Document:

exhibit4_1.htm

    
      

      

    

    Exhibit
4.1

      

       

      SECURITIES
PURCHASE AGREEMENT

       

      This
Securities Purchase Agreement (this “Agreement”) is dated
as of April 21, 2009, among Pharmos Corporation, a Nevada corporation (the
“Company”), and
the purchasers identified on the signature pages hereto (each a “Purchaser” and
collectively the “Purchasers”);
and

       

      WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act (as defined below), and Rule 506 promulgated
thereunder, the Company desires to issue and sell to the Purchasers, and each
Purchaser, severally and not jointly, desires to purchase from the Company in
the aggregate, up to $1,800,000 of the Shares and the Warrants (as defined
below), as more fully described in this Agreement;

       

      NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, the Company and each Purchaser agrees as
follows:

       

      ARTICLE
I.

       

      DEFINITIONS

       

      1.1         Definitions

       

      .  In
addition to the terms defined elsewhere in this Agreement, for all purposes of
this Agreement, the following terms have the meanings indicated in this Section
1.1:

       

      “Action” shall have
the meaning ascribed to such term in Section 3.1(j).

       

      “Affiliate” means any
Person that, directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with a Person as such terms are
used in and construed under Rule 144.  With respect to a Purchaser,
any investment fund or managed account that is managed on a discretionary basis
by the same investment manager as such Purchaser will be deemed to be an
Affiliate of such Purchaser.

       

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

       

      “Closing Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all conditions precedent to (i)
the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Shares and the Warrants have been satisfied
or waived.

       

      “Closing Price” means
$0.10 per share of Common Stock.

       

      “Commission” means the
Securities and Exchange Commission.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Common Stock” means
the common stock of the Company, $0.03 par value per share, and any securities
into which such common stock may hereafter be reclassified.

       

      “Common Stock
Equivalents” means any securities of the Company or the Subsidiaries
which would entitle the holder thereof to acquire at any time Common Stock,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

       

      “Company Counsel”
means Eilenberg & Krause LLP.

       

      “Company Sale
Transaction” shall mean, with respect to the Company, a transaction or
series of related transactions pursuant to which (i) the Company effects a sale
of all or substantially all of its assets or an exclusive license of all or
substantially all of its Intellectual Property Rights, (ii) the Company effects
a merger or consolidation of the Company with or into another Person whereby the
Company is not the surviving entity, (iii) the Company allows another Person or
Persons to make a purchase, tender or exchange offer that is accepted by the
holders of more than the 50% of the outstanding shares of Common Stock on a
fully-converted basis (not including any shares of Common Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer)
or (iv) the Company executes a stock purchase agreement or effects a business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than 50% of the outstanding shares of Common Stock on a
fully-converted basis (not including any shares of Common Stock held by the
other Person or other Persons making or party to, or associated or affiliated
with the other Persons making or party to, such stock purchase agreement or
other business combination).

       

      “Debenture Amendment
Agreement” means the Agreement, dated as of the date hereof, among the
Company and the Purchasers providing that, with respect to those Debentures held
by the Purchasers, the Set Price thereunder with respect to the conversion of
the principal amount of only such Debentures is reduced from $0.70 to $0.275,
with the conversion price for all unpaid and accrued interest thereon remaining
unchanged at $0.34, in the form of Exhibit E
hereto.

       

      “Debenture Purchase
Agreement” means the Securities Purchase Agreement dated as of January 3,
2008 between the Company and the persons identified on the signature pages
thereof.

       

      “Debentures” means,
the 10% Convertible Debentures due November 1, 2012, issued by the Company
pursuant to the Debenture Purchase Agreement..

       

      “Effective Date” means
the date that the Registration Statement is first declared effective by the
Commission.

       

      “Event of Default”
shall have the meaning ascribed to such term in Section 4.13.

       

      “Exchange Act” means
the Securities Exchange Act of 1934, as amended.

       

      
        
          
             

            

             

          

           

        

        
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      “Indemnification
Agreements” shall mean the Indemnification Agreements dated as of the
date hereof between the Company and each of the Company’s current directors and
members of senior management, in the form of Exhibit G hereto.

       

      “Intellectual Property
Rights” shall have the meaning ascribed to such term in Section
3.1(o).

       

      “Liens” means a lien,
charge, security interest, encumbrance, right of first refusal or other
restriction.

       

      “Material Adverse
Effect” shall have the meaning ascribed to such term in Section
3.1(b).

       

      “Material Permits”
shall have the meaning ascribed to such term in Section 3.1(m).

       

      “Permitted
Indebtedness” means indebtedness for trade payables or otherwise arising
in the ordinary course of business, including without limitation accounts
payable, customer deposits and accrued expenses incurred in the ordinary course
of business.

       

      “Person” means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any
kind.

       

      “Registration
Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Shares and the Warrant Shares.

       

      “Registration Rights
Agreement” means the Registration Rights Agreement, dated as of the date
of this Agreement, among the Company and each Purchaser, in the form of Exhibit C
hereto.

       

      “Rights Agreement
Amendment” means the Rights Agreement Amendment No. 3 dated as of the
date hereof between the Company and American Stock Transfer & Trust Co., in
the form of Exhibit F.

       

      “Rule 144,” means Rule
144 promulgated by the Commission pursuant to the Securities Act, as such Rules
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.

       

      “SEC Reports” shall
have the meaning ascribed to such term in Section 3.1(h).

       

       “Securities” means the
Shares, the Warrants and the Warrant Shares.

       

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

       

      “Shares”
means the shares of Common Stock issued to each Purchaser pursuant to this
Agreement.

       

      
        
          
             

            

             

          

           

        

        
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      “Subscription Amount”
means, as to each Purchaser, the amount to be paid for the Shares and Warrants
purchased hereunder as specified below such Purchaser’s name on the signature
page of this Agreement and next to the heading “Subscription Amount”, in United
States Dollars and in immediately available funds.

       

      “Subsidiary” shall
have the meaning ascribed to such term in Section 3.1(a).

       

      “Trading Day” means
(i) a day on which the Common Stock is traded on a Trading Market, or (ii) if
the Common Stock is not listed on a Trading Market, a day on which the Common
Stock is traded on the over-the-counter market, as reported by the OTC Bulletin
Board, or (iii) if the Common Stock is not quoted on the OTC Bulletin Board, a
day on which the Common Stock is 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 Common Stock is not listed or quoted as set forth in
(i), (ii) and (iii) hereof, then Trading Day shall mean a Business
Day.

       

      “Trading Market” means
the OTC Bulletin Board or any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the New York Stock Exchange, the Nasdaq Capital Market
or the Nasdaq Global Market.

       

      “Transaction
Documents” means this Agreement, the Warrant, the Registration Rights
Agreement, the
Debenture Amendment Agreement, the Rights Agreement Amendment and the
Indemnification Agreements and any other documents or agreements executed in
connection with the transactions contemplated hereunder.

       

      “Warrants”
means collectively the Common Stock purchase warrants, in the form of Exhibit B delivered
to the Purchasers at the Closing in accordance with Section 2.2 hereof, which
Warrants shall be exercisable immediately and have a term of exercise equal to 5
years.

       

      “Warrant Shares” means
the shares of Common Stock issuable upon exercise of the Warrants.

       

      ARTICLE
II.

