Document:

Exhibit 4.1

                          DISCOVERY LABORATORIES, INC.

                 AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN

                                  July 15, 2003

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                          DISCOVERY LABORATORIES, INC.
                 AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN

                                   ARTICLE ONE

                               GENERAL PROVISIONS

I.    PURPOSE OF THE PLAN

      This Amended and Restated 1998 Stock Incentive Plan (the "Plan") is
intended to promote the interests of Discovery Laboratories, Inc., a Delaware
corporation, by providing eligible persons with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.

      The Plan amends and restates the Corporation's 1998 Stock Incentive Plan
and shall serve as the successor to the Corporation's 1995 Stock Option Plan and
1993 Stock Option Plan (the "Predecessor Plans"). No further option grants shall
be made under the Predecessor Plans after the Initial Approval Date. All options
outstanding under the Predecessor Plans on the Initial Approval Date are
incorporated into the Plan and shall be treated as outstanding options under the
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.

      Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.

II.   STRUCTURE OF THE PLAN

      A. The Plan shall be divided into three separate equity programs:

                  (i) the Discretionary Option Grant Program under which
      eligible persons may, at the discretion of the Plan Administrator, be
      granted options to purchase shares of Common Stock,

                  (ii) the Stock Issuance Program under which eligible persons
      may, at the discretion of the Plan Administrator, be issued shares of
      Common Stock directly, either through the immediate purchase of such
      shares or as a bonus for services rendered the Corporation (or any Parent
      or Subsidiary), and

                  (iii) the Automatic Option Grant Program under which eligible
      non-employee board members shall automatically receive option grants at
      periodic intervals to purchase shares of Common Stock.

      B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.

III.  ADMINISTRATION OF THE PLAN

      A. The Board shall have authority to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 Insiders but may
delegate such authority to

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the Primary Committee. Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.

      B. Members of the Primary Committee or any Secondary Committee shall serve
for such period of time as the Board may determine and may be removed by the
Board at any time. The Board may also at any time terminate the functions of any
Secondary Committee and reassume all powers and authority previously delegated
to such committee.

      C. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

      D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

IV.   ELIGIBILITY

      A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:

                  (i) Employees,

                  (ii) non-employee members of the Board or the board of
      directors of any Parent or Subsidiary, and

                  (iii) consultants and other independent advisors who provide
      services to the Corporation (or any Parent or Subsidiary).

      B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

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      C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

      D. Only non-employee members of the Board shall be eligible to participate
in the Automatic Option Grant Program.

V.    STOCK SUBJECT TO THE PLAN

A.    The stock issuable under the Plan shall be shares of authorized but
      unissued or reacquired Common Stock, including shares repurchased by the
      Corporation on the open market. The maximum number of shares of Common
      Stock reserved for issuance over the term of the Plan shall not exceed
      6,570,000 shares.

      B. No one person participating in the Plan may receive options, separately
exercisable stock appreciation rights and direct stock issuances for more than
250,000 shares of Common Stock in the aggregate per calendar year, beginning
with the 1998 calendar year.

      C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.

      D. If any change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under the Plan, (ii)
the number and/or class of securities for which any one person may be granted
options, separately exercisable stock appreciation rights and direct stock
issuances under this Plan per calendar year, (iii) the number and/or class of
securities for which grants are subsequently to be made under the Automatic
Option Grant Program to new and continuing non-employee Board members, (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan and (v) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

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                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM

I.    OPTION TERMS

      Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

      A. Exercise Price.

            1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

            2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Five and
the documents evidencing the option, be payable in one or more of the forms
specified below:

                  (i) cash or check made payable to the Corporation,

                  (ii) shares of Common Stock held for the requisite period
      necessary to avoid a charge to the Corporation's earnings for financial
      reporting purposes and valued at Fair Market Value on the Exercise Date,
      or

                  (iii) to the extent the option is exercised for vested shares,
      through a special sale and remittance procedure pursuant to which the
      Optionee shall concurrently provide irrevocable written instructions to
      (a) a Corporation-designated brokerage firm to effect the immediate sale
      of the purchased shares and remit to the Corporation, out of the sale
      proceeds available on the settlement date, sufficient funds to cover the
      aggregate exercise price payable for the purchased shares plus all
      applicable Federal, state and local income and employment taxes required
      to be withheld by the Corporation by reason of such exercise and (b) the
      Corporation to deliver the certificates for the purchased shares directly
      to such brokerage firm in order to complete the sale.

            Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

      B. Exercise and Term of Options. Each option shall be exercisable at such
time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

      C. Effect of Termination of Service.

            1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:

                  (i) Any option outstanding at the time of the Optionee's
      cessation of Service for any reason shall remain exercisable for such
      period of time thereafter as shall be determined by the Plan Administrator
      and set forth in the documents evidencing the option, but no such option
      shall be exercisable after the expiration of the option term.

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                  (ii) Any option exercisable in whole or in part by the
      Optionee at the time of death may be subsequently exercised by the
      personal representative of the Optionee's estate or by the person or
      persons to whom the option is transferred pursuant to the Optionee's will
      or in accordance with the laws of descent and distribution.

                  (iii) During the applicable post-Service exercise period, the
      option may not be exercised in the aggregate for more than the number of
      vested shares for which the option is exercisable on the date of the
      Optionee's cessation of Service. Upon the expiration of the applicable
      exercise period or (if earlier) upon the expiration of the option term,
      the option shall terminate and cease to be outstanding for any vested
      shares for which the option has not been exercised. However, the option
      shall, immediately upon the Optionee's cessation of Service, terminate and
      cease to be outstanding to the extent the option is not otherwise at that
      time exercisable for vested shares.

