Rights Agreement, and
     the Initial Debentures and the Remaining  Debentures shall be considered to
     be Debentures as defined in the Original Transaction Documents.

          (j) The  parties  acknowledge  and agree that the  Purchasers  are not
     agents,  affiliates  or partners of each other,  that all  representations,
     warranties,  covenants  and  agreements  of the  Purchasers  hereunder  are
     several and not joint,  that no Purchaser shall have any  responsibility or
     liability for the representations,  warrants, agreements, acts or omissions
     of any  other  Purchaser,  and  that any  rights  granted  to  "Purchasers"
     hereunder shall be enforceable by each Purchaser hereunder.

          (k) This Amendment Agreement,  the Original Transaction  Documents and
     the  agreements  and  other  documents   referred  to  herein  and  therein
     constitute the full and entire  understanding  and agreement of the parties
     with  respect to the matters  covered  hereby and thereby,  supercedes  any
     prior understanding,  memoranda or other written or oral agreements between
     or among any of them respecting the matters covered hereby and thereby and,
     except as specifically set forth herein or therein, neither the Company nor
     any Purchaser makes any representation,  warranty,  covenant or undertaking
     with respect to such matters.  No provision of this Amendment Agreement may
     be waived or amended other than by a written instrument signed by the party
     against whom enforcement of any such amendment or waiver is sought.

          (l) Notices to the parties  hereto shall be sent to the  addresses set
     forth in the Purchase Agreement.

                       *** Signatures on the next page ***

                                       7
<PAGE>

ACCEPTED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN:

COMPANY:

PHARMOS CORPORATION

By:       /s/ Robert W. Cook
   -------------------------------------
          Name: Robert W. Cook
          Title:   EVP, CFO

PURCHASERS:

MILLENNIUM PARTNERS, LP
By:   Daniel Cardella

By:       /s/ Daniel Cardella
    ------------------------------------
          Name:  Daniel Cardella
          Title:  Portfolio Manager

ST. ALBANS PARTNERS LTD.
By:

By:       /s/ John B. Wagner
     -----------------------------------
           Name:   John B. Wagner
           Title:  Managing Partner

                     [Signature Page to Amendment Agreement]

<PAGE>

                                                                      SCHEDULE 1

                    Updates to Representations and Warranties

     1. As of November 1, 2001,  there were  55,356,307  shares of the Company's
Common Stock outstanding.

     2. In October  2001,  the Company sold it  ophthalmic  business to Bausch &
Lomb  Incorporated,  as  reported  in the  Current  Report  of Form 8-K filed on
October 16, 2001.Exhibit 4.2

     THIS SECURITY HAS NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE TRANSFERRED, ASSIGNED, SOLD
OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID ACT AND ANY APPLICABLE  STATE  SECURITIES LAW OR AN OPINION OF COUNSEL,  IN
FORM AND SUBSTANCE  REASONABLY  ACCEPTABLE TO THE COMPANY,  THAT REGISTRATION IS
NOT  REQUIRED  BECAUSE  OF  AN  APPLICABLE   EXEMPTION  FROM  SUCH  REGISTRATION
REQUIREMENTS.

     No. ____                                                         $_________

     Dated:  September 1, 2000 (as amended December 31, 2001)

                               PHARMOS CORPORATION

                   6% CONVERTIBLE DEBENTURE DUE JUNE 30, 2003

     THIS  DEBENTURE  ("Debenture")  is  one  of  a  duly  authorized  issue  of
Debentures of PHARMOS CORPORATION (the "Company"),  a corporation duly organized
and existing under the laws of the state of Nevada,  designated as the Company's
6%  Convertible  Debentures  Originally  Due February  28,  2002,  in an initial
aggregate principal amount of Eight Million U.S. Dollars (U.S.  $8,000,000) (the
"Debentures").  This  Debenture  has been  amended  pursuant to the terms of the
Amendment Agreement,  by and among the Company and the Purchasers named therein,
dated December 31, 2001.

     FOR VALUE  RECEIVED,  the Company  promises to pay to [HOLDER]  the initial
holder hereof,  or its order (including  successors-in-interest,  the "Holder"),
the principal sum of [THREE MILLION NINETY  THOUSAND (U.S.  $3,090,000)] on June
30,  2003  (the  "Maturity  Date")  and to pay  interest  on the  principal  sum
outstanding under this Debenture  ("Outstanding  Principal Amount"), at the rate
of 6% per annum, compounded  semi-annually,  payable in arrears on the first day
of March and  September of each year and on the Maturity Date (each an "Interest
Payment  Date"),  with the first such  payment  due on March 1,  2002.  Interest
payable  on March 1, 2002  shall be deemed to have  accrued  on the  outstanding
principal  with effect from  September  1, 2001.  Interest  shall  accrue  daily
commencing  on the date hereof and shall  continue  until payment in full of all
amounts due under this  Debenture.  The  interest so payable will be paid to the
person in whose name this  Debenture is registered on the records of the Company
regarding   registration   and  transfers  of  the  Debenture  (the   "Debenture
Register").  Capitalized  terms used herein and not otherwise defined shall have
the meanings set forth in the Purchase  Agreement  dated as of September 1, 2000
between  the  Company  and  the  Holder  (the   "Purchase   Agreement")  or  the
Registration  Rights Agreement dated as of September 1, 2000 between the Company
and the Holder (the "Registration Rights Agreement").

     The interest on this Debenture is payable, at the Company's option:

<PAGE>

     (a) in such coin or currency of the United States as of the time of payment
is legal  tender for payment of public and private  debts,  at the address  last
appearing on the  Debenture  Register of the Company as designated in writing by
the Holder hereof from time to time;

     (b) by adding the amount thereof to the  Outstanding  Principal  Amount due
under this Debenture ("PIK Interest"). For example, if the Outstanding Principal
Amount were $1,000 and the interest  payment were $30, then the new  Outstanding
Principal Amount after the Interest Payment Date would be $1,030.

     Except as herein  provided for  interest,  all amounts  payable  under this
Debenture shall be paid as provided in clause (a) above.

     The  Company  shall   exercise  its  option   hereunder  by  delivering  an
irrevocable  statement  in the form of  Exhibit 1 hereto  ("Payment  Statement")
delivered  at least  ten (10)  Trading  Days  prior to the  applicable  Interest
Payment Date and applicable for such Interest  Payment Date only. If the Payment
Statement is not timely delivered to the Holder as provided herein,  the payment
with  respect to such  Interest  Payment Date shall be in PIK  Interest.  If the
Company selects cash interest in the Payment Statement and fails to deliver such
cash on or before the Interest  Payment Date, the Holder shall have the right to
require the Company to pay PIK Interest in lieu  thereof.  Any PIK Interest when
so added to the Outstanding Principal Amount due under this Debenture shall, for
all  purposes  of  this  Debenture,  be  deemed  to be  part  of  the  principal
indebtedness  evidenced by this Debenture  including,  without  limitation,  for
purposes of determining interest payable hereunder after the applicable Interest
Payment  Date for which such PIK Interest is paid and amounts  convertible  into
Common Shares  hereunder  after the applicable  Interest  Payment Date for which
such PIK Interest is paid.