       

      PURCHASE
AND SALE

       

      2.1         Purchase and
Sale.  Subject to and upon the terms and conditions set forth
in this Agreement, the Company agrees to issue and sell to each Purchaser, and
each Purchaser, severally and not jointly with the other Purchasers, hereby
agrees to purchase from the Company, at the Closing, the number of shares of
Common Stock set forth opposite the name of such Purchaser under the heading
“Number of Shares to be Purchased” on Exhibit A hereto, at
a purchase price of $0.10 per share.  The total purchase price payable by
each Purchaser for the number of shares of Common Stock that such Purchaser is
hereby agreeing to purchase is set forth opposite the name of such Purchaser
under the heading “Subscription Amount” on Exhibit A
hereto.  The Company agrees that it will not issue more than an
aggregate of 18,000,000 Shares.

       

      
        
          
             

            

             

          

           

        

        
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      2.2         Warrants.  As
additional consideration for the purchase of the Shares, subject to the terms
and conditions of this Agreement, each Purchaser agrees, severally and not
jointly with the other Purchasers, to purchase, and the Company agrees to sell
and issue to each Purchaser, a five-year cashless exercise Warrant, in form and
substance attached hereto as Exhibit B, to acquire one (1) share of the
Company’s Common Stock at an exercise price equal to $0.12 (120% of the Purchase
Price) per share (subject to adjustment therein) for each one (1) Share acquired
pursuant to Section 2.1 above. No fractional shares shall be issued under the
Warrants (any fractional shares shall be rounded up to the nearest whole
number).

       

      2.3         Conditions to
Closing.  Upon satisfaction or waiver by the party sought to be
benefited thereby of the conditions set forth in this Section 2.2, the Closing
shall occur.

       

      (a)           At
or prior to the Closing, the Company shall deliver or cause to be delivered to
each Purchaser with respect to such Closing:

       

      (i)           a
stock certificate representing the Shares purchased by such Purchaser,
registered in the name of such Purchaser, or in lieu of such stock certificate,
a copy of an irrevocable letter of instruction from the Company to its transfer
agent relating to the issuance of such certificate;

       

      (ii)           a
Warrant, in the form set forth in Exhibit B,
exercisable for the number of Warrant Shares set forth opposite such Purchaser’s
name on Exhibit A,
registered in the name of such Purchaser;

       

      (iii)           the
legal opinion of Company Counsel, in the form of Exhibit D attached
hereto, addressed to the Purchasers;

       

      (iv)           the
Registration Rights Agreement duly executed by the Company;

       

       (v)           the
Rights Agreement Amendment duly executed by the Company and American Stock
Transfer & Trust Co.;

       

      (vi)           the
Debenture Agreement Amendment, duly executed by the Company;

       

      (vii)           the
Indemnification Agreements, duly executed by the Company;

       

      (viii)                      this
Agreement, duly executed by the Company; and

       

      (ix)           a
copy of a good standing certificate of the Company.

       

      (b)           At
or prior to the Closing, each Purchaser shall deliver or cause to be delivered
to the Company the following with respect to such Closing:

       

      (i)           such
Purchaser’s Subscription Amount;

       

      (ii)           this
Agreement, duly executed by such Purchaser;

       

      (iii)           the
Registration Rights Agreement duly executed by such Purchaser; and

       

      
        
          
             

             

          

           

        

        
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      (iv)           the
Debenture Agreement Amendment duly executed by such Purchaser, together with the
original Debentures being surrendered for conversion pursuant to the terms
thereof.

       

      (c)           All
representations and warranties of the other party contained herein shall remain
true and correct as of the Closing Date and all covenants of the other party
shall have been performed if due prior to such date.

       

      (d)           As
of the Closing Date, there shall have been no Material Adverse Effect with
respect to the Company since the date hereof.

       

      (e)           From
the date hereof to the Closing Date, trading in the Common Stock shall not have
been suspended by the Commission (except for any suspension of trading of
limited duration agreed to by the Company, which suspension shall be terminated
prior to the Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets shall not have
been suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by such service, or on any Trading Market,
nor shall a banking moratorium have been declared either by the United States or
New York State authorities, nor shall there have occurred any material outbreak
or escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Shares and Warrants at the
Closing.

       

      (f)           At
or prior to the Closing, no less than $1,800,000 of the Shares and Warrants
shall be purchased by the Purchasers and issued by the Company.

       

      (g)           At
or prior to the Closing, pursuant to the Debenture Amendment Agreement, all
outstanding principal on the Debentures held by all of the Purchasers (in
principal amount of $3,000,000) shall have been converted into shares of Common
Stock of the Company (the “Debenture Principal
Shares”) at a Set Price (as defined in the Debentures) of $0.275, and all
unpaid and accrued interest thereon shall have been converted into shares of
Common Stock of the Company at a conversion price of $0.34 per share (the “Debenture Interest
Shares”, together with the Debenture Principal Shares, the “Debenture Shares”),
and the Company shall have delivered to the Purchasers stock certificates
representing the Debenture Shares, registered in the name of the Purchasers, or
in lieu of such stock certificates, a copy of an irrevocable letter of
instruction from the Company to its transfer agent relating to the issuance of
certificates representing the Debenture Shares.

       

      ARTICLE
III.

       

      REPRESENTATIONS
AND WARRANTIES

       

      3.1         Representations and
Warranties of the Company.

       

      The
Company hereby makes the following representations and warranties as of the date
hereof and as of the Closing Date to each Purchaser:

       

      
        
          
             

            

             

          

           

        

        
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            (a)           Subsidiaries.  All
of the subsidiaries of the Company (each, a “Subsidiary”) are set
forth in the SEC Reports.  The Company owns, directly or indirectly,
all of the capital stock of each Subsidiary free and clear of any Liens, and all
the issued and outstanding shares of capital stock of each Subsidiary are
validly issued and are fully paid, non-assessable and free of preemptive and
similar rights.

       

      (b)           Organization and
Qualification.  Each of the Company and the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation of
any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter
documents.  Each of the Company and the Subsidiaries is duly qualified
to conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, would not
have or reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business or
financial condition of the Company and the Subsidiaries, taken as a whole, or
(iii) adversely impair the Company’s ability to perform in any material respect
on a timely basis its obligations under any Transaction Document (any of (i),
(ii) or (iii), a “Material Adverse
Effect”).

       

      (c)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
thereunder.  The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company in
connection therewith, except that, as previously disclosed to the Purchasers,
the Company does not currently have a sufficient number of authorized shares of
Common Stock reserved to honor the exercise of all of the Warrants and to issue
all of the Warrant Shares (the “Warrant-Exercise Capital
Deficiency”), and has agreed pursuant to Section 4.9 hereof to undertake
to amend its Articles of Incorporation to increase such number of authorized
shares by an amount sufficient to permit such exercise and
issuance.  Each Transaction Document has been (or upon delivery will
have been) duly executed by the Company and, when delivered in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms except (i)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.

       

      (d)           No
Conflicts.  Except for the Warrant-Exercise Capital Deficiency,
the execution, delivery and performance of the Transaction Documents by the
Company and the consummation by the Company of the transactions contemplated
thereby do not and will not (i) conflict with or violate any provision of the
Company’s or any Subsidiary’s

       

      
        
          
             

            

             

          

           

        

        
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      certificate
or articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation (with or
without notice, lapse of time or both) of, any agreement, credit facility, debt
or other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected.