                  (vi) Should the Optionee's Service be terminated for
      Misconduct, then all outstanding options held by the Optionee shall
      terminate immediately and cease to remain outstanding.

            2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                  (i) extend the period of time for which the option is to
      remain exercisable following the Optionee's cessation of Service from the
      limited exercise period otherwise in effect for that option to such
      greater period of time as the Plan Administrator shall deem appropriate,
      but in no event beyond the expiration of the option term, and/or

                  (ii) permit the option to be exercised, during the applicable
      post-Service exercise period, not only with respect to the number of
      vested shares of Common Stock for which such option is exercisable at the
      time of the Optionee's cessation of Service but also with respect to one
      or more additional installments in which the Optionee would have vested
      had the Optionee continued in Service.

      D. Stockholder Rights. The holder of an option shall have no stockholder
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.

      E. Repurchase Rights. The Plan Administrator shall have the discretion to
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.

      F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a

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proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.

II.   INCENTIVE OPTIONS

      The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Five shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.

      A. Eligibility. Incentive Options may only be granted to Employees.

      B. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

      C. 10% Stockholder. If any Employee to whom an Incentive Option is granted
is a 10% Stockholder, then the exercise price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.

III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

      A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. However, an outstanding option shall not so
accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.

      B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan

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Administrator at the time the repurchase right is issued.

      C. The Plan Administrator shall have the discretion, exercisable either at
the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options upon the occurrence of a Corporate Transaction, whether or
not those options are to be assumed or replaced in the Corporate Transaction.

      D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.

      E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator may provide that one
or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Corporate Transaction shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full, even in the event the options are to be
assumed.

      F. The Plan Administrator shall have full power and authority exercisable,
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program in the event
the Optionee's Service terminates by reason of an Involuntary Termination within
a designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those options are assumed or replaced
and do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate, and the shares subject
to those terminated repurchase rights shall accordingly vest in full.

      G. The Plan Administrator shall have full power and authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the termination of the Optionee's Service by

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reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of such Change in Control.
Each option so accelerated shall remain exercisable for fully-vested shares
until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Optionee's cessation of Service. In addition, the Plan Administrator may provide
that one or more of the Corporation's outstanding repurchase rights with respect
to shares held by the Optionee at the time of such Change in Control or
Involuntary Termination shall immediately terminate, and the shares subject to
those terminated repurchase rights shall accordingly vest in full.

      H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.

      I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

V.    STOCK APPRECIATION RIGHTS

      A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.

      B. The following terms shall govern the grant and exercise of tandem stock
appreciation rights:

                  (i) One or more Optionees may be granted the right,
      exercisable upon such terms as the Plan Administrator may establish, to
      elect between the exercise of the underlying option for shares of Common
      Stock and the surrender of that option in exchange for a distribution from
      the Corporation in an amount equal to the excess of (a) the Fair Market
      Value (on the option surrender date) of the number of shares in which the
      Optionee is at the time vested under the surrendered option (or
      surrendered portion thereof) over (b) the aggregate exercise price payable
      for such shares.

                  (ii) No such option surrender shall be effective unless it is
      approved by the Plan Administrator, either at the time of the actual
      option surrender or at any earlier time. If the surrender is so approved,
      then the distribution to which the Optionee shall be entitled may be made
      in shares of Common Stock valued at Fair Market Value on the option
      surrender date, in cash, or partly in shares and partly in cash, as the
      Plan Administrator shall in its sole discretion deem appropriate.

                  (iii) If the surrender of an option is not approved by the
      Plan Administrator, then the Optionee shall retain whatever rights the
      Optionee had under the surrendered option (or surrendered portion thereof)
      on the option surrender date and may exercise such rights at any time
      prior to the later of (a) five (5) business days after the receipt of the
      rejection notice or (b) the last day on which the option is otherwise
      exercisable in accordance with the terms of the documents evidencing such
      option, but in no event may such rights be exercised more than ten (10)
      years after the option grant date.

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      C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:

                  (i) One or more Section 16 Insiders may be granted limited
      stock appreciation rights with respect to their outstanding options.

                  (ii) Upon the occurrence of a Hostile Take-Over, each
      individual holding one or more options with such a limited stock
      appreciation right shall have the unconditional right (exercisable for a
      thirty (30)-day period following such Hostile Take-Over) to surrender each
      such option to the Corporation, to the extent the option is at the time
      exercisable for vested shares of Common Stock. In return for the
      surrendered option, the Optionee shall receive a cash distribution from
      the Corporation in an amount equal to the excess of (A) the Take-Over
      Price of the shares of Common Stock which are at the time vested under
      each surrendered option (or surrendered portion thereof) over (B) the
      aggregate exercise price payable for such shares. Such cash distribution
      shall be paid within five (5) days following the option surrender date.

                  (iii) The balance of the option (if any) shall remain
      outstanding and exercisable in accordance with the documents evidencing
      such option.

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                                  ARTICLE THREE

                             STOCK ISSUANCE PROGRAM

I.    STOCK ISSUANCE TERMS

      Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.

      A. Purchase Price.

            1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

            2. Subject to the provisions of Section I of Article Five, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

                  (i) cash or check made payable to the Corporation, or

                  (ii) past services rendered to the Corporation (or any Parent
      or Subsidiary).

      B. Vesting Provisions.

            1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives.

            2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,

recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

            3. The Participant shall have full stockholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.

            4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for

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consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.

            5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

A.    All of the Corporation's outstanding repurchase rights under the Stock
      Issuance Program shall terminate automatically, and all the shares of
      Common Stock subject to those terminated rights shall immediately vest in
      full, in the event of any Corporate Transaction, except to the extent (i)
      those repurchase rights are to be assigned to the successor corporation
      (or parent thereof) in connection with such Corporate Transaction or (ii)
      such accelerated vesting is precluded by other limitations imposed in the
      Stock Issuance Agreement.