     The Company will pay any principal due and all accrued and unpaid  interest
due upon this  Debenture  to the person that is the Holder of this  Debenture on
the  records  of the  Company as of the  applicable  Interest  Payment  Date and
addressed  to  such  Holder  at the  last  address  appearing  on the  Debenture
Register.

     The  Outstanding  Principal  Amount and interest due  hereunder  shall bear
interest,  from and  after the day  following  the  occurrence  and  during  the
continuance of an Event of Default hereunder, at the per annum rate equal to the
lower of the Citibank  Prime Rate per annum plus six (6%) percent or the highest
rate permitted by law. The Holder shall have the option to receive such interest
as cash interest or PIK Interest and shall  exercise its option by delivering to
the Company a statement in a form substantially similar to the Payment Statement
which shall be effective  until the Holder  delivers an additional  statement to
the contrary.  If the Holder elects to receive the interest in cash, it shall be
payable on demand.

     Additional cash payments  (referred to as "delay payments") may be required
pursuant to the  Registration  Rights  Agreement if there occurs an "Interfering
Event" (as defined  therein),  or pursuant to the Purchase  Agreement  under the
terms set forth in Section 3.14  therein.  Such delay  payments,  if not paid in

                                       2
<PAGE>

cash when due,  may be  treated by the  Holder in its sole  discretion  as being
added to the Outstanding Principal Amount due under this Debenture.

     Subject to applicable law, any interest  otherwise payable that is not paid
for any applicable  period because it would exceed the highest rate permitted by
law shall become  payable  whenever  the payment  thereof,  together  with other
interest due for any such subsequent period, would not exceed such highest legal
rate.

     The Holder of this  Debenture  is entitled to certain  rights and  remedies
pursuant to the Purchase Agreement and Registration Rights Agreement,  including
without limitation  provisions  requiring mandatory redemption of the Debenture.
This Debenture does not provide voting rights to the Holder.

     This Debenture is subject to the following additional provisions:

     1. Exchange.

     (a) The Debentures are exchangeable for an equal aggregate principal amount
of   Debentures  of  different   denominations,   as  requested  by  the  Holder
surrendering  the same. No service charge will be made for such  registration or
transfer or exchange.

     (b) The Debentures are also exchangeable for Debentures  identical to those
exchanged except that the new Debentures  shall set forth the actual  Conversion
Price, which shall be determined promptly after the close of business on the 7th
Trading Day following  Closing  Date, in accordance  herewith by the Company and
the  Investors.  In the event that the Company and the Investors do not agree on
the actual  Conversion Price, an accountant  mutually  designated by the Company
and the Holder(s) shall make such determination.  No service charge will be made
for such registration or transfer or exchange.

     2. Transfers.  This Debenture may be transferred or exchanged in the United
States only in  compliance  with the  Securities  Act of 1933,  as amended  (the
"Act") and applicable state securities laws, or applicable exemptions therefrom.
Prior to due presentment  for transfer of this Debenture,  the Company may treat
the person in whose name this  Debenture  is duly  registered  on the  Company's
Debenture  Register as the owner hereof for the purpose of receiving  payment as
herein provided, whether or not this Debenture is overdue.

     3. Definitions. For purposes hereof the following definitions shall apply:

     "Act" shall have the meaning set forth in Section 2.

     "Adjustment Date" shall have the meaning set forth in Section 7(b)(i).

     "Affected  Conversion  Price"  shall have the  meaning set forth in Section
7(a).

                                       3
<PAGE>

     "Call Amount" shall have the meaning set forth in Section 6(a).

     "Change  in Control  Consideration"  shall  have the  meaning  set forth in
Section 4 hereof.

     "Change in Control  Conversion  Price"  shall have the meaning set forth in
Section 4 hereof.

     "Change in Control  Transaction" shall mean (i) any consolidation or merger
of the  Company  with or into any other  corporation  or other  entity or person
(whether or not the Company is the surviving  corporation)  occurs, or any other
corporate  reorganization  or transaction or series of related  transactions  in
which in excess of 50% of the Company's  voting power is  transferred  through a
merger,  consolidation,  tender offer or similar transaction occurs; or (ii) any
person (as defined in Section 13(d) of the  Securities  Exchange Act of 1934, as
amended (the "Exchange  Act")),  together with its affiliates and associates (as
such  terms are  defined  in Rule 405 under  the Act),  beneficially  owns or is
deemed to  beneficially  own (as  described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise  period) in excess of 50% of the Company's
voting power;  (iii) there is a replacement of more than one-half of the members
of the Company's Board of Directors  which is not approved by those  individuals
who are members of the Company's Board of Directors on the date thereof; or (iv)
in one or a series of related transactions there is a sale or transfer of all or
substantially  all of the assets of the Company,  determined  on a  consolidated
basis.

     "Closing  Date"  shall  mean  the  date of the  original  issuance  of this
Debenture.

     "Common  Stock"  shall  mean the  common  stock,  par value  $0.03,  of the
Company.

     "Company" shall have the meaning set forth in the Preamble.

     "Conversion Notice" shall have the meaning set forth in Section 5(d).

     "Convertible  Securities  " shall  have the  meaning  set forth in  Section
7(b)(ii).

     "Conversion Price" shall have the meaning set forth in Section 5(c).

     "Conversion Rate" shall have the meaning set forth in Section 5(b).

     "Debenture" shall have the meaning set forth in the Preamble.

     "Debentures" shall have the meaning set forth in the Preamble.

     "Debenture Register" shall have the meaning set forth in the Preamble.

     "Delay payments" shall have the meaning set forth in the Preamble.

                                       4
<PAGE>

     "DTC" shall have the meaning set forth in Section 5(d).

     "DWAC" shall have the meaning set forth in Section 5(d).

     "Escrow  Agreement"  shall  have the  meaning  set  forth  in the  Purchase
Agreement.

     "FAST" shall have the meaning set forth in Section 5(d).

     "Holder Conversion Date" shall have the meaning set forth in Section 5(d).

     "Interest Payment Date" shall have the meaning set forth in the Preamble.

     "Maturity Date" shall have the meaning set forth in the Preamble.

     "Market Price for Shares of Common Stock" shall mean the price of one share
of Common Stock determined as follows:

          (i) If the Common Stock is approved for trading on the NASDAQ National
     Market System or the Nasdaq Small-Cap Market, the last reported "bid" price
     thereon on the date of valuation;

          (ii) If (i) does not apply and the  Common  Stock is listed on NYSE or
     the American Stock Exchange,  the closing bid price on such exchange on the
     date of valuation;

          (iii) If neither (i) nor (ii) apply but the Common  Stock is quoted in
     the  over-the-counter  market,  another  recognized  exchange,  on the pink
     sheets or bulletin board, (A) the last sales price on the date of valuation
     or, if there is no such sales price, (B) the mean between the last reported
     "bid" and "asked" prices thereof on the date of valuation; and

          (iv) If neither  clause (i), (ii) or (iii) above  applies,  the market
     value as determined by a nationally  recognized  investment banking firm or
     other nationally  recognized  financial advisor retained by the Company for
     such purpose, taking into consideration,  among other factors, the earnings
     history,  book value and prospects for the Company, and the prices at which
     shares of Common Stock recently have been traded.  Such determination shall
     be conclusive and binding on all persons.