       

      (e)           Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(a) the filing with the Commission of the Registration Statement, the
application(s) to each Trading Market for the listing of the Shares and the
Warrant Shares for trading thereon in the time and manner required thereby, and
applicable Blue Sky filings, (b) such as have already been obtained or such
exemptive filings as are required to be made under applicable securities laws,
(c) such other filings as may be required following the Closing Date under the
Securities Act, the Exchange Act and corporate law.

       

      (f)           Issuance of the
Securities.  Except for the Warrant-Exercise Capital Deficiency
with respect to the Warrant Shares, the Securities are duly authorized and, when
issued and paid for in accordance with the Transaction Documents, will be duly
and validly issued, fully paid and nonassessable, free and clear of all
Liens.

       

      (g)           Capitalization.  The
capitalization of the Company is as described in the Company’s most recent
periodic report filed with the Commission.  The Company has not issued
any capital stock since such filing other than pursuant to the exercise of
employee stock options under the Company’s stock option plans, the issuance of
shares of Common Stock to employees pursuant to the Company’s employee stock
purchase plan and pursuant to the conversion or exercise of outstanding Common
Stock Equivalents.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents.  The issue
and sale of the Securities will not obligate the Company to issue shares of
Common Stock or other securities to any Person (other than the Purchasers) and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such
securities.

       

      (h)           SEC Reports; Financial
Statements.  The Company has filed all reports required to be
filed by it under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or
such shorter period as the Company was required by law to file such material)
(the foregoing materials, including the exhibits thereto, being collectively
referred to herein as

       

      
        
          
             

            

             

          

           

        

        
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      the
“SEC Reports”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.  The
financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing.  Such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (“GAAP”), except as may
be otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.

       

      (i)           Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as disclosed in the SEC
Reports, (i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, and (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its stockholders or
purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock and (v) the Company has not issued any equity securities to
any officer, director or Affiliate, except pursuant to existing Company stock
option plans or pursuant to agreements related to the resignation of certain
directors approved by all other members of the board.  The Company
does not have pending before the Commission any request for confidential
treatment of information.

       

      (j)           Litigation.  Except
as disclosed in the SEC Reports, there is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect.  Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action involving
a claim of violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty.

       

      
        
          
             

            

             

          

           

        

        
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      There has
not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company or any
current or former director or officer of the Company.  The Commission
has not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.

       

      (k)           Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.

       

      (l)           Compliance.  Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority or Trading Market,
including without limitation all foreign, federal, state and local laws
applicable to its business, except as disclosed in the SEC Reports or except in
the case of clauses (i), (ii) and (iii) as would not have or reasonably be
expected to result in a Material Adverse Effect.

       

      (m)           Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits would not have or reasonably be expected to result in a
Material Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.

       

      (n)           Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties.  Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries are
in compliance.

       

      (o)           Patents and
Trademarks.  To the knowledge of the Company and each
Subsidiary, the Company and the Subsidiaries have, or have rights to use, all
patents, patent applications, inventions, trade secrets, know-how, trademarks,
trademark applications, service marks, trade names, copyrights, licenses and
other intellectual

       

      
        
          
             

            

             

          

           

        

        
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      property
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could have or reasonably could be expected to result in a Material
Adverse Effect (collectively, the “Intellectual Property
Rights”).  Neither the Company nor any Subsidiary has received
a written notice that the Intellectual Property Rights used by the Company or
any Subsidiary violates or infringes upon the rights of any
Person.  To the knowledge of the Company, all such Intellectual
Property Rights are enforceable.  To the knowledge of the Company and
each Subsidiary, no third party, including any academic or governmental
organization, possesses rights to the Intellectual Property Rights which, if
exercised, could enable such third party to develop products competitive with
the business of the Company as currently being conducted.

       

      (p)           Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged.  The Company currently maintains and has paid for Directors
and Officers Liability Insurance and Excess Directors and Officers Liability
Insurance in amounts and for the term previously disclosed to the
Purchasers.  Neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business without a significant increase in
cost.

       

      (q)           Transactions With Affiliates
and Employees.  Except as set forth in the SEC Reports, none of
the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $60,000 other than (a) for payment of salary or consulting fees for services
rendered, (b) reimbursement for expenses incurred on behalf of the Company and
(c) for other employee benefits, including stock option agreements under any
stock option plan of the Company.

       

      (r)           Internal Accounting
Controls.  The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and designed
such disclosures controls and procedures to ensure that material information
relating to the

       

      
        
          
             

            

             

          

           

        

        
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      Company,
including its subsidiaries, is made known to the certifying officers by others
within those entities, particularly during the period in which the Company's
Form 10-K or 10-Q, as the case may be, is being prepared.  The
Company's certifying officers have evaluated the effectiveness of the Company's
controls and procedures as of a date within 90 days prior to the filing date of
the Form 10-K for the year ended December 31, 2008 (such date, the "Evaluation
Date").  The Company presented in its most recently filed Form
10-K or Form 10-Q the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date.  Since the Evaluation Date,
there have been no significant changes in the Company's internal controls (as
such term is defined in Item 307(b) of Regulation S-K under the Exchange Act)
or, to the Company's knowledge, in other factors that could significantly affect
the Company's internal controls.

       

      (s)           Private Placement;
Trading. Assuming the accuracy of the Purchasers’ representations and
warranties set forth in Section 3.2, no registration under the Securities Act is
required for the offer and sale of the Securities by the Company to the
Purchasers as contemplated hereby. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading
Market.  The Company has not taken and
will not, in violation of applicable law, take, any action designed to or that
might reasonably be expected to
cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Securities.

       

      (t)           Investment Company.
The Company is not, and is not an Affiliate of, an “investment company” within
the meaning of the Investment Company Act of 1940, as amended.

       

      (u)           Registration
Rights.  Except for the Purchasers with respect to their
Conversion Shares (as defined in the Debenture), no Person other than the
Purchasers has any right to cause the Company to include in the Registration
Statement contemplated by the Registration Rights Agreement any other securities
of the Company.

       

      (v)           Application of Takeover
Protections.  The Company and its Board of Directors have taken
all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
the Rights Agreement dated as of October 23, 2002 between the Company and
American Stock Transfer & Trust Co.) or other similar anti-takeover
provision under the Company's Certificate of Incorporation (or similar charter
documents) or the laws of its state of incorporation that is or could become
applicable to the Purchasers as a result of the Purchasers and the Company
fulfilling their obligations or exercising their rights under the Transaction
Documents, including without limitation the Company’s issuance of the Securities
and the Purchasers’ ownership of the Securities.

       

      (w)           Disclosure.  The
Company understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the Purchasers regarding the
Company, its business and the transactions contemplated hereby, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a

       

      
        
          
             

            

             

          

           

        

        
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      material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.

       

      (x)           No Integrated
Offering. Neither the Company, nor any of its affiliates, nor any Person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the Securities Act or which
could violate any applicable shareholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated.

       

      (y)           [Intentionally
Omitted]

       

      (z)           Foreign Corrupt Practices
Act.  Neither the Company, nor to
the knowledge of the Company, any Affiliate or agent or other person acting on
behalf of the Company or any Affiliate, has (i) directly or indirectly, used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) made
any unlawful payment to foreign or domestic government officials or employees or
to any foreign or domestic political parties or campaigns from corporate funds,
(iii) failed to disclose fully any contribution made by the Company (or made by
any person acting on its behalf of which the Company is aware) which is in
violation of law, or (iv) violated in any material respect any provision of the
Foreign Corrupt Practices Act of 1977, as amended.