      B. The Plan Administrator shall have the discretion, exercisable either at
the time the unvested shares are issued or at any time while the Corporation's
repurchase right remains outstanding, to provide for the automatic termination
of one or more of those outstanding rights and the immediate vesting of the
shares of Common Stock subject to such rights upon the occurrence of a Corporate
Transaction.

      C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Corporate Transaction
in which those repurchase rights are assigned to the successor corporation (or
parent thereof).

      D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest upon (i) a Change in Control or (ii) the termination of the
Participant's Service by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of such Change in Control.

III.  SHARE ESCROW/LEGENDS

      Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.

                                       11
<PAGE>

                                  ARTICLE FOUR

                         AUTOMATIC OPTION GRANT PROGRAM

I.    OPTION TERMS

      A. Grant Dates. Option grants shall be made on the dates specified below:

            1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been a director of or in the employ of the
Corporation or any Parent or Subsidiary.

            2. On the date of the 1998 Annual Meeting (the Stockholder Approval
Date) and on the date of each Annual Stockholders Meeting held after such date,
each individual who is to continue to serve as an Eligible Director, whether or
not that individual is standing for re-election to the Board at that particular
Annual Meeting, shall automatically be granted a Non-Statutory Option to
purchase 10,000 shares of Common Stock, provided that such amount shall be
increased to 20,000 shares for grants on or after the date of the 2000 Annual
Meeting, with respect to each Annual Stockholders Meeting, such individual has
served as a non-employee board member for at least six (6) months. There shall
be no limit on the number of such 10,000 or 20,000-share option grants any one
Eligible Director may receive over his or her period of Board Service, and
non-employee board members who have previously been a director of or in the
employ of the Corporation (or any Parent or Subsidiary) shall be eligible to
receive one or more such annual option grants over their period of continued
Board Service.

      B. Exercise Price.

            1. The exercise price per share shall be equal to the Fair Market
Value per share of Common Stock on the option grant date.

            2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

      C. Option Term. Each option shall have a term of ten (10) years measured
from the option grant date.

      D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board Service
prior to vesting in those shares. With respect to options granted on or after
the date of the 1998 annual stockholders' meeting, each option shall vest, and
the Corporation's repurchase right shall lapse, on the first anniversary of the
date of grant.

      E. Termination of Board Service. The following provisions shall govern the
exercise of any options held by the Optionee at the time the Optionee ceases to
serve as a Board member:

                  (i) The Optionee (or, in the event of the Optionee's death,
      the personal representative of the Optionee's estate or the person or
      persons to whom the option is

                                       12
<PAGE>

      transferred pursuant to the Optionee's will or in accordance with the laws
      of descent and distribution) shall have a twelve (12)-month period
      following the date of such cessation of Board Service in which to exercise
      each such option.

                  (ii) During the twelve (12)-month post-service exercise
      period, the option may not be exercised in the aggregate for more than the
      number of vested shares of Common Stock for which the option is
      exercisable at the time of the Optionee's cessation of Board Service.

                  (iii) Should the Optionee cease to serve as a Board member by
      reason of death or Permanent Disability, then all shares at the time
      subject to the option shall immediately vest so that such option may,
      during the twelve (12)-month exercise period following such cessation of
      Board Service, be exercised for all or any portion of those shares as
      fully-vested shares of Common Stock.

                  (iv) In no event shall the option remain exercisable after the
      expiration of the option term. Upon the expiration of the twelve
      (12)-month post-service exercise period or (if earlier) upon the
      expiration of the option term, the option shall terminate and cease to be
      outstanding for any vested shares for which the option has not been
      exercised. However, the option shall, immediately upon the Optionee's
      cessation of Board Service for any reason other than death or Permanent
      Disability, terminate and cease to be outstanding to the extent the option
      is not otherwise at that time exercisable for vested shares.

                  (v) Notwithstanding anything contained in Subparagraphs (i)
      through (iv), above, of Paragraph E of this Article Four, the Plan
      Administrator shall have complete discretion, exercisable either at the
      time an option is granted or at any time while the option remains
      outstanding, to:

                        1. extend the period of time for which the option is to
            remain exercisable following Optionee's cessation of Board Service
            from the limited exercise period otherwise in effect for that option
            to such greater period of time as the Plan Administrator shall deem
            appropriate, but in no event beyond the expiration of the option
            term, and/or

                        2. permit the option to be exercised, during the
            applicable post-Service exercise period, not only with respect to
            the number of vested shares of Common Stock for which such option is
            exercisable at the time of the Optionee's cessation of Service but
            also with respect to one or more additional installments in which
            the Optionee would have vested had the Optionee continued in Board
            Service.

II.   CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

      A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Immediately following the consummation of the Corporate
Transaction, each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed

                                       13
<PAGE>

by the successor corporation (or parent thereof).

      B. In connection with any Change in Control, the shares of Common Stock at
the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Change in Control, become fully exercisable for all of
the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

      C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.

      D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

      E. The grant of options under the Automatic Option Grant Program shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

III.  REMAINING TERMS

      The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

                                       14
<PAGE>

                                  ARTICLE FIVE

                                  MISCELLANEOUS

I.    FINANCING

      The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

II.   TAX WITHHOLDING

      A. The Corporation's obligation to deliver shares of Common Stock upon the
exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.