     "NYSE" shall mean the New York Stock Exchange.

     "Outstanding  Principal  Amount"  shall have the  meaning  set forth in the
Preamble.

     "Payment Statement" shall have the meaning set forth in the Preamble.

     "PIK Interest" shall have the meaning set forth in the Preamble.

                                       5
<PAGE>

     "Pricing Period" shall have the meaning set forth in Section 5(c).

     "Public  Announcement" shall mean any public filing with the Securities and
Exchange Commission, any press release by either the Company or a third party or
any other public  statement,  that announces a proposed  transaction  which,  if
consummated, would constitute a Change in Control Transaction.

     "Purchase Agreement" shall have the meaning set forth in the Preamble.

     "Redemption Date" shall have the meaning set forth in Section 6(a).

     "Redemption Notice" shall have the meaning set forth in Section 6(a).

     "Redemption Occurrence" shall have the meaning set forth in Section 6(a).

     "Redemption Price" shall have the meaning set forth in Section 4(a).

     "Registration   Statement"   shall  have  the  meaning  set  forth  in  the
Registration Rights Agreement.

     "Registration Rights Agreement" shall have the meaning set forth in

     "Restricted  Ownership  Percentage"  shall  have the  meaning  set forth in
Section 12.

     "Trading  Day" shall mean a day on which the Common  Stock is traded on the
NASDAQ Small-Cap Market or principal exchange on which the Common Stock has been
listed  (or any  similar  organization  or  agency  succeeding  such  market  or
exchange's functions of reporting prices).

     4. Change in Control, Etc.

     (a) If at any time there occurs any Change in Control  Transaction,  Holder
shall be entitled, at its sole option, to have the Company redeem this Debenture
in  whole or in part at a  Redemption  Price  equal  to 115% of the  Outstanding
Principal  Amount of this  Debenture  plus all accrued but unpaid  interest  and
delay payments on this Debenture (the "Redemption Price").  Such Holder shall be
entitled to make such  election at any time a Public  Announcement  of a pending
and up to 10 days after the effective date of the Change in Control Transaction.

     (b) If at any time there occurs a Public  Announcement  of a pending Change
in Control  Transaction in which the public  shareholders  of the Company are to
receive  consideration,  a portion  of which is  capital  stock or any  security
convertible  into  capital  stock of another  entity in  exchange  for shares of
Common Stock ("Change in Control Consideration"), then prompt provision shall be
made in a manner reasonably  acceptable to the Holders so that each Holder shall
have the right (in addition to its other rights under this Debenture):

                                       6
<PAGE>

          (i)  following the closing of the  transaction  covered by such Public
     Announcement,  to  convert  its  Debentures  into  the  Change  in  Control
     Consideration  that such  Holder  would have been or would be  entitled  to
     receive  had  it  converted  all  of  its  Debentures   into  Common  Stock
     (notwithstanding  any restrictions imposed upon the Holder pursuant to this
     Debenture  or the Purchase  Agreement in its ability to do so)  immediately
     prior to the  Change  in  Control  Transaction  at the  Change  in  Control
     Conversion  Price (as defined  below),  and  acquired the Change in Control
     Consideration as a shareholder of the Company; or

          (ii) following such Public  Announcement,  convert its Debentures into
     Common Stock at the Change in Control Conversion Price (as defined below).

          The "Change in Control  Conversion Price" shall mean a price,  subject
     to adjustments  in the same manner as adjustments to the Conversion  Price,
     equal to the lesser of: (i) the then existing  Conversion Price (as defined
     in Section 5(c) below);  (ii) 100% of the lowest Market Price for Shares of
     Common  Stock for any of the four Trading Days  immediately  preceding  the
     Public Announcement of the Change in Control Transaction;  and (iii) 85% of
     the lowest  Market  Price for Shares of Common  Stock on the three  Trading
     Days immediately  following the Public  Announcement.  The Market Price for
     Shares of Common Stock shall be  appropriately  adjusted for stock  splits,
     reverse splits, stock dividends and other dilutive events,  including those
     events occurring in connection with the Change in Control Transaction, that
     occur during the Trading Days referred to above.

     5.  Conversion  at the Option of the Holder.  The Holder of this  Debenture
shall have the following conversion rights:

     (a)  Holder's  Right to  Convert.  Upon the  earlier  to occur of:  (i) the
effectiveness  of the  Registration  Statement  under  the Act;  or (ii) 90 days
following the Closing Date,  up to 50% of the initial  principal  amount of this
Debenture  may be  converted  at the  option  of the  Holder  during  any 30 day
calendar period,  into fully paid, validly issued and  non-assessable  shares of
Common Stock;  provided that this Debenture shall be immediately  convertible in
whole in the event of:  (i)  delivery  by the  Company  of a  Redemption  Notice
pursuant to Section 6; (ii) in the event that there is a Public  Announcement or
this  Debenture  shall  become  redeemable  at the Holder's  option  pursuant to
Section 4; (iii) any material default or breach of the Purchase  Agreement,  the
Escrow  Agreement,  the  Registration  Rights  Agreement,  any  Warrant  or this
Debenture;  or (iv) any Event of Default or any event which,  with the giving of
notice or the passage of time or both, would constitute an Event of Default.  If
this Debenture is converted in part, the remaining portion or this Debenture not
so converted shall remain entitled to the conversion rights provided herein.

     (b) Conversion  Rate. The  Outstanding  Principal  Amount of this Debenture
that is converted  into shares of Common Stock at the option of the Holder shall
be  convertible  into the number of shares of Common  Stock which  results  from
application of the following formula:

                                       7
<PAGE>

                                    P + I + D
                                ----------------
                                Conversion Price

     P =  Outstanding   Principal   Amount  of  this  Debenture   submitted  for
          conversion as of the Holder Conversion Date

     I =  accrued but unpaid interest (not  previously  added to principal) on P
          as of the Holder Conversion Date

     D =  delay  payments  (not  previously  added to  principal) on P as of the
          Holder Conversion Date

          The number of shares of Common Stock into which each $1,000  principal
     amount of this Debenture hereto may be converted pursuant to this paragraph
     hereof is hereafter referred to as the "Conversion Rate."

     (c) Conversion Price.  Subject to adjustments pursuant to Sections 4 and 7,
this Debenture will have a conversion  price (the  "Conversion  Price") equal to
$2.15.