       

      (aa)           Taxes.  The Company has filed (or has obtained an
extension of time within which to file) all necessary federal, state and foreign
income and franchise tax returns and has paid all taxes shown as due on such tax
returns, except where the failure to so file or the failure to so pay would not
have a Material Adverse Effect.  No material controversy with respect
to taxes of any type with respect to the Company is pending or, to the Company’s
knowledge, threatened.  The Company has withheld or collected from
each payment made to its employees the amount of all taxes required to be
withheld or collected therefrom and has paid all such amounts to the appropriate
taxing authorities when due.  The Company is not aware of any tax
deficiency that has been or might be asserted or threatened against it that
would have a Material Adverse Effect.

       

      (bb)           Environmental.  The Company is in compliance in all
material respects with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment (“Environmental Laws”) which are applicable to its business;
(ii) the Company has not received any notice from any governmental authority or
third party of an asserted claim under Environmental Laws; (iii) to the
Company’s knowledge, no facts currently
exist that will require the Company to make future material capital expenditures
to comply with Environmental Laws; and (iv) to the Company’s knowledge, no
property which is or has been owned, leased or occupied by the Company has been designated as a Superfund site pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (42 U.S.C. Section 9601, et. seq.) (“CERCLA”) or
otherwise designated as a

       

      
        
          
             

            

             

          

           

        

        
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      contaminated site under applicable state or local law. The Company has not been named
as a “potentially responsible
party” under CERCLA.

       

      (cc)           Company Acknowledgement of
Investor Representation.  The
Company acknowledges and agrees that each Purchaser does not make and has not
made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in this Agreement.  

       

      3.2         Representations and
Warranties of the Purchasers

       

      .  Each
Purchaser hereby, for itself and for no other Purchaser, represents and warrants
as of the date hereof and as of the Closing Date to the Company as
follows:

       

      (a)           Organization;
Authority.  If an entity, such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership power
and authority to enter into and to consummate the transactions contemplated by
the Transaction Documents and otherwise to carry out its obligations thereunder.
The execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of such Purchaser.  Each Transaction
Document to which it is party has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with terms hereof, will constitute the
valid and legally binding obligation of such Purchaser, enforceable against it
in accordance with its terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies.

       

      (b)           Investment
Intent.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof, has no present intention of distributing any of
such Securities and has no arrangement or understanding with any other persons
regarding the distribution of such Securities in violation of applicable
securities laws (this representation and warranty not limiting such Purchaser’s
right to sell the Securities pursuant to the Registration Statement or otherwise
in compliance with applicable federal and state securities
laws).  Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business. Such Purchaser does not have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

       

      (c)           Purchaser
Status.  At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is an “accredited investor” as defined in Rule
501(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.

       

      (d)           Experience of such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the

       

      
        
          
             

            

             

          

           

        

        
          14

          
            

          

        

        
           

        

      

      prospective
investment in the Securities, and has so evaluated the merits and risks of such
investment.  Such Purchaser is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to afford a
complete loss of such investment.

       

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

       

      (f)           Registration
Required.  Such Purchaser hereby covenants with the Company not
to make any sale of the Shares or the Warrant Shares without complying with the
provisions hereof and of the Registration Rights Agreement, and without
effectively causing the prospectus delivery requirement under the Securities Act
to be satisfied (unless such Purchaser is selling such Shares or Warrant Shares
in a transaction not subject to the prospectus delivery requirement), and such
Purchaser acknowledges that the certificates evidencing the Shares and Warrant
Shares will be imprinted with a legend that prohibits their transfer except in
accordance therewith.

       

      (g)           No Tax or Legal
Advice.  Such Purchaser understands that nothing in this
Agreement, any other Transaction Document or any other materials presented to
such Purchaser in connection with the purchase and sale of the Securities
constitutes legal, tax or investment advice.  Such Purchaser has
consulted such legal, tax and investment advisors as it, in its sole discretion,
has deemed necessary or appropriate in connection with its purchase of
Securities.

       

      The
Company acknowledges and agrees that each Purchaser does not make or has not
made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section
3.2.

       

      ARTICLE
IV.

       

      OTHER
AGREEMENTS OF THE PARTIES

       

      4.1         Transfer
Restrictions.

       

      (a)           The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the
Company, to an Affiliate of a Purchaser or in connection with a pledge as
contemplated in Section 4.1(b), the Company may require the transferor thereof
to provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act.  As a condition of
transfer, any such transferee shall agree in writing to be bound by the terms of
this Agreement and shall have the rights of a Purchaser under this Agreement and
the Registration Rights Agreement.

       

      
        
          
             

            

             

          

           

        

        
          15

          
            

          

        

        
           

        

      

      (b)           The
Purchasers agree to the imprinting, so long as is required by this Section
4.1(b), of a legend on any of the Securities in the following form:

       

      THESE
SECURITIES HAVE NOT 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 ANY 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.

       

      The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and, if required under the terms of such arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would not be subject to approval
of the Company and no legal opinion of legal counsel of the pledgee, secured
party or pledgor shall be required in connection therewith.  Further,
no notice shall be required of such pledge.  At the appropriate
Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) of the Securities Act or other applicable provision of the Securities
Act to appropriately amend the list of Selling Stockholders
thereunder.

       

      (c)           Certificates
evidencing the Shares and the Warrant Shares shall not contain any legend
(including the legend set forth in Section 4.1(b)), (i) while a registration
statement (including the Registration Statement) covering the resale of such
security is effective under the Securities Act (provided, however, that a
Purchaser’s prospectus delivery requirements under the Securities Act and as set
forth in Section 3.2(f) will remain applicable), or (ii) following any sale of
such Shares or Warrant Shares pursuant to Rule 144, or (iii) if such Shares or
Warrant Shares are eligible for sale under Rule 144(k), or (iv) if such legend
is not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the Staff of the
Commission).  The Company shall cause its counsel to issue a legal
opinion to the Company’s transfer agent promptly after the Effective Date if
required by the Company’s transfer agent to effect the removal of the legend
hereunder.  If all or any portion of a

       

      
        
          
             

            

             

          

           

        

        
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      Warrant
is exercised at a time when there is an effective registration statement to
cover the resale of the Warrant Shares, or if such Warrant Shares may be sold
under Rule 144(k) or if such legend is not otherwise required under applicable
requirement of the Securities Act (including judicial interpretations thereof),
then such Warrant Shares shall be issued free of all legends.  The
Company agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 4.1(c), it will, no later than five
Trading Days following the delivery by a Purchaser to the Company or the
Company’s transfer agent of a certificate representing Shares or the Warrant
Shares, as the case may be, issued with a restrictive legend (such fifth Trading
Day, “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such Securities that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section or in Section 3.2(f).

       

      (d)           In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as liquidated damages and not as a penalty, for each
$1,000 of Shares or Warrant Shares (based on the Closing Price of the Common
Stock on the date such Securities are submitted to the Company’s transfer agent)
subject to Section 4.1(c), $5 per Trading Day (increasing to $10 per Trading Day
five (5) Trading Days after such damages have begun to accrue) for each Trading
Day after the 2nd Trading
Day after the Legend Removal Date, until such certificate is delivered. Nothing
herein shall limit such Purchaser's right to pursue actual damages for the
Company's failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser 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.