      B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

            Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

            Stock Delivery: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

III.  EFFECTIVE DATE AND TERM OF THE PLAN

      A. The Plan shall become effective immediately upon the Plan Effective
Date. Options may be granted under the Discretionary Option Grant or Automatic
Option Grant Program at any time on or after the Plan Effective Date. However,
no options granted under the Plan may be exercised, and no shares shall be
issued under the Plan, until the Stockholder Approval Date. If the Stockholder
Approval Date does not occur within twelve (12) months after the Plan Effective
Date, then all options previously granted under this Plan shall terminate and
cease to be outstanding, and no further options shall be granted and no shares
shall be issued

                                       15
<PAGE>

under the Plan.

      B. One or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan on the Stockholder Approval Date which do not otherwise contain such
provisions.

      C. The Plan shall terminate upon the earliest of (i) March 24, 2008 (ii)
the date on which all shares available for issuance under the Plan shall have
been issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. Upon such plan termination,
all outstanding option grants and unvested stock issuances shall thereafter
continue to have force and effect in accordance with the provisions of the
documents evidencing such grants or issuances.

IV.   AMENDMENT OF THE PLAN

      A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

      B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Programs and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.

V.    USE OF PROCEEDS

      Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.

VI.   REGULATORY APPROVALS

      A. The implementation of the Plan, the granting of any stock option under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any granted option or (ii) under the Stock Issuance Program shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

      B. No shares of Common Stock or other assets shall be issued or delivered
under the

                                       16
<PAGE>

Plan unless and until there shall have been compliance with all applicable
requirements of Federal and state securities laws, including the filing and
effectiveness of the Form S-8 registration statement for the shares of Common
Stock issuable under the Plan, and all applicable listing requirements of any
stock exchange (or the Nasdaq National Market, if applicable) on which Common
Stock is then listed for trading.

VII.  NO EMPLOYMENT/SERVICE RIGHTS

      Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service or Board Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person) or
of the Optionee or the Participant, which rights are hereby expressly reserved
by each, to terminate such person's Service or Board Service at any time for any
reason, with or without cause.

                                       17
<PAGE>

                                    APPENDIX

The following definitions shall be in effect under the Plan:

      A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.

      B. Board shall mean the Corporation's Board of Directors.

      C. Board Service shall mean the performance of services for the
Corporation by a person in the capacity of a non-employee member of the board of
directors.

      D. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

                  (i) the acquisition, directly or indirectly by any person or
      related group of persons (other than the Corporation or a person that
      directly or indirectly controls, is controlled by, or is under common
      control with, the Corporation), of beneficial ownership (within the
      meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
      fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities pursuant to a tender or exchange
      offer made directly to the Corporation's stockholders which the Board does
      not recommend such stockholders to accept, or

                  (ii) a change in the composition of the Board over a period of
      thirty-six (36) consecutive months or less such that a majority of the
      Board members ceases, by reason of one or more contested elections for
      Board membership, to be comprised of individuals who either (A) have been
      Board members continuously since the beginning of such period or (B) have
      been elected or nominated for election as Board members during such period
      by at least a majority of the Board members described in clause (A) who
      were still in office at the time the Board approved such election or
      nomination.

      E. Code shall mean the Internal Revenue Code of 1986, as amended.

      F. Common Stock shall mean the Corporation's common stock.

      G. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
      more than fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities are transferred to a person or
      persons different from the persons holding those securities immediately
      prior to such transaction, or

                  (ii) the sale, transfer or other disposition of all or
      substantially all of the Corporation's assets in complete liquidation or
      dissolution of the Corporation.

      H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation, and its successors.

      I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.

      J. Eligible Director shall mean a non-employee Board member who is not a
10% Stockholder.

                                       18
<PAGE>

      K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

      L. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.

      M. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
      SmallCap Market or Nasdaq National Market, then the Fair Market Value
      shall be deemed equal to the closing selling price per share of Common
      Stock on the date in question, as such price is reported on such market or
      any successor system. If there is no closing selling price for the Common
      Stock on the date in question, then the Fair Market Value shall be the
      closing selling price on the last preceding date for which such quotation
      exists.

                  (ii) If the Common Stock is at the time listed on any Stock
      Exchange, then the Fair Market Value shall be deemed equal to the closing
      selling price per share of Common Stock on the date in question on the
      Stock Exchange determined by the Plan Administrator to be the primary
      market for the Common Stock, as such price is officially quoted in the
      composite tape of transactions on such exchange. If there is no closing
      selling price for the Common Stock on the date in question, then the Fair
      Market Value shall be the closing selling price on the last preceding date
      for which such quotation exists.

      N. Hostile Take-Over shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

      O. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

      P. Initial Approval Date shall mean June 16, 1998, the date on which the
Corporation's 1998 Stock Incentive Plan was initially approved by the
stockholders of the Corporation.

      Q. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:

                  (i) such individual's involuntary dismissal or discharge by
      the Corporation for reasons other than Misconduct, or

                  (ii) Optionee's voluntary resignation following (A) a change
      in Optionee's position with the Corporation (or Parent or Subsidiary
      employing Optionee) which materially reduces Optionee's duties and
      responsibilities or the level of management to which Optionee reports, (B)
      a reduction in Optionee's level of compensation (including base salary,
      fringe benefits and target bonus under any corporate performance-based
      bonus or incentive programs) by more than fifteen percent (15%) or

                                       19
<PAGE>

      (C) a relocation of Optionee's place of employment by more than fifty (50)
      miles, provided and only if such change, reduction or relocation is
      effected by the Corporation without Optionee's consent.

      R. Misconduct shall mean, unless otherwise determined by the Plan
Administrator and recorded in the agreements evidencing the option grant or
stock issuance, the commission of any act of fraud, embezzlement or dishonesty
by the Optionee or Participant, any unauthorized use or disclosure by such
person of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by such person
adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).

      S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

      T. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

      U. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.

      V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

      W. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

      X. Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.