     (d) Mechanics of  Conversion.  In order to convert this Debenture (in whole
or in part) into full shares of Common Stock,  the Holder (i) shall give written
notice in the form of Exhibit 2 hereto (the "Conversion Notice") by facsimile to
the  Company at such  office  that the Holder  elects to convert  the  principal
amount (plus accrued but unpaid interest and delay payments)  specified therein,
which such  notice and  election  shall be  revocable  by the Holder at any time
prior to its receipt of the Common Stock upon conversion, and (ii) if the entire
Outstanding  Principal Amount is being converted,  as soon as practicable  after
such notice, shall surrender this Debenture,  duly endorsed, by either overnight
courier or 2-day  courier,  to the  principal  office of the Company;  provided,
however,  that  the  Company  shall  not  be  obligated  to  issue  certificates
evidencing the shares of the Common Stock issuable upon such  conversion  (where
the entire  Outstanding  Principal Amount is being converted)  unless either the
Debenture  evidencing  the  principal  amount is  delivered  to the  Company  as
provided above, or the Holder notifies the Company that such  Debenture(s)  have
been lost,  stolen or destroyed  and promptly  executes an agreement  reasonably
satisfactory  to the Company to indemnify  the Company from any loss incurred by
it in connection with such lost, stolen or destroyed Debentures.

     The Holder shall not be required to physically  surrender this Debenture to
the Company unless the full  Outstanding  Principal  Amount  represented by this
Debenture is being converted.  The Holder and the Company shall maintain records
showing the  Outstanding  Principal  Amount so  converted  and the dates of such
conversions  or shall use such  other  method,  reasonably  satisfactory  to the
Holder  and  the  Company,  so as not to  require  physical  surrender  of  this
Debenture upon each such conversion. In the event of any dispute or discrepancy,
such  records of the  Company  shall be  controlling  and  determinative  in the
absence of manifest error.  Notwithstanding the foregoing,  if this Debenture is
converted as aforesaid,  the Holder may not transfer this  Debenture  unless the
Holder first physically surrenders this Debenture to the Company,  whereupon the

                                       8
<PAGE>

Company  will  forthwith  issue and  deliver  upon the order of the Holder a new
Debenture of like tenor,  registered as the Holder may request,  representing in
the aggregate the remaining  Outstanding  Principal  Amount  represented by this
Debenture. The Holder and any assignee, by acceptance of this Debenture or a new
Debenture,  acknowledge  and agree  that,  by reason of the  provisions  of this
paragraph,   following  conversion  of  any  portion  of  this  Debenture,   the
Outstanding  Principal Amount represented by this Debenture may be less than the
Outstanding  Principal  Amount and the  accrued  interest  set forth on the face
hereof.

     The Company  shall  issue and  deliver  within  three  Trading  Days of the
delivery  to  the  Company  of  such  Conversion   Notice,  to  such  Holder  of
Debenture(s) at the address of the Holder, or to its designee,  a certificate or
certificates  for the number of shares of Common Stock to which the Holder shall
be entitled as aforesaid, together with a calculation of the Conversion Rate and
a Debenture or Debentures  for the principal  amount of Debentures not submitted
for  conversion.  The date on which the Conversion  Notice is given (the "Holder
Conversion  Date")  shall  be  deemed  to be the date the  Company  received  by
facsimile the Conversion  Notice,  and the person or persons entitled to receive
the shares of Common Stock  issuable upon such  conversion  shall be treated for
all  purposes as the record  holder or holders of such shares of Common Stock on
such date.  In the event that such Holder or its designee has not received  such
certificate  or  certificates  within ten (10)  calendar  days of the  Company's
receipt of the  Conversion  Notice,  the Holder  may,  in  addition to any other
rights or remedies it may have, revoke its Conversion Notice.

     In lieu of delivering physical certificates  representing the Common Shares
issuable upon  conversion of Debentures or the Warrant Shares (as defined in the
Purchase  Agreement)  deliverable  upon  exercise of Warrants (as defined in the
Purchase  Agreement),  provided the Company's transfer agent is participating in
the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST")
program,  upon request of the holder,  the Company shall use its best efforts to
cause its  transfer  agent to  electronically  transmit  the  Common  Shares and
Warrant Shares issuable upon conversion or exercise to the Holder,  by crediting
the account of  Holder's  prime  broker with DTC through its Deposit  Withdrawal
Agent Commission  ("DWAC") system. The time periods for delivery described above
shall apply to the electronic  transmittals through the DWAC system. The parties
agree to  coordinate  with DTC to accomplish  this  objective.  The  conversions
pursuant  to Sections 5 shall be deemed to have been made  immediately  prior to
the close of  business  on the  Holder  Conversion  Date.  The person or persons
entitled to receive the Common  Shares  issuable upon such  conversion  shall be
treated for all purposes as the record  holder or holders of such Common  Shares
at the close of business on the Holder Conversion Date.

     6. Company Option to Redeem.

     (a) In the event  that,  during the one year period  following  the Closing
Date, the Market Price for Shares of Common Stock exceeds 200% of the Conversion
Price for 20  consecutive  Trading Days (a  "Redemption  Occurrence"),  then the
Company may state its  intention  to redeem  all,  but not less than all, of the
Debentures  (all or none) for a cash price  equal to the  Outstanding  Principal
Amount of the Debentures plus all accrued but unpaid interest and delay payments

                                       9
<PAGE>

thereon (the "Call  Amount") by providing an  irrevocable,  written  notice (the
"Redemption  Notice") to the Holder;  provided that such Redemption Notice shall
be sent within 20 days of a Redemption  Occurrence and must be sent concurrently
to the holders of all Debentures.  The Redemption Notice shall indicate that the
Company  seeks to redeem the  Debenture and shall set the date for the Company's
redemption of the Debenture  (the  "Redemption  Date"),  which date shall be not
less than 10 Trading  Days,  [nor more than 20  Trading  Days] from the date the
Redemption Notice is delivered (the "Post-Notice Period").

     (b) Notwithstanding the foregoing,  the Company may not effect a redemption
of the Notes pursuant to Section 6(a) above unless:

          (i)  Effective  Registration  (as defined in the  Purchase  Agreement)
     existed at all times  during  the  Redemption  Occurrence  and at all times
     thereafter up to and including the Redemption Date;

          (ii) No  material  default or breach  exists,  and no event shall have
     occurred which  constitutes (or would constitute with notice or the passage
     of time or both) a material  default or breach of the  Purchase  Agreement,
     the Escrow Agreement,  the Registration  Rights  Agreement,  any Warrant or
     this Debenture;

          (iii)  Conversion by the Holder on the Redemption Date will not exceed
     the limits on a Holder's right to convert under Section 12 below.  However,
     at the option of the Holder,  (i) the portion of the Outstanding  Principal
     Amount that may not be converted by reason of such Section 12 shall be paid
     to the Holder in cash,  if any,  in an amount  equal to the  greater of the
     Call Amount and the Conversion Value (as defined in the Registration Rights
     Agreement)  or  (ii)  the  redemption  of the  portion  of the  Outstanding
     Principal  Amount that may not be  converted  by reason of such  Section 12
     shall be deferred until such time as the conversion hereof shall not exceed
     such limits.