       

      4.2         Furnishing of
Information

       

      .  As
long as any Purchaser owns Securities, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act.  Upon the request of any such holder of
Securities, the Company shall deliver to such holder a written certification of
a duly authorized officer as to whether it has complied with the preceding
sentence. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to
the Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Securities under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell such Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144.

       

      4.3         Integration

       

      .  The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the

       

      
        
          
             

            

             

          

           

        

        
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      Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.

       

      4.4         Shareholders Rights
Plan.  No claim will be made or enforced by the Company or any
other Person that any Purchaser is an “Acquiring Person” under any shareholders
rights plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.

       

      4.5         Use of
Proceeds.  The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes including the Phase 2b
trial for dextofisopam.

       

      4.6         Reimbursement. If any
Purchaser becomes involved in any capacity in any Action by or against any
Person who is a stockholder of the Company, as a result of such Purchaser's
acquisition of the Securities under this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
4.7, for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations (and limitations thereon) of the Company under this paragraph shall
be in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any Affiliates of the Purchasers
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any), as the
case may be, of the Purchasers and any such Affiliate, and shall be binding upon
and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement except to the extent any representation, warranty or covenant
owing to the Company is breached.

       

      4.7         Indemnification of
Purchasers.   The Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (each, a “Purchaser Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys' fees and costs of
investigation that any such Purchaser Party may suffer or incur as a result of
or relating to: (a) any misrepresentation, breach or inaccuracy, or any
allegation by a third party that, if true, would constitute a material breach or
inaccuracy, of any of the representations, warranties, covenants or agreements
made by the Company in this Agreement or in the other Transaction Documents; or
(b) any cause of action, suit or claim brought or made against such Purchaser
Party and arising primarily out of or primarily resulting from the execution,
delivery, performance or enforcement of this Agreement or any of the other
Transaction Documents and without causation by any other activity, obligation,
condition or liability pertaining to such Purchaser. The Company will reimburse
such Purchaser for its reasonable legal and other expenses (including the cost
of any

       

      
        
          
             

            

             

          

           

        

        
          18

          
            

          

        

        
           

        

      

      investigation,
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred.

       

      4.8         Indemnification of the
Company.  Each Purchaser, severally and not jointly with the
other Purchasers, will indemnify and hold the Company and their directors,
officers, shareholders, partners, employees and agents (each, a “Company Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys' fees and costs of
investigation that any such Company Party may suffer or incur as a result of or
relating to any material breach or inaccuracy of any of the representations or
warranties made by such Purchaser in this Agreement or in the other Transaction
Documents.  Each such Purchaser will reimburse the Company for its
reasonable legal and other expenses (including the cost of any investigation,
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred.

       

      4.9         Reservation of Common Stock;
Amendment of Articles of Incorporation. The Company does not
currently have a sufficient number of authorized shares of Common Stock reserved
to honor the exercise of all of the Warrants and to issue all of the Warrant
Shares.  The Company will take all actions as soon as practicable to
obtain stockholder approval to amend the Company’s Articles of Incorporation to
increase the number of authorized shares of Common Stock by an amount sufficient
to permit such exercise of all of the Warrants and the issuance of all of the
Warrant Shares (the “Charter Amendment”),
and to reserve and continue to reserve and keep available at all times, free of
preemptive rights, a sufficient number of shares of Common Stock for the purpose
of enabling the Company to issue the Warrant Shares upon exercise of the
Warrants.  Each of the Purchasers, as to itself or himself only,
agrees to vote any shares of Common Stock of the Company held by it or him in
favor of the Charter Amendment.

       

      4.10         Acknowledgment of
Dilution.  The Company acknowledges that the issuance of the
Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market
conditions.  The Company further acknowledges that its obligations
under the Transaction Documents, including without limitation its obligation to
issue the Warrant Shares pursuant to the Transaction Documents, are
unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any Purchaser and regardless of the
dilutive effect that such issuance may have on the ownership of the other
stockholders of the Company.

       

      4.11         Exercise
Procedures.  The form of Notice of Exercise included in the
Warrants sets forth
the totality of the procedures required of the Purchasers in order to exercise
their Warrants and obtain Warrant Shares.  No additional legal opinion
or other information or instructions shall be required of the Purchasers to
convert their Warrants.  Subject to approval of the Charter Amendment
by the Company’s shareholders, the Company shall honor exercises of the Warrants
and shall deliver Warrant Shares in accordance with the terms, conditions and
time periods set forth in the Transaction Documents.

       

      4.12         Equal Treatment of
Purchasers.  No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any
of the

       

      
        
          
             

            

             

          

           

        

        
          19

          
            

          

        

        
           

        

      

      Transaction
Documents unless the same consideration is also offered to all of the parties to
the Transaction Documents. For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and shall not in any way be construed
as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

       

      4.13       Consent by
Purchasers.  The Purchasers, in their capacity as holders of
greater than 50% of the outstanding principal amount of the Debentures (and
therefore, of more than 50% of the “Securities” not yet sold under the
“Registration Statement” or under “Rule 144”, as those terms are defined in the
Debenture Purchase Agreement) and pursuant to the provisions of Section 5.4 of
the Debenture Purchase Agreement, hereby waive any breach by the Company of its
obligations under Section 4.15(ii) of the Debenture Purchase Agreement, to the
extent that the issuance of the Securities pursuant to this Agreement
constitutes a “Company Sale Transaction” under the Debenture Purchase
Agreement.

       

      

       

      ARTICLE
V.

       

      MISCELLANEOUS

       

      5.1         Fees and
Expenses.  Except as otherwise set forth in this Agreement,
each party shall pay the fees and expenses of its advisers, counsel, accountants
and other experts, if any, and all other expenses incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of
the Transaction Documents.

       

      5.2         Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and
schedules.

       

      5.3         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 (a) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
the relevant signature pages hereof prior to 5:30 p.m. (New York City time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 5:30
p.m. (New York City time) on any Trading Day, (c) the Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is required
to be given.  The address for such notices and communications shall be
as set forth on the signature pages attached hereto.

       

      5.4         Amendments;
Waivers.  No provision of this Agreement may be waived or
amended except in a written instrument signed by the Company, on the one hand,
and by those Purchasers (or their transferees) then holding more than 50% of the
Securities not yet sold under the Registration Statement or under Rule 144, on
the other hand.  Any such waiver or amendment obtained from the
Company and such Purchasers shall be referred to as a Consent under the
Transaction Documents.  No waiver of any default with respect to any
provision,

       

      
        
          
             

            

             

          

           

        

        
          20

          
            

          

        

        
           

        

      

      condition
or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any subsequent default or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right.

       

      5.5         Construction.  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.  The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.

       

      5.6         Successors and
Assigns

       

      .  This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns.  The Company may not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the Purchasers (or their transferees).  Any Purchaser may
assign any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the “Purchasers”, including without limitation,
the representations and warranties as to such transferee’s status as an
“accredited investor” under the Securities Act.