      Y. Plan shall mean the Corporation's Amended and Restated 1998 Stock
Incentive Plan, as set forth in this document.

      Z. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

      AA. Plan Effective Date shall mean March 24, 1998, the date on which the
Plan was adopted by the Board.

                                       20
<PAGE>

      BB. Predecessor Plans shall mean the Corporation's 1995 Stock Option Plan
and 1993 Stock Option Plan as in effect immediately prior to the Plan Effective
Date hereunder.

      CC. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.

      DD. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

      EE. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

      FF. Service shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

      GG. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.

      HH. Stockholder Approval Date shall mean the date on which the Plan is
approved by the Corporation's stockholders.

      II Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

      JJ. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.

      KK. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

      LL. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

      MM. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

      NN. 10% Stockholder shall mean the owner of stock (as determined under
Code).

      Section 424(d) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

                                       21Exhibit 4.1

                          SECURITIES PURCHASE AGREEMENT

      This Securities Purchase Agreement (this "Agreement") is dated as of
September 26, 2003, 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 $21,000,000 of the Debentures and
certain Warrants, 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" means the closing of the purchase and sale of the
      Debentures and Warrant pursuant to Section 2.1(a).

            "Closing Date" means the date of the Closing.

            "Closing Price" means on any particular date (a) the last reported
      closing bid price per share of Common Stock on such date on the Trading
      Market (as reported by Bloomberg L.P. at 4:15 PM (New York time), or (b)
      if there is no such price on such date, then the closing bid price on the
      Trading Market on the date nearest preceding such date (as reported by
      Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for
      regular session trading on such day), or (c) if the Common Stock is not
      then listed or quoted on the Trading Market and if prices for the Common
      Stock are then reported in the "pink sheets" published by the National
      Quotation Bureau Incorporated (or a

<PAGE>

      similar organization or agency succeeding to its functions of reporting
      prices), the most recent bid price per share of the Common Stock so
      reported, or (d) if the shares of Common Stock are not then publicly
      traded the fair market value of a share of Common Stock as determined by
      an appraiser selected in good faith by the Purchasers of a majority in
      interest of the Debentures then outstanding.

            "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 Ehrenreich Eilenberg & Krause LLP.

            "Debentures" means, the 4% Convertible Debentures due 18 months from
      their date of issuance, issued by the Company to the Purchasers hereunder,
      in the form of Exhibit A.

            "Disclosure Schedules" means the Disclosure Schedules attached as
      Annex I hereto.

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

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

            "Escrow Agreement" means the Escrow Agreement in substantially the
      form of Exhibit E hereto executed and delivered contemporaneously with
      this Agreement.

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

            "FW" means Feldman Weinstein LLP, with offices at 420 Lexington
      Avenue, Suite 2620, New York, New York 10170-0002, counsel to Rodman and
      Renshaw, Inc., the placement agent to the transaction.

            "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).

            "Nevada Counsel" means McDonald Carano Wilson LLP.

<PAGE>

      "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 Underlying 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 B hereto.

            "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 Debentures, the Warrants and the Underlying
      Shares.

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

            "Set Price" shall have the meaning ascribed to such term in the
      Debentures.

            "Subscription Amount" means, as to each Purchaser, the amount to be
      paid for Debentures 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 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
      National Market or the Nasdaq SmallCap Market.

            "Transaction Documents" means this Agreement, the Debentures, the
      Warrants, the Registration Rights Agreement, the Escrow Agreement and any
      other documents or agreements executed in connection with the transactions
      contemplated hereunder.

<PAGE>

            "Underlying Shares" means the shares of Common Stock issuable upon
      conversion of the Debentures and upon exercise of the Warrants and issued
      and issuable in lieu of the cash payment of interest on the Debentures.

            "Warrants" means the Common Stock Purchase Warrants, in the form of
      Exhibit C, issuable to the Purchasers at the Closing, with a term of
      exercise of 3 years and an exercise price equal to the Closing Price on
      the Trading Day immediately prior to the Closing Date, subject to
      adjustment therein.

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

                                   ARTICLE II.
                                PURCHASE AND SALE

      2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, the Company agrees to sell, and the Purchasers
agree to purchase in the aggregate, severally and not jointly, up to $21,000,000
principal amount of the Debentures and Warrants. Upon satisfaction of the
conditions set forth in Section 2.2, the Closing shall occur at the offices of
FW, or such other location as the parties shall mutually agree.

      2.2 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 the Escrow Agent for the benefit of each Purchaser:

                  (i) a Debenture with a principal amount equal to such
            Purchaser's Subscription Amount, registered in the name of such
            Purchaser;

                  (ii) a Warrant registered in the name of such Purchaser to
            purchase up to a number of shares of Common Stock equal to such
            Purchaser's pro-rata share of 5,000,000 (based on such Purchaser's
            Subscription Amount in proportion to the aggregate Subscription
            Amounts);

                  (iii) the legal opinion of Company Counsel, in the form of
            Exhibit D-1 attached hereto, addressed to the Purchasers;

                  (iv) the legal opinion of Nevada Counsel, in the form of
            Exhibit D-2 attached hereto, addressed to the Purchasers;

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

                  (v) the Escrow Agreement; and

                  (vi) this Agreement, duly executed by the Company.

            (b) At or prior to the Closing, each Purchaser shall deliver or
      cause to be delivered to the Escrow Agent the following:

<PAGE>

                  (i) such Purchaser's Subscription Amount;

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

                  (iii) the Escrow Agreement; and

                  (iv) the Registration Rights Agreement duly executed by such
            Purchaser.

            (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 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 Debentures at the Closing.