     (c) The  redemption  shall occur on the  Redemption  Date at the offices of
Holder's  counsel.  If the  Company  fails to pay the Call Amount in full on the
Redemption Date in immediately  available  funds, (i) the Company shall lose its
right to redeem any  Debenture  in  accordance  with this  Section 6 and (ii) in
addition to any other rights or remedies it may have,  the Holder shall have the
right to require  the  Company to  repurchase  this  Debenture  (or any  portion
thereof,  as selected  by the  Holder) at a price equal to 110% of the  purchase
price  pursuant to Section  6(b)(iii)  above pursuant to a written notice to the
Company.

     (d) Nothing in this  Debenture  shall limit the  Holder's  right to convert
after a Redemption Notice has been received but before actual redemption.

                                       10
<PAGE>

     7. Stock Splits; Dividends; Adjustments; Reorganizations.

     (a) If the Company, at any time while the Debentures are outstanding, shall
(i) pay a stock dividend or otherwise make a distribution  or  distributions  on
any equity securities (including  investments or securities  convertible into or
exchangeable  for such  equity  securities)  in  shares of  Common  Stock,  (ii)
subdivide the outstanding shares of Common Stock into a larger number of shares,
(iii)  combine  outstanding  shares of  Common  Stock  into a smaller  number of
shares,  then  each  Affected  Conversion  Price  (as  defined  below)  shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock 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 7(a) shall become effective immediately
after the record date for the determination of shareholders  entitled to receive
such dividend or distribution and shall become effective  immediately  after the
effective date in the case of an issuance, a subdivision or a combination.

     As  used  herein,  the  Affected   Conversion  Prices  (each  an  "Affected
Conversion Price") shall refer to the Conversion Price.

In the event that the  Company  issues or sells any Common  Stock or  securities
which are convertible into or exchangeable for its Common Stock, or any warrants
or other rights to subscribe  for or to purchase or any options for the purchase
of its Common  Stock at a per share of Common  Stock  selling  price ("Per Share
Selling Price") which is less than the Conversion  Price on the Trading Day next
preceding  such  issue or sale or, in the case of  issuances  to  holders of its
Common Stock, the date fixed for the  determination of stockholders  entitled to
receive such  warrants,  rights or options  (the  "Adjustment  Date"),  then the
Conversion  Price per share shall be  adjusted  downward to equal such lower Per
Share Selling Price effective concurrently with such issue or sale.

     Notwithstanding the foregoing,  this provision shall not apply to shares or
options issued or which may be issued  pursuant to (i) the Company's  current or
future employee,  director or bona fide consultant option plans or shares issued
upon  exercise of options,  warrants  or rights  outstanding  on the date of the
Agreement and listed in the Company's  most recent  periodic  report filed under
the Exchange Act, (ii) strategic corporate alliances not undertaken  principally
for financing purposes,  (iii) arrangements with the Holder or (iv) acquisitions
of other entities by the Company.

     For the purposes of the foregoing  adjustment,  in the case of the issuance
of any convertible  securities,  warrants,  options or other rights to subscribe
for or to  purchase  or  exchange  for,  shares  of Common  Stock  ("Convertible
Securities"),  the  maximum  number  of shares of  Common  Stock  issuable  upon
exercise,  exchange or conversion of such Convertible Securities shall be deemed
to be issued and  outstanding  based upon a Per Share Selling Price equal to the
lowest price at which Common Stock can be acquired  pursuant to the  Convertible
Securities,  provided that no further  adjustment  shall be made upon the actual
issuance  of  Common  Stock  upon  exercise,  exchange  or  conversion  of  such
Convertible Securities.

                                       11
<PAGE>

     (b) If the Company, at any time while the Debentures are outstanding, shall
distribute  to  all  holders  of  shares  of  Common  Stock   evidences  of  its
indebtedness  or assets or rights or warrants to  subscribe  for or purchase any
security  (excluding  those referred to in Section 7(b) above),  then the prices
referred to in (ii) of the  definition  of the  Affected  Conversion  Prices set
forth in Section  7(a) above  shall be  reduced to equal the  relevant  Affected
Conversion Price multiplied by a fraction (i) the numerator of which is equal to
(A) the  Market  Price for  Shares of Common  Stock on the  record  date for the
distribution  minus (B) the price  allocable to one share of Common Stock of the
value (as  jointly  determined  in good faith by the board of  directors  of the
Company and the Holder) of any and all such evidences of indebtedness, shares of
capital  stock,  other  securities  or  property,  so  distributed  and (ii) the
denominator  of which is equal to the Market Price for Shares of Common Stock on
the record date for the distribution.

     (c) In the event  that at any time or from time to time  after the  Closing
Date, the Common Stock issuable upon the conversion of the Debentures is changed
into the same or a different  number of shares of any class or classes of stock,
whether  by  merger,   consolidation,   recapitalization,   reclassification  or
otherwise  (other than a subdivision  or combination of shares or stock dividend
or  reorganization  provided  for  elsewhere  in this  Section 7), then and as a
condition  to each such  event  provision  shall be made in a manner  reasonably
acceptable to the Holders of Debentures so that each Holder of Debentures  shall
have the right  thereafter  to  convert  such  Debenture  into the kind of stock
receivable  upon  such  recapitalization,  reclassification  or other  change by
holders of shares of Common Stock, all subject to further adjustment as provided
herein.  In such  event,  the  formulae  set forth  herein  for  conversion  and
redemption  shall be  equitably  adjusted  to reflect  such  change in number of
shares or, if shares of a new class of stock are  issued,  to reflect the market
price of the  class or  classes  of stock  (applying  the same  factors  used in
determining the Conversion  Price) issued in connection with the above described
transaction.

     (d) Whenever any element of the  Conversion  Price is adjusted  pursuant to
Section 7, the Company shall promptly mail to each Holder of the  Debentures,  a
notice  setting forth the  Conversion  Price after such  adjustment  and setting
forth a brief statement of the facts requiring such adjustment.

     (e) In the  event of any  taking  by the  Company  of a record  date of the
holders of any class of securities  for the purpose of  determining  the holders
thereof  who are  entitled to receive any  dividend or other  distribution,  any
security or right  convertible  or  exchangeable  into or  entitling  the holder
thereof to receive  additional shares of Common Stock, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall deliver
to each  Holder  of  Debentures  at  least 20 days  prior to the date  specified
therein,  a notice  specifying  the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right and the amount
and character of such dividend, distribution, security or right.

     (f) If the Company, at any time while the Debentures are outstanding, shall
distribute  to  all  holders  of  Shares  of  Common  Stock   evidences  of  its
indebtedness  or assets or rights or warrants to  subscribe  for or purchase any
security  (excluding  those  referred to in Section  7(b) above) then the Holder

                                       12
<PAGE>

shall  participate in such  distribution on a pro rata basis with the holders of
shares  of  Common  Stock  entitled  to  receive  such  dividend,  distribution,
issuance, subdivision or combination as if the Holder held that number of shares
of Common  Stock that the Holder would have been  entitled to receive  hereunder
upon  conversion of the  Debenture  (without  regard to Section 12)  immediately
prior to the record date fixed for  determination  of  shareholders  entitled to
receive such dividend, at the Conversion Price then in existence.