       

      5.7         No Third-Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.7.

       

      5.8         Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents 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 and any other Transaction Documents (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.  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 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, 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
(including its affiliates, agents, officers, directors and

       

      
        
          
             

            

             

          

           

        

        
          21

          
            

          

        

        
           

        

      

      employees)
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.

       

      5.9         Survival.  The
representations, warranties, agreements and covenants contained herein shall
survive the Closing and delivery of the Warrant Shares.

       

      5.10       Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both 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 party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

       

      5.11        Severability.  If
any provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the
parties will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

       

      5.12         Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) the Transaction Documents,
whenever any Purchaser exercises a right, election, demand or option under a
Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights; provided, however, in the case of a
rescission of the exercise of a Warrant, the Purchaser shall be required to
return any shares of Common Stock subject to any such rescinded
exercise.

       

      5.13         Replacement of
Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.

       

      5.14          Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction Documents, without any
prior requirement of obtaining a bond or other form of security.  The
parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be
adequate.

       

      
        
          
             

            

             

          

           

        

        
          22

          
            

          

        

        
           

        

      

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

       

      5.16          Independent Nature of
Purchasers’ Obligations and Rights

       

      .  The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document.  Nothing contained herein or
in any Transaction Document, and no action taken by any Purchaser pursuant
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 or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Document.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation, the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.

       

      5.18           Liquidated
Damages.  The Company’s obligations to pay any liquidated
damages or other amounts owing under the Transaction Documents is a continuing
obligation of the Company and shall not terminate until all unpaid liquidated
damages and other amounts have been paid notwithstanding the fact that the
instrument or security pursuant to which such liquidated damages or other
amounts are due and payable shall have been canceled.

       

      (Signature
Page Follows)

       

      
        
          
             

            

             

          

           

        

        
          23

          
            

          

        

        
           

        

      

      IN WITNESS WHEREOF, the parties hereto
have caused this Securities Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated
above.

       

      PHARMOS
CORPORATION                                                                                             Address for
Notice:

              99 Wood Avenue South,
Suite 311

              Iselin, New Jersey
08830

      By:_____________________________________                Attn:  Chief
Financial Officer

            Name:  S.
Colin
Neill                                                                                             Tel: (732)
452-9556

            Title:    President
and Chief Financial OfficerFax: (732) 452-9557

      

      With a
copy to (which shall not constitute notice):

      

      Eilenberg
& Krause LLP

      11 East
44th
Street, 19th
Floor

      New York,
New York 10017

      Attn:  Adam
D. Eilenberg, Esq.

      Tel:  (212)
986-9700

      Fax:  (212)
986-2399

      

      [PURCHASERS’
SIGNATURE PAGES FOLLOW]

      
        
          
             

            

             

          

           

        

        
          24

          
            

          

        

        
           

        

      

      [PURCHASERS’
SIGNATURE PAGES]

      

      Name:

      

      

      By:___________________________

      Name:

      Title:

      

      

      Subscription
Amount:  $_________

      

      Address
for Notice:

      

      _____________________________

      

      _____________________________

      

      _____________________________

      Tel:

      Fax:

      

      

      With a
copy to (which shall not constitute notice):

      

      _____________________________

      

      _____________________________

      

      _____________________________

      Tel:

      Fax:

      
        
          
             

            

             

          

           

        

        
          25

          
            

          

        

        
           

        

      

      EXHIBIT
A

      

      PURCHASERS

      

      
        	
                Name

              	 	
                Subscription Amount

              	 	 	
                Number
      of Shares to be Purchased

              	 	 	
                No. Warrants

              	 	 	
                No. Warrant Shares

              	 
	
                New
      Enterprise Associates 10, Limited Partnership

                 

              	 	$	800,000	 	 	 	8,000,000	 	 	 	8,000,000	 	 	 	8,000,000	 
	
                Demeter
      Trust

                 

              	 	$	600,000	 	 	 	6,000,000	 	 	 	6,000,000	 	 	 	6,000,000	 
	
                Venrock
      Associates

                 

              	 	$	72,000	 	 	 	720,000	 	 	 	720,000	 	 	 	720,000	 
	
                Venrock
      Associates III, L.P.

                 

              	 	$	320,000	 	 	 	3,200,000	 	 	 	3,200,000	 	 	 	3,200,000	 
	
                Venrock
      Entrepreneurs Fund III, L.P.

                 

              	 	$	8,000	 	 	 	80,000	 	 	 	80,000	 	 	 	80,000	 
	
                TOTAL

              	 	$	1,800,000	 	 	 	18,000,000	 	 	 	18,000,000	 	 	 	18,000,000	 

      

      

      
        
          
             

            

             

          

           

        

        
          26

          
            

          

        

        
           

        

      

      EXHIBIT
B

      

      FORM OF
WARRANT

      
        
          
             

            

             

          

           

        

        
          27

          
            

          

        

        
           

        

      

      EXHIBIT
C

      

      FORM OF
REGISTRATION RIGHTS AGREEMENT

      
        
          
             

            

             

          

           

        

        
          28

          
            

          

        

        
           

        

      

      EXHIBIT
D

      

      FORM OF
OPINION

      
        
          
             

            

             

          

           

        

        
          29

          
            

          

        

        
           

        

      

      EXHIBIT
E

      

      FORM OF
DEBENTURE AMENDMENT AGREEMENT

      
        
          
            
 

          

           

        

        
          30

          
            

          

        

        
           

        

      

      EXHIBIT
F

      

      FORM OF
RIGHTS AGREEMENT AMENDMENT

      
        
          
             

            

             

          

           

        

        
          31

          
            

          

        

        
           

        

      

      EXHIBIT
G

      

      FORM OF
INDEMNIFICATION AGREEMENT

      

      

     

     

     32exhibit4_2.htm

    
      

      

    

     

    Exhibit
4.2

      

       

      THESE
SECURITIES HAVE NOT 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 MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A
FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a)
UNDER THE SECURITIES ACT.

       

      STOCK
PURCHASE WARRANT

      

      

      To
Purchase __________ Shares of Common Stock of

       

      Pharmos
Corporation

       

      THIS
STOCK PURCHASE WARRANT CERTIFIES that, for value received, _____________ (the
“Holder”), is entitled, upon the terms and subject to the limitations on
exercise and the conditions hereinafter set forth, at any time on or after April
21, 2009 (the “Initial
Exercise Date”) and on or prior to the close of business on the five-year
anniversary of the Initial Exercise Date (the “Termination Date”)
but not thereafter, to subscribe for and purchase from Pharmos Corporation, a
corporation incorporated in the State of Nevada (the “Company”), up to
____________ shares (the “Warrant Shares”) of
Common Stock, par value $0.03 per share, of the Company (the “Common
Stock”).  The purchase price of one share of Common Stock (the
“Exercise
Price”) under this Warrant shall be $0.12, subject to adjustment
hereunder.  The Exercise Price and the number of Warrant Shares for
which the Warrant is exercisable shall be subject to adjustment as provided
herein.

       

      Capitalized
terms used and not otherwise defined herein shall have the meanings set forth in
that certain Securities Purchase Agreement (the “Purchase Agreement”),
dated April 21, 2009, between the Company and the purchasers signatory
thereto.

       

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

      

       

      1.      Title to
Warrant.  Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part, at the office or
agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.  The transferee shall sign an investment letter in
form and substance reasonably satisfactory to the Company.