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

      3.1 Representations and Warranties of the Company. Except as set forth in
the SEC Reports or under the corresponding section of the Disclosure Schedules
delivered concurrently herewith, the Company hereby makes the following
representations and warranties as of the date hereof and as of the Closing Date
to each Purchaser:

            (a) Subsidiaries. All of the subsidiaries of the Company 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 lien, charge,
      security interest, encumbrance, right of first refusal or other
      restriction (collectively, "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. If
      the Company has no subsidiaries, then references in the Transaction
      Documents to the Subsidiaries will be disregarded.

            (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

<PAGE>

      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. 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. 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
      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;
      except in the case of each of clauses (ii) and (iii), such as would not
      have or reasonably be expected to result in a Material Adverse Effect.

            (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 Underlying Shares for trading thereon in the time and
      manner required thereby,

<PAGE>

      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. 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. The Company has reserved from its duly
      authorized capital stock the maximum number of shares of Common Stock
      issuable pursuant to the Debentures and the Warrants, including shares
      issuable in lieu of interest assuming all interest is paid in shares until
      maturity of the Debentures and the conversion rate thereof is the lowest
      possible conversion rate available.

            (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. Except as a result
      of the purchase and sale of the Securities, there are no outstanding
      options, warrants, script rights to subscribe to, calls or commitments of
      any character whatsoever relating to, or securities, rights or obligations
      convertible into or exchangeable for, or giving any Person any right to
      subscribe for or acquire, any shares of Common Stock, or contracts,
      commitments, understandings or arrangements by which the Company or any
      Subsidiary is or may become bound to issue additional shares of Common
      Stock, or securities or rights convertible or exchangeable into shares of
      Common Stock. 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 the "SEC Reports" and, together with the Disclosure Schedules to
      this Agreement, the "Disclosure Materials") 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

<PAGE>

      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. 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. 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. Except as disclosed in the SEC Reports, 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

<PAGE>

      authority, including without limitation all foreign, federal, state and
      local laws applicable to its business, 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, trademarks, trademark applications,
      service marks, trade names, copyrights, licenses and other similar 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 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.

            (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. 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

<PAGE>

      $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 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-Q for the quarter ended
      June 30, 2002 (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. 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.

            (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. No Person other than the Purchasers or the
      placement agent of the Securities 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) Listing and Maintenance Requirements. The Company has not, in
      the 12 months preceding the date hereof, received written notice from any
      Trading Market on which the Common Stock is or has been listed or quoted
      to the effect that the Company is not in compliance with the listing or
      maintenance requirements of such Trading Market. The Company is, and has
      no reason to believe that it will not in the foreseeable future continue
      to be, in compliance with all such listing and maintenance requirements.

            (w) 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 a rights agreement) or other
      similar

<PAGE>

      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.

            (x) Disclosure. The Company confirms that, neither the Company nor
      any other Person acting on its behalf has provided any of the Purchasers
      or their agents or counsel with any information that constitutes or might
      constitute material, non-public information. 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, including the Disclosure
      Schedules to this Agreement, furnished by or on behalf of the Company are
      true and correct and do not contain any untrue statement of a 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.

            (y) 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.

            (z) Solvency. Based on the financial condition of the Company as of
      the Closing Date, (i) the Company's fair saleable value of its assets
      exceeds the amount that will be required to be paid on or in respect of
      the Company's existing debts and other liabilities (including known
      contingent liabilities) as they mature; (ii) the Company's assets do not
      constitute unreasonably small capital to carry on its business for the
      current fiscal year as now conducted and as proposed to be conducted
      including its capital needs taking into account the particular capital
      requirements of the business conducted by the Company, and projected
      capital requirements and capital availability thereof; and (iii) the
      current cash flow of the Company, together with the proceeds the Company
      would receive, were it to liquidate all of its assets, after taking into
      account all anticipated uses of the cash, would be sufficient to pay all
      amounts on or in respect of its debt when such amounts are required to be
      paid. The Company does not intend to incur debts beyond its ability to pay
      such debts as they mature (taking into account the timing and amounts of
      cash to be payable on or in respect of its debt). The Company has no
      knowledge of any facts or circumstances which lead it to believe that it
      will file for reorganization or liquidation under the bankruptcy or
      reorganization laws of any jurisdiction within one year from the Closing
      Date. The SEC Reports set forth as of the dates thereof all outstanding
      secured and unsecured Indebtedness of the Company or any Subsidiary, or
      for which the Company or any Subsidiary has commitments. For the purposes
      of this Agreement, "Indebtedness" shall mean (a) any liabilities for
      borrowed money or amounts owed in excess of $50,000 (other than trade
      accounts payable incurred in the ordinary course of business), (b) all
      guaranties, endorsements and other contingent obligations, whether or not
      the same are or should be reflected in the Company's balance sheet or the
      notes thereto, except guaranties by endorsement of negotiable instruments
      for deposit or collection in the ordinary course of business, and (c) the
      present value of any lease payments in excess of $50,000 due under

<PAGE>

      leases required to be capitalized in accordance with GAAP. Neither the
      Company nor any Subsidiary is in default with respect to any Indebtedness.

            (aa) Seniority. As of the Closing Date, no indebtedness of the
      Company is senior to the Debentures in right of payment, whether with
      respect to interest or upon liquidation or dissolution, or otherwise,
      other than indebtedness secured by purchase money security interests
      (which is senior only as to underlying assets covered thereby) and capital
      lease obligations (which is senior only as to the property covered
      thereby).

            (bb) No Disagreements with Accountants and Lawyers. There are no
      disagreements of any kind presently existing, or reasonably anticipated by
      the Company to arise, between the accountants and lawyers formerly or
      presently employed by the Company and the Company is current with respect
      to any fees owed to its accountants and lawyers.

      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. 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.