     8.  Fractional  Shares.  No  fractional  shares  of  Common  Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder.  The
number of shares of Common Stock that are issuable upon any conversion  shall be
rounded up to the nearest whole share.

     9. Reservation of Stock Issuable Upon Conversion.

     (a)  Reservation  Requirement.  The Company  covenants  that it will at all
times reserve and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon  conversion of the  Debentures as herein
provided,  free  from  preemptive  rights  or any other  present  or  contingent
purchase rights of persons other than the Holders of the Debentures, 160% of the
maximum  number  of shares of Common  Stock as shall be  issuable  (taking  into
account the  adjustments  and  restrictions of Sections 5 and 7 hereof) upon the
conversion of all of the Debentures  pursuant hereto. The Company covenants that
all shares of Common Stock that shall be so issuable  shall upon issue,  be duly
and validly authorized, issued and fully paid and nonassessable.  Without in any
way limiting the foregoing,  so long as any Debentures  remain  outstanding  the
Company agrees to reserve and at all times keep available solely for purposes of
conversion of Debentures such number of authorized but unissued shares of Common
Stock that is set forth in the Purchase Agreement.

     (b) Deficiency.  If the Company does not have a sufficient number of shares
of Common Stock  available to satisfy the Company's  obligations  to a Holder of
Debentures upon receipt of a Conversion  Notice or is otherwise  unable to issue
such shares of Common Stock in accordance  with the terms of this Agreement such
Holder  shall  be  entitled  to  the  rights  and  remedies  set  forth  in  the
Registration Rights Agreement.

     10. No Reissuance of the Debenture.  No Debentures  acquired by the Company
by reason of redemption,  purchase, exchange or otherwise shall be reissued, and
all such Debentures shall be retired.

     11. No  Impairment.  The Company  shall not  intentionally  take any action
which would impair the rights and  privileges of the Debentures set forth herein
or the Holders thereof.

     12. Limitations on Holder's Right to Convert.

     (a)  Notwithstanding  anything to the contrary contained herein, the number
of shares of Common Stock that may be acquired by the Holder upon  conversion of
this Debenture pursuant to the terms hereof shall not exceed a number that, when
added to the total number of shares of Common Stock deemed beneficially owned by
such Holder  (other than by virtue of the  ownership of  securities or rights to

                                       13
<PAGE>

acquire  securities  that have  limitations  on the  holder's  right to convert,
exercise or purchase similar to the limitation set forth herein),  together with
all shares of Common  Stock deemed  beneficially  owned (other than by virtue of
the  ownership  of  securities  or  rights  to  acquire   securities  that  have
limitations  on the  right to  convert,  exercise  or  purchase  similar  to the
limitation  set forth herein) by the Holder's  "affiliates"  (as defined in Rule
144 of the Act) ("Aggregation Parties") that would be aggregated for purposes of
determining  whether a group under Section 13(d) of the Securities  Exchange Act
of 1934  as  amended,  exists,  would  exceed  9.99%  of the  total  issued  and
outstanding shares of the Common Stock (the "Restricted Ownership  Percentage").
Each Holder shall have the right (i) at any time and from time to time to reduce
its Restricted Ownership  Percentage  immediately upon notice to the Company and
(ii)  (subject  to waiver) at any time and from time to time,  to  increase  its
Restricted Ownership Percentage  immediately in the event of the announcement as
pending or planned, of a Change of Control Transaction.

     (b) The  Holder  covenants  at all times on each day  (each  such day being
referred to as a "Covenant Day") as follows: During the balance of such Covenant
Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and
the succeeding 61 days being  referred to as the "Covenant  Period") such Holder
will not acquire  shares of Common Stock  pursuant to any right  existing at the
commencement  of the  Covenant  Period  to the  extent  the  number of shares so
acquired by such Holder and its Aggregation  Parties (ignoring all dispositions)
would exceed:

               (x) the  Restricted  Ownership  Percentage of the total number of
               shares of Common Stock  outstanding  at the  commencement  of the
               Covenant Period,

               minus

               (y) the number of shares of Common Stock owned by such Holder and
               its  Aggregation  Parties  at the  commencement  of the  Covenant
               Period.

     A new and independent  covenant will be deemed to be given by the Holder as
of each moment of each  Covenant Day. No covenant  will  terminate,  diminish or
modify any other covenant.  The Holder agrees to comply with each such covenant.
This Section 12 controls in the case of any conflict with any other provision of
any other agreement to which the Company and the Holder may be parties.

     (c) The  Company's  obligation  to issue shares of Common Stock which would
exceed such  limits  referred to in this  Section 12 shall be  suspended  to the
extent  necessary  until such  time,  if any,  as shares of Common  Stock may be
issued in compliance with such restrictions.

     13.  Obligations  Absolute.  No provision of this  Debenture,  the Purchase
Agreement  or the  Registration  Rights  Agreement  shall  alter or  impair  the
obligation  of the  Company,  which is absolute  and  unconditional,  to pay the
principal  of, and  interest and delay  payments on, this  Debenture or to issue
shares of Common Stock in response to a Conversion Notice at the time, place and
rate, and in the manner, herein prescribed.

                                       14
<PAGE>

     14. Waivers of Demand,  Etc. The Company hereby  expressly and  irrevocably
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor,  notice of acceleration or intent to accelerate,
bringing of suit and  diligence in taking any action to collect  amounts  called
for hereunder  and will be directly and primarily  liable for the payment of all
sums  owing  and to be owing  hereon,  regardless  of and  without  any  notice,
diligence,  act or omission as or with respect to the  collection  of any amount
called for hereunder.

     15.  Replacement  Debenture.  In the event  that any  Holder  notifies  the
Company that its Debenture(s) have been lost,  stolen or destroyed,  replacement
Debenture(s)  identical in all respects to the original Debenture(s) (except for
registration  number and Outstanding  Principal  Amount,  if different than that
shown on the  original  Debenture(s)),  shall be issued to the Holder,  provided
that the Holder  executes and  delivers to the Company an  agreement  reasonably
satisfactory  to the Company to indemnify  the Company from any loss incurred by
it in connection with such Debenture.

     16. Payment of Expenses;  Issue Taxes.  The Company agrees to pay all debts
and expenses, including reasonable attorneys' fees, which may be incurred by the
Holder in enforcing  the  provisions of this  Debenture  and/or  collecting  any
amount due under this Debenture,  the Escrow Agreement,  the Purchase Agreement,
any Warrant or the Registration Rights Agreement.  The Company shall pay any and
all issue and other taxes  (excluding  any income,  franchise or similar  taxes)
that maybe payable in respect of any issue or delivery of shares of Common Stock
on conversion of any Debenture pursuant hereto.