       

      2.      Authorization of
Shares.  Subject to the provisions of Section 16 hereof, the
Company covenants that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon exercise of the
purchase rights represented by this Warrant, be duly authorized, validly issued,
fully paid and nonassessable and free from all taxes, liens and charges in
respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).

       

      3.      Exercise of
Warrant.

       

      (a)  Except
as provided in Sections 4 and 16 herein, exercise of the purchase rights
represented by this Warrant may be made at any time or times on or after the
Initial Exercise Date and on or before the Termination Date by the surrender of
this Warrant and the Notice of Exercise Form annexed hereto duly executed, at
the office of the Company (or such other office or agency of the Company as it
may designate by notice in writing to the registered Holder at the address of
such Holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased by wire transfer or cashier’s
check drawn on a United States bank or by means of a cashless exercise pursuant
to Section 3(c).  Upon such exercise, the Holder shall be entitled to
receive a certificate for the number of Warrant Shares so
purchased.  Certificates for shares purchased hereunder shall be
delivered to the Holder within three Trading Days after the date on which this
Warrant shall have been exercised as aforesaid.  Notwithstanding
anything herein to the contrary, in lieu of issuing certificates for shares
purchased hereunder, upon mutual agreement of the Company and the Holder, the
Company may authorize its transfer agent to issue shares through electronic
transactions.  This Warrant shall be deemed to have been exercised and
such certificate or certificates shall be deemed to have been issued, and Holder
or any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price and
all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior
to the issuance of such shares, have been paid.  If the Company fails
to deliver to the Holder a certificate or certificates representing the Warrant
Shares pursuant to this Section 3(a) by the third Trading Day after the date of
exercise, then the Holder will have the right to rescind such
exercise.

      

      (b)           If
this Warrant shall have been exercised in part, the Company shall, at the time
of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       Warrant
Shares called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant.

      (c)           This
Warrant may also be exercised at such time by means of a “cashless exercise” in
which the Holder shall be entitled to receive a certificate for the number of
Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where:

       

      
        	
                 
      

              	
                (A)
      = the average of the Closing Prices on the three Trading Days immediately
      preceding the date of such
election;

              

      

      

      
        	
                 
      

              	
                (B)
      = the Exercise Price of the Warrants, as adjusted;
  and

              

      

      

      
        	
                 
      

              	
                (X)
      = the number of Warrant Shares issuable upon exercise of the Warrants in
      accordance with the terms of this
Warrant.

              

      

       

      4.      No Fractional Shares or
Scrip.  No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant.  As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Exercise
Price.

       

      5.      Charges, Taxes and
Expenses.  Issuance of certificates for Warrant Shares shall be
made without charge to the Holder for any issue or transfer tax or other
incidental expense in respect of the issuance of such certificate, all of which
taxes and expenses shall be paid by the Company, and such certificates shall be
issued in the name of the Holder or in such name or names as may be directed by
the Holder; provided, however, that in the
event certificates for Warrant Shares are to be issued in a name other than the
name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder;
and the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.

       

      6.      Closing of
Books.  The Company will not close its stockholder books or
records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.

       

      7.      Transfer, Division and
Combination.

       

      (a)           Subject
to compliance with any applicable securities laws and the conditions set forth
in Sections 1 and 7(e) hereof and to the provisions of Section 4.1 of the
Purchase Agreement, this Warrant and all rights hereunder are transferable, in
whole or in part, upon surrender of this Warrant at the principal office of the
Company, together with a written assignment of this Warrant substantially in the
form attached hereto duly executed by the Holder or its agent or attorney and
funds sufficient to pay any transfer taxes payable upon the making of such
transfer.  Upon such surrender and, if required, such payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       the
portion of this Warrant not so assigned, and this Warrant shall promptly be
cancelled.  A Warrant, if properly assigned, may be exercised by a new
holder for the purchase of Warrant Shares without having a new Warrant
issued.

      (b)           This
Warrant may be divided or combined with other Warrants of like tenor and terms
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by the Holder or its agent or attorney.  Subject
to compliance with Section 7(a), as to any transfer which may be involved in
such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.

      

      (c)           The
Company shall prepare, issue and deliver at its own expense (other than transfer
taxes) the new Warrant or Warrants under this Section 7.

      

      (d)           The
Company agrees to maintain, at its aforesaid office, books for the registration
and the registration of transfer of the Warrants.

       

      (e)           If, at the time of
the surrender of this Warrant in connection with any transfer of this Warrant,
the transfer of this Warrant shall not be registered pursuant to an effective
registration statement under the Securities
Act and under applicable state securities
or blue sky laws, the Company may require, as a condition of allowing such
transfer (i) that the Holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel (which opinion shall be in
form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such transfer may be made without
registration under the Securities Act and under
applicable state securities or blue sky laws, (ii) that the holder or transferee
execute and deliver to the Company an investment letter in form and substance
acceptable to the Company and (iii) that the transferee be an “accredited
investor” as defined in Rule 501(a) promulgated under the Securities
Act.

       

      8.      No Rights as Shareholder
until Exercise.  This Warrant does not entitle the Holder to
any voting rights or other rights as a shareholder of the Company prior to the
exercise hereof.  Upon the surrender of this Warrant and the payment
of the aggregate Exercise Price (or by means of a cashless exercise), the
Warrant Shares so purchased shall be and be deemed to be issued to such Holder
as the record owner of such shares as of the close of business on the later of
the date of such surrender or payment.

       

      9.      Loss, Theft, Destruction or
Mutilation of Warrant.  The Company covenants that upon receipt
by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant or any stock certificate relating to
the Warrant Shares, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it (which, in the case of the Warrant, shall
not include the posting of any bond), and upon surrender and cancellation of
such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.

       

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

      

      10.           Saturdays, Sundays,
Holidays, etc.  If the last or appointed day for the taking of
any action or the expiration of any right required or granted herein shall be a
Saturday, Sunday or a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.

       

      11.           Adjustments of Exercise
Price and Number of Warrant Shares; Stock Splits, etc.
The number and kind of securities purchasable upon the exercise of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.  In case the Company shall (i) pay
a dividend in shares of Common Stock or make a distribution in shares of Common
Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding
shares of Common Stock into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, or (iv) issue any shares of its capital stock in a reclassification of
the Common Stock, then the number of Warrant Shares purchasable upon exercise of
this Warrant immediately prior thereto shall be adjusted so that the Holder
shall be entitled to receive the kind and number of Warrant Shares or other
securities of the Company which it would have owned or have been entitled to
receive had such Warrant been exercised in advance thereof.  Upon each
such adjustment of the kind and number of Warrant Shares or other securities of
the Company which are purchasable hereunder, the Holder shall thereafter be
entitled to purchase the number of Warrant Shares or other securities resulting
from such adjustment at an Exercise Price per Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such
adjustment.  An adjustment made pursuant to this paragraph shall
become effective immediately after the effective date of such event retroactive
to the record date, if any, for such event.