<PAGE>

            (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 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 Underlying 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
      Underlying Shares in a transaction not subject to the prospectus delivery
      requirement), and such Purchaser acknowledges that the certificates
      evidencing the Underlying 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.

      (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:

<PAGE>

            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.

            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 Underlying 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 Underlying Shares pursuant to Rule 144,
      or (iii) if such Underlying 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 Debenture is converted or a Warrant is exercised at a time when there
      is an effective registration statement to cover the resale of the
      Underlying Shares, or if such Underlying 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 Underlying 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

<PAGE>

      of a certificate representing Underlying 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 Underlying 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
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 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m.
Eastern time on the Business Day following the date of this Agreement, issue a
press release or file a Current Report on Form 8-K, in each case reasonably
acceptable to the placement agent of the Securities disclosing the transactions
contemplated hereby and make such other filings and notices in the manner and
time required by the Commission. The Company and the placement agent of the
Securities shall consult with each other in issuing any press releases with
respect to the transactions contemplated hereby, and neither the Company nor any
Purchaser shall issue any such press release or otherwise make any such public
statement without the prior consent of the Company, with respect to any press
release of any Purchaser, or without the prior consent of the placement agent of
the Securities, with respect to any press release of the Company, which consent
shall not unreasonably be withheld, except if such disclosure is required by
law, in which case the disclosing party shall promptly provide the other party
with prior notice of such public statement or communication. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser, or
include

<PAGE>

the name of any Purchaser in any filing with the Commission or any regulatory
agency or Trading Market, without the prior written consent of such Purchaser,
except (i) as required by federal securities law in connection with the
registration statement contemplated by the Registration Rights Agreement and
(ii) to the extent such disclosure is required by law or Trading Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure permitted under subclause (i) or (ii).

      4.5 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.

      4.6 Non-Public Information. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.

      4.7 Use of Proceeds. Except as set forth on Schedule 4.7 attached hereto,
the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital purposes and acquisition purposes and not (a) for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables in the ordinary course of the Company's business and prior practices),
(b) to redeem any Company equity or equity-equivalent securities or (c) to
settle any outstanding litigation.

      4.8 Reimbursement. If any Purchaser becomes involved in any capacity in
any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser's acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability on the part of, or pertaining to such Purchaser and not to the
purchase of Securities pursuant to this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
4.9, 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 covenant or warranty owing to the
Company is breached.

      4.9 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

<PAGE>

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
solely out of or solely 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 investigation,
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred.

      4.10 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, warranties, covenants or agreements 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.

      4.11 Reservation of Common Stock. As of the date hereof, the Company has
reserved and the Company shall 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 Underlying Shares pursuant to
the Debentures and the Warrants, including shares issuable in lieu of interest
assuming all interest is paid in shares until maturity of the Debentures and the
conversion rate thereof is the lowest possible conversion rate available.

      4.12 Listing of Common Stock. The Company hereby agrees to use
commercially reasonably efforts to maintain the listing of the Common Stock on
the Trading Market, and as soon as reasonably practicable following the Closing
(but not later than the earlier of the Effective Date and the first anniversary
of the Closing Date) to list all of the Underlying Shares on the Trading Market,
including shares issuable in lieu of interest assuming all interest is paid in
shares until maturity of the Debentures and the conversion rate thereof is the
lowest possible conversion rate available. The Company further agrees, if the
Company applies to have the Common Stock traded on any other Trading Market, it
will include in such application the Underlying Shares, including shares
issuable in lieu of interest assuming all interest is paid in shares until
maturity of the Debentures and the conversion rate thereof is the lowest
possible conversion rate available, and will take such other action as is
necessary or desirable in the opinion of the Investors to cause such shares to
be listed on such other Trading Market as promptly as possible. The Company will
take all action reasonably necessary to continue the listing and trading of its
Common Stock on a Trading Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Trading Market.

      4.13 Subsequent Equity Sales. From the date hereof until after the
Effective Date, neither the Company nor any Subsidiary shall issue additional
shares of Common Stock or Common Stock Equivalents without the prior written
consent of the Purchasers then holding a majority of the Securities issued
hereunder. Notwithstanding anything to the contrary herein, this Section 4.13
shall not apply to the following (a) the granting of options to employees,
consultants, officers and directors of the Company pursuant to any stock

<PAGE>

option plan duly adopted by a majority of the non-employee members of the Board
of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, or (b) the exercise of any
security issued by the Company in connection with the offer and sale of this
Company's securities pursuant to this Agreement, or (c) the exercise of or
conversion of any convertible securities, options or warrants issued and
outstanding on the date hereof, provided such securities have not been amended
since the date hereof, or (d) acquisitions or strategic investments, the primary
purpose of which is not to raise capital, or (e) the issuance of warrants to the
placement agent of the Securities purchased pursuant to this Agreement.

      4.14 MFN and Variable Rate Transactions. From the date hereof until 12
months following the Effective Date, the Company shall be prohibited from
effecting or enter into an agreement to effect any Subsequent Financing
involving a "Variable Rate Transaction" or an "MFN Transaction" (each as defined
below). The term "Variable Rate Transaction" shall mean a transaction in which
the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction" shall mean a transaction in which the Company issues or sells any
securities in a capital raising transaction or series of related transactions
which grants to an investor the right to receive additional shares based upon
future transactions of the Company on terms more favorable than those granted to
the such investor in such offering.

      4.15 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 Underlying
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.

      4.16 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

      4.17 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 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
is intended to treat for the Company the Debenture holders as a class and shall
not in any

<PAGE>

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.

      4.18 Waiver. Each Purchaser that was a party to the Securities Purchase
Agreement dated as of May 30, 2003 among the Company and the purchasers
identified on the signature pages thereto hereby waives any rights it may have
under Section 4.12 thereunder with respect to the Company's issuance of the
Debentures and the Warrants hereunder. This waiver is limited to such issuance
only, and does not affect any Purchaser's ongoing rights to participate in any
future offerings of the Company in accordance with the provisions thereof.