     17. Defaults. If one or more of the following described "Events of Default"
shall occur with respect to any of the Debentures:

     (a)  the  Company  shall  default in the  payment of (i)  interest  on this
          Debenture  or any other  Debenture  issued  pursuant  to the  Purchase
          Agreement  (subject to the Company's option to pay PIK Interest),  and
          such  default  shall  continue  for five (5) days  after  the due date
          thereof,  or  (ii)  the  principal  of  this  Debenture  or any  other
          Debenture issued pursuant to the Purchase Agreement; or

     (b)  any of the representations or warranties made by the Company in any of
          the Debentures,  in the Purchase Agreement,  the Escrow Agreement, the
          Registration  Rights  Agreement,  any Warrant or in any certificate or
          financial or other statements  heretofore or hereafter furnished by or
          on behalf of the Company in connection with the execution and delivery
          of this Debenture or such other documents shall be false or misleading
          at the time made; or

                                       15
<PAGE>

     (c)  the Company shall fail to  materially  perform or observe any covenant
          or agreement  in the Purchase  Agreement,  the Escrow  Agreement,  any
          Warrant or the Registration  Rights Agreement,  or any other covenant,
          term,  provision,  condition,  agreement or  obligation of the Company
          under any of the Debentures  and such failure shall  continue  uncured
          for a period of ten (10) days after notice of such failure; or

     (d)  the  Company  shall (1) become  insolvent;  (2) admit in  writing  its
          inability  to pay its  debts  generally  as they  mature;  (3) make an
          assignment  for the benefit of creditors or commence  proceedings  for
          its  dissolution;  or (4) apply for or consent to the appointment of a
          trustee,  liquidator or receiver for it or for a  substantial  part of
          its property or business; or

     (e)  a trustee,  liquidator or receiver  shall be appointed for the Company
          or for a  substantial  part of its  property or  business  without its
          consent and shall not be discharged  within forty-five (45) days after
          such appointment; or

     (f)  any governmental agency or any court of competent  jurisdiction at the
          instance of any governmental agency shall assume custody or control of
          the whole or any  substantial  portion of the  properties or assets of
          the Company and shall not be  dismissed  within  forty-five  (45) days
          thereafter; or

     (g)  the  Company  shall,  in one or a  series  of  transactions,  sell  or
          otherwise transfer all or substantially all of its assets; or

     (h)  bankruptcy,  reorganization,  insolvency or liquidation proceedings or
          other  proceedings,  or relief under any bankruptcy law or any law for
          the relief of debt shall be  instituted by or against the Company and,
          if  instituted  against  the  Company  shall not be  dismissed  within
          forty-five (45) days after such  institution,  or the Company shall by
          any action or answer  approve of, consent to, or acquiesce in any such
          proceedings  or admit to any  material  allegations  of, or default in
          answering a petition filed in any such proceeding; or

     (i)  the  Company  shall be in  default  of any  other of its  indebtedness
          exceeding  $500,000,  or any other event shall have occurred such that
          as a result  thereof the holders  thereof  shall have  accelerated  or
          shall have the right (upon the giving of notice,  the passage of time,
          or both) to accelerate such indebtedness; or

     (j)  a "going private" transaction under Rule 13e-3 promulgated pursuant to
          the Exchange Act shall have been announced; or

                                       16
<PAGE>

     (k)  a tender offer by the Company under Rule 13e-4 promulgated pursuant to
          the Exchange Act shall have been announced;

     then, or at any time  thereafter,  in the case of Events of Default arising
from the events  described in  paragraphs  (a),  (b), (c), (g) (i), (j) and (k),
unless  such  Event of Default  shall have been  waived in writing by the Holder
(which waiver shall not be deemed to be a waiver of any  subsequent  default) at
the option of the Holder and in the  Holder's  sole  discretion,  the Holder may
declare  the  Debenture  immediately  due and payable  and  concurrently  demand
payment thereof,  and the Holder may immediately,  and without expiration of any
period  of  grace,  enforce  any and all of the  Holder's  rights  and  remedies
provided herein or any other rights or remedies afforded by law. In the event of
Events of Default arising from the events  described in paragraphs (d), (e), (f)
or (h) above,  this Debenture  shall become  immediately due and payable without
further  action or notice.  In the event that the  Debenture  is due and payable
pursuant  to this  provision,  the  Debenture  shall be  redeemed at the Premium
Redemption Price (as defined in the Registration Rights Agreement).

     18.  Savings  Clause.  In case any provision of this Debenture is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent  possible,  and the validity and
enforceability of the remaining provisions of this Debenture will not in any way
be affected or impaired  thereby,  and such provision shall remain  effective in
all other jurisdictions.

     19. Entire Agreement. This Debenture and the agreements referred to in this
Debenture constitute the full and entire understanding and agreement between the
Company  and the  Holder  with  respect  to the  subject  hereof.  Neither  this
Debenture nor any term hereof may be amended,  waived,  discharged or terminated
other than by a written instrument signed by the Company and the Holder.

     20. Assignment,  Etc. Subject to Section 7.8 of the Purchase Agreement, the
Holder  (but not the  Company)  may  without  notice,  transfer  or assign  this
Debenture or any interest  herein and may mortgage,  encumber or transfer any of
its rights or interest in and to this Debenture or any part hereof and,  without
limitation,  each  assignee,  transferee  and  mortgagee  (which may include any
affiliate  of the  Holder)  shall  have the  right to  transfer  or  assign  its
interest.  Each such assignee,  transferee  and mortgagee  shall have all of the
rights of the Holder under this Debenture.  The Company agrees that,  subject to
compliance with the Purchase Agreement,  after receipt by the Company of written
notice  of  assignment  from the  Holder  or from  the  Holder's  assignee,  all
principal,  interest and other amounts which are then and thereafter  become due
under  this  Debenture  shall be paid to such  assignee  at the place of payment
designated in such notice.  This Debenture shall be binding upon the Company and
its  successors  and affiliates and shall inure to the benefit of the Holder and
its successors and assigns.

     21. No Waiver.  No failure  on the part of the Holder to  exercise,  and no
delay in  exercising  any right,  remedy or power  hereunder  shall operate as a
waiver  thereof,  nor shall any single or partial  exercise by the Holder of any
right,  remedy or power  hereunder  preclude any other or future exercise of any

                                       17
<PAGE>

other  right,  remedy or power.  Each and every  right,  remedy or power  hereby
granted  to the  Holder  or  allowed  it by  law or  other  agreement  shall  be
cumulative  and not  exclusive of any other,  and may be exercised by the Holder
from time to time.

     22. Certificate. The Company shall, upon the written request at any time of
any Holder of  Debentures,  furnish or cause to be  furnished  to such  Holder a
certificate prepared by the chief financial officer of Company setting forth any
adjustments or  readjustments of the Conversion Price pursuant to this Debenture
and any right of the Holder to receive  additional shares of Common Stock or any
other equity or debt security pursuant to Section 7.