       

      12.           Reorganization,
Reclassification, Merger, Consolidation or Disposition of
Assets.  In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation (“Other Property”), are
to be received by or distributed to the holders of Common Stock of the Company,
then the Holder shall have the right thereafter to receive upon exercise of this
Warrant, the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and Other
Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a Holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event.  In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

      performed
and observed by the Company and all the obligations and liabilities hereunder,
subject to such modifications as may be deemed appropriate (as determined in
good faith by resolution of the Board of Directors of the Company) in order to
provide for adjustments of Warrant Shares for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the adjustments provided
for in this Section 12.  For purposes of this Section 12, “common
stock of the successor or acquiring corporation” shall include stock of such
corporation of any class which is not preferred as to dividends or assets over
any other class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness, shares of stock
or other securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe for
or purchase any such stock.  The foregoing provisions of this Section
12 shall similarly apply to successive reorganizations, reclassifications,
mergers, consolidations or disposition of assets.

      

      13.           Voluntary Adjustment by the
Company.  The Company may at any time during the term of this
Warrant reduce the then current Exercise Price to any amount and for any period
of time deemed appropriate by the Board of Directors of the Company without
otherwise affecting any other rights of the Holder.

       

      14.           Notice of
Adjustment.  Whenever the number of Warrant Shares or number or
kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
give notice thereof to the Holder, which notice shall state the number of
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other
securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.

       

      15.           Notice of Corporate
Action.  If at any time:

       

      (a)           the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend or other distribution, or any right to
subscribe for or purchase any evidences of its indebtedness, any shares of stock
of any class or any other securities or property, or to receive any other right,
or

      

      (b)           there
shall be any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any consolidation or
merger of the Company with, or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company to, another
corporation or,

      

      (c)           there
shall be a voluntary or involuntary dissolution, liquidation or winding up of
the Company;

      

      then, in
any one or more of such cases, the Company shall give to Holder (i) at least 20
days’ prior written notice of the date on which a record date shall be selected
for such dividend, distribution or right or for determining rights to vote in
respect of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, liquidation or winding up, and

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

      (ii) in
the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 20
days’ prior written notice of the date when the same shall take
place.  Such notice in accordance with the foregoing clause also shall
specify (i) the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, the date on which the holders of Common
Stock shall be entitled to any such dividend, distribution or right, and the
amount and character thereof, and (ii) the date on which any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which the holders of Common Stock
shall be entitled to exchange their Warrant Shares for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up.  Each such written notice shall be sufficiently given if addressed
to Holder at the last address of Holder appearing on the books of the Company
and delivered in accordance with Section 17(d).

       

      16.           Authorized
Shares.  The Company does not currently have a sufficient
number of authorized shares of Common Stock reserved to honor the exercise of
all of the Warrants issued pursuant to the Purchase Agreement.  The
Company will take all actions as soon as practicable to obtain stockholder
approval to amend the Company’s Articles of Incorporation to increase the number
of authorized shares of Common Stock by an amount sufficient to permit such
exercise of all of the Warrants.  Subject to the foregoing, the
Company covenants that (i) during the period the Warrant is outstanding, it will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of the Warrant Shares upon the exercise of
any purchase rights under this Warrant, (ii) its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant
and (iii) it will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the Trading Market
upon which the Common Stock may be listed.

       

      Except
and to the extent as waived or consented to by the Holder, the Company shall not
by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant against
impairment.  Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares upon the exercise of this Warrant, and (c) use commercially
reasonable efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this
Warrant.

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

      

      Before
taking any action which would result in an adjustment in the number of Warrant
Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.

      

      17.           Miscellaneous.

       

      (a)           Governing Law;
Jurisdiction.  All questions concerning the construction,
validity, enforcement and interpretation of this Warrant 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.  All legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Warrant
(whether brought against the Company or its affiliates, directors, officers,
shareholders, employees or agents) shall be commenced exclusively in the state
and federal courts sitting in the City of New York.  The Company
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 this Warrant), 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.  The Company 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 the Company at the
address in effect for notices to it under the Purchase 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.  The
Company (including its affiliates, agents, officers, directors and employees)
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 Warrant or the transactions contemplated hereby.

       

      (b)           Restrictions.  The
Holder acknowledges that the Warrant Shares acquired upon the exercise of this
Warrant, if not registered, will have restrictions upon resale imposed by state
and federal securities laws.

       

      (c)           Nonwaiver.  No
course of dealing or any delay or failure to exercise any right hereunder on the
part of Holder shall operate as a waiver of such right or otherwise prejudice
Holder’s rights, powers or remedies, notwithstanding all rights hereunder
terminate on the Termination Date.

       

      (d)           Notices.  Any
notice, request or other document required or permitted to be given or delivered
to the Holder by the Company shall be delivered in accordance with the notice
provisions of the Purchase Agreement.

       

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

      

      (e)           Successors and
Assigns.  Subject to applicable securities laws, this Warrant
and the rights and obligations evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company and the successors and
permitted assigns of Holder.  The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant
Shares.

       

      (f)           Limitation of
Liability.  No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant or purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall
give rise to any liability of Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

       

      (g)           Remedies.  Holder,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant.  The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Warrant and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be
adequate.

       

      (h)           Amendment.  This
Warrant may be modified or amended or the provisions hereof waived with the
written consent of the Company and the Holder.

       

      (i)           Severability.  Wherever
possible, each provision of this Warrant shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Warrant shall be prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining provisions of
this Warrant.

       

      (j)           Headings.  The
headings used in this Warrant are for the convenience of reference only and
shall not, for any purpose, be deemed a part of this Warrant.

       

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

      

      

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

       

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

       

      

      Dated:  April
21, 2009

       PHARMOS CORPORATION

      

      

      

      By:                                                                                     

            Name: S.
Colin Neill

            Title:President
and Chief Financial Officer

      

      
        
           

        

        
          10 

          
            

          

        

        
           

        

      

      

      NOTICE
OF EXERCISE

      

      To:           Pharmos
Corporation

      

      1. (1)                 The
undersigned hereby elects to purchase ________ Warrant Shares of Pharmos
Corporation pursuant to the terms of the attached Warrant, and tenders herewith
such Warrant and payment of the exercise price in full, together with all
applicable transfer taxes, if any.

       

      2. (2)                 Payment
shall take the form of (check applicable box):

       

      [  ]
in lawful money of the United States; or

       

      [ ] the
cancellation of such number of Warrant Shares as is necessary, in accordance
with the formula set forth in subsection 3(c), to exercise this Warrant with
respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 3(c).

       

      3. (3)                 Please
issue a certificate or certificates representing said Warrant Shares in the name
of the undersigned or in such other name as is specified below:

       

      _______________________________

      

      

      The
Warrant Shares shall be delivered to the following:

      

      _______________________________

      

      _______________________________

      

      _______________________________

      

      (3)  Accredited
Investor.  The undersigned is an “accredited investor” as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.

      

      [PURCHASER]

      

      

      By:
______________________________

            Name:

            Title:

      

      Dated:  ________________________

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      ASSIGNMENT
FORM

      

      (To
assign the foregoing warrant, execute

      this form
and supply required information.

      Do not
use this form to exercise the warrant.)

      

      

      

      FOR VALUE
RECEIVED the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

       

      

      _______________________________________________
whose address is

      

      _______________________________________________________________.

      

      

      

      _______________________________________________________________

      

      Dated:  ______________,
_______

      

      

      Holder's
Signature:                                           _____________________________

      

      Holder's
Address:                                           _____________________________

      

      _____________________________

      

      

      

      Signature
Guaranteed:  ___________________________________________

      

      

      NOTE:  The
signature to this Assignment Form must correspond with the name as it appears on
the face of the Warrant, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust
company.  Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.

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