                                   ARTICLE V.
                                  MISCELLANEOUS

      5.1 Fees and Expenses. The Company agrees to pay up to $30,000, in the
aggregate, to the Purchasers and Rodman & Renshaw, Inc. for their legal and due
diligence fees and expenses incurred in connection with the investigation and
negotiation of the transaction and the preparation and negotiation of the
Transaction Documents. Accordingly, in lieu of the foregoing payments, the
Company, on the Closing Date, hereby directs that the aggregate amount that The
Tailwind Fund Limited is to pay for the Debentures and Warrants at the Closing
be reduced by $10,000. Payments to Rodman & Renshaw, Inc. will be made at the
Closing via the Escrow Agreement. 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 this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the sale of the Securities.

      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 this Section prior to 6:30 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 6:30 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, in the case of an amendment, by the
Company, on the one hand, and by those Purchasers (or their transferees) then
holding at least 75% of the Securities not yet sold under the Registration
Statement or under Rule 144, on the other hand. No waiver of any default with
respect to any provision, 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.

<PAGE>

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 4.9 and Section 4.10.

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
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 Underlying
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

<PAGE>

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 a conversion of a Debenture or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock subject to any
such rescinded conversion or exercise notice.

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. 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.

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 Usury. To the extent it may lawfully do so, the Company hereby agrees not
to insist upon or plead or in any manner whatsoever claim, and will resist any
and all efforts to be compelled to take the benefit or advantage of, usury laws
wherever enacted, now or at any time hereafter in force, in connection with any
claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under

<PAGE>

applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.

5.17 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. Each
Purchaser has been represented by its own separate legal counsel in their review
and negotiation of the Transaction Documents. For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through Feldman Weinstein LLP. Feldman Weinstein
LLP does not represent the Purchasers in this transaction but only Rodman &
Renshaw, Inc., the placement agent that introduced the Company to the
Purchasers. The Company has elected to provide all Purchasers with the same
terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers.

      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)

<PAGE>

            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, Suite 311
                                                       Iselin, New Jersey 08830
                                                       Attn:
                                                       Tel: (732) 452-9556
By: /S/ ROBERT W. COOK                                 Fax: (732) 452-9557
    ------------------
    Name:  Robert W. Cook
    Title: Executive Vice President, CFO

With copy to (which shall not constitute notice):

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

                      [PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

SMITHFIELD FIDUCIARY LLC

By: /S/ ADAM J. CHILL
    -----------------
Name:  Adam J. Chill
Title: Authorized Signatory

Subscription Amount: $2,000,000
Warrant Shares: 476,190

Address for Notice:
c/o Highbridge Capital Management, LLC
9 West 57th Street
27th Floor
New York, NY 10019
Fax: 212-751-0755
Tel: 212-287-4720
Attention: Ari J. Storch / Adam J. Chill

                 [ADDITIONAL PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

OMICRON MASTER TRUST                                Address for Notice:
By: Omicron Capital L.P., as subadvisor             c/o Omicron Capital L.P.
By: Omicron Capital Inc., its general partner       810 Seventh Avenue, 39th Fl.
                                                    New York, NY 10019
                                                    Fax: (212) 803-5269
                                                    Attn: Brian Daly

By: /S/ OLIVIER MORALI
        Name:  Olivier Morali
        Title: President

Subcription Amount: $3,250,000
Warrant Shares: 773,810

                 [ADDITIONAL PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

THE RIVERVIEW GROUP, LLC

By: /S/ ISRAEL ENGLANDER
    --------------------
Name:  Israel Englander
Title: Managing Partner

Address for Notice:

c/o Millennium Partners, L.P.
666 5th Avenue, 8th Floor
New York, New York 10103
Attn: Daniel Cardella
Tel: (212) 841-4176
Fax: (212) 977-1667

Subscription Amount: $10,000,000
Warrant Shares: 2,380,952

                 [ADDITIONAL PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

The Tail Wind Fund Limited
By: Tail Wind Advisory & Management Ltd., as
Investment Manager

By: /S/ DAVID CROOK
    ---------------
        David Crook, Chief Executive Officer

Address for Notice:

Attn: David Crook
Chief Executive Officer
c/o: Tail Wind Advisory & Management Ltd.
1st Floor, No. 1 Regent Street
London, SW1Y 4NS, UK
Fax: +44 20 7468 7657

Subscription Amount: $3,000,000
Warrant Shares: 714,286

                 [ADDITIONAL PURCHASERS' SIGNATURE PAGES FOLLOW]

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

CRANSHIRE CAPITAL L.P.

By: /s/ MITCHELL KOPIN
    ------------------
Name:  Mitchell Kopin
Title: President, Downsview Capital, The General Partner

Address for Notice:

Attn: Mitchell Kopin
666 Dundee Road
Suite 1901
Northbrook, IL 60062
Fax: 847-562-9031

Subscription Amount: $500,000
Warrant Shares: 119,048

<PAGE>

          [PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT]

SF CAPITAL PARTNERS LTD.

By: /s/ BRIAN H. DAVIDSON
    ---------------------
Name:  Brian H. Davidson
Title: Authorized Signatory

Address for Notice:

3600 South Lake Drive
St. Francis, Wisconsin
Fax: 414-294-7700

Subscription Amount: $2,250,000
Warrant Shares: 535,714

<PAGE>

                                                            DISCLOSURE SCHEDULES
                                                TO SECURITIES PURCHASE AGREEMENT

     There are no Disclosure Schedules to the Securities Purchase Agreement

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