     23.  Notices.  The Company  shall  distribute  to the Holders of Debentures
copies  of  all  notices,   materials,   annual  and  quarterly  reports,  proxy
statements, information statements and any other documents distributed generally
to the holders of shares of Common  Stock of the  Company,  at such times and by
such method as such  documents  are  distributed  to such holders of such Common
Stock,  but  shall  not  directly  or  indirectly  provide  material  non-public
information to the Holder without such Holder's prior written consent.

     24. Specific Enforcement.  The Company agrees that irreparable damage would
occur  in the  event  that  any of the  provisions  of this  Debenture  were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly  agreed that the Holders of Debentures shall be entitled to swift
specific  performance,  injunctive relief or other equitable remedies to prevent
or cure breaches of the provisions of this Debenture and to enforce specifically
the terms and provisions  hereof,  this being in addition to any other remedy to
which any of them may be entitled under agreement, at law or in equity.

     25.  Miscellaneous.  Unless otherwise  provided herein, any notice or other
communication to a party hereunder shall be sufficiently given if in writing and
personally  delivered,  facsimiled  or mailed to said party by  certified  mail,
return receipt requested,  at its address set forth herein or such other address
as  either  may   designate   for  itself  in  such  notice  to  the  other  and
communications  shall be deemed to have been received when delivered  personally
or, if sent by mail or facsimile,  then when  actually  received by the party to
whom it is addressed.  Whenever the sense of this Debenture  requires,  words in
the singular shall be deemed to include the plural and words in the plural shall
be deemed to include the singular.  Paragraph  headings are for convenience only
and shall not affect the meaning of this document.

     26.  GOVERNING  LAW;  CONSENT  TO  JURISDICTION.  THIS  DEBENTURE  SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE  WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED ENTIRELY WITHIN
SUCH  STATE.  THE  COMPANY  (I)  HEREBY  IRREVOCABLY  SUBMITS  TO THE  EXCLUSIVE
JURISDICTION  OF THE STATE AND FEDERAL  COURTS  LOCATED IN NEW YORK COUNTY,  NEW
YORK FOR THE  PURPOSES  OF ANY SUIT,  ACTION  OR  PROCEEDING  ARISING  OUT OF OR
RELATED TO THIS  DEBENTURE AND (II) HEREBY  WAIVES,  AND AGREES NOT TO ASSERT IN
ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT
TO THE  JURISDICTION  OF SUCH  COURT,  THAT THE SUIT,  ACTION OR  PROCEEDING  IS

                                       18
<PAGE>

BROUGHT  IN AN  INCONVENIENT  FORUM OR THAT THE  VENUE OF THE  SUIT,  ACTION  OR
PROCEEDING IS IMPROPER. THE COMPANY CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT,  ACTION OR  PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED
HEREIN AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE
OF PROCESS AND NOTICE  THEREOF.  NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT
ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

                             Signature Page Follows

                                       19
<PAGE>

     IN WITNESS  WHEREOF,  the  Company has caused  this  instrument  to be duly
executed by an officer thereunto duly authorized.

                                            PHARMOS CORPORATION

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

     Signature page to 6% Convertible Debenture of PHARMOS CORPORATION

                                       20
<PAGE>

                                    EXHIBIT 1

                                PAYMENT STATEMENT

Date:______________

To: [Name of Holder of Debenture] ("Holder")

Re:  6%  Convertible  Debenture  Due  June 30,  2003  ("Debenture")  of  PHARMOS
CORPORATION (the "Company"), in the Outstanding Principal Amount of US$________.

     The Company hereby irrevocably elects to pay interest on the Debenture, for
the Interest  Payment Date indicated below, in the following manner (the Company
should check its selection):

     ____ cash interest; or

     ____ PIK Interest.

     Interest Payment Date: _________________________

     If the  selection  above is PIK  Interest,  the Company  should fill in the
following:

     Outstanding Principal Amount prior
     to issuance of this Payment Statement:              US$_____________

     PIK Interest:                                       US$_____________

     Outstanding Principal Amount after
     issuance of this Payment Statement:                 US$_____________

     The Company hereby certifies to the Holder, its successors and assigns that
the Outstanding  Principal Amount due under the Debenture after delivery of this
Payment  Statement equals the amount indicated below.  Capitalized terms used in
this Payment Statement and not otherwise defined shall have the meaning ascribed
thereto in the Debenture.

                                       21
<PAGE>

     IN WITNESS  WHEREOF,  this  Payment  Statement  has been duly  executed and
delivered on the date first written above.

                                            PHARMOS CORPORATION

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

                                       22
<PAGE>

                                    EXHIBIT 2

                      (To be Executed by Registered Holder
                         in order to Convert Debenture)

                                CONVERSION NOTICE
                                       FOR
                   6% CONVERTIBLE DEBENTURE DUE JUNE 30, 2003

     The  undersigned,  as Holder of the 6%  Convertible  Debenture Due June 30,
2003 of PHARMOS CORPORATION (the "Company"), in the outstanding principal amount
of U.S. $_____________ (the "Debenture"),  hereby elects to convert that portion
of the outstanding principal amount of the Debenture shown on the next page into
shares of Common Stock,  $0.03 par value per share (the "Common Stock"),  of the
Company  according to the  conditions of the  Debenture,  as of the date written
below.  The undersigned  hereby requests that share  certificates for the Common
Stock to be issued to the  undersigned  pursuant  to this  Conversion  Notice be
issued in the name of, and  delivered  to, the  undersigned  or its  designee as
indicated  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. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any.

Conversion Information:      NAME OF HOLDER:
                                            -----------------------------------

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

                             Print Address of Holder:

                             ---------------------------------------------------

                             ---------------------------------------------------

                             Issue Common Stock to:
                                                   -----------------------------
                             at:
                                ------------------------------------------------

                             Electronically transmit and credit Common Stock to:
                                               at:
                             ------------------   ------------------------------

                             ---------------------------------------------------
                             Date of Conversion

                             ---------------------------------------------------
                             Applicable Conversion Rate

                THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
                  BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE

<PAGE>

              Page 2 to Conversion Notice for:
                                              --------------------------------
                                                     (Name of Holder)

              COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED

A.  Outstanding Principal Amount converted:                              $______

B.  Accrued, unpaid interest on Outstanding Principal Amount converted:  $______

C.  Delay payments due Holder on Outstanding Principal Amount converted: $______

Total dollar amount converted (total of A + B + C)                       $______

Exchange Price                                                           $______

Number of Shares of Common Stock = Total dollar amount converted =       $______
                                   -----------------------------
                                         Conversion Price                $

Number of shares of Common Stock = _____________________________

If the  conversion is not being  settled by DTC,  please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):

---------------------------------------------------------------

---------------------------------------------------------------

---------------------------------------------------------------

---------------------------------------------------------------

Please issue and deliver _____ new Debenture(s) in the following amounts:

---------------------------------------------------------------

---------------------------------------------------------------

---------------------------------------------------------------

---------------------------------------------------------------

                                       2

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