Document:

EXHIBIT 4.1

                               PURCHASE AGREEMENT

     PURCHASE  AGREEMENT  ("Agreement")  dated as of  September  1, 2000 between
Pharmos  Corporation,  a Nevada corporation (the "Company"),  and each person or
entity  listed as an investor on  Schedule I attached  to this  Agreement  (each
individually an "Investor" and  collectively the  "Investors").  Undefined terms
contained herein shall have the meaning ascribed to them in the Debentures.

                              W I T N E S S E T H:

     WHEREAS,  the Company  desires to sell and issue to the Investors,  and the
Investors  wish to purchase  from the Company,  6%  Convertible  Debentures  due
February  28, 2002 (the  "Debentures"),  in the  aggregate  principal  amount of
$8,000,000 at an aggregate  purchase price of $8,000,000,  having the rights and
privileges  set  forth in the  Debentures  in the form of  Exhibit  1A  attached
hereto, on the terms and conditions set forth herein; and

     WHEREAS,  pursuant to the terms of the  Debentures,  the Debentures will be
convertible  into shares ("Common  Shares") of common stock,  par value $.03, of
the Company ("Common Stock"); and

     WHEREAS,  to induce the Investors to purchase the  Debentures,  the Company
has agreed to issue to the Investors  warrants (the "Warrants")  exercisable for
shares of Common Stock  ("Warrant  Shares") in the form  attached as Exhibit 1B;
and

     WHEREAS,  the Investors will have registration  rights with respect to such
Common  Shares and the  Warrant  Shares  pursuant  to the terms of that  certain
Registration  Rights  Agreement  to be entered  into between the Company and the
Investors  substantially  in the form of Exhibit  4.2(e)  hereto  ("Registration
Rights Agreement");

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

                                    ARTICLE 1
               Purchase and Sale of Debentures and Warrants, Etc.

     Section 1.1 Issuance of Debentures and Warrants.

          (a) Issuance.  Upon the following  terms and  conditions,  the Company
shall issue and sell to each Investor  severally,  and each  Investor  severally
shall purchase from the Company, the outstanding  principal amount of Debentures
and the number of Warrants  indicated next to such Investor's name on Schedule I
attached hereto.

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          (b) Purchase Price. The purchase price for the Debentures and Warrants
to be acquired by each  Investor  (the  "Purchase  Price") shall be the Purchase
Price set forth next to such Investor's name on Schedule I.

          (c) The Closing.

               (i) The closing of the  purchase and sale of the  Debentures  and
          the  Warrants  (the  "Closing")  shall  take  place at the  offices of
          Kleinberg,  Kaplan, Wolff & Cohen, P.C.  ("Investors'  Counsel") or at
          such other place as is mutually  agreeable,  at 10:00 am.,  local time
          on:  (x) the date on which the last to be  fulfilled  or waived of the
          conditions set forth in Article 4 hereof and applicable to the Closing
          shall be fulfilled or waived in accordance herewith, or (y) such other
          time and place  and/or on such  other  date as the  Investors  and the
          Company may agree. The date on which the Closing occurs is referred to
          herein as the "Closing Date".

               (ii) On the  Closing  Date,  the  Company  shall  deliver to each
          Investor  (x)  one  or  more  Debentures   (with  the  number  of  and
          outstanding  principal  amount of each  debenture to be as  reasonably
          requested by such  Investor)  representing  the  aggregate  Debentures
          purchased  hereunder by such Investor at the Closing registered in the
          name of such  Investor or its nominee and (y) the Warrants  registered
          in the  name of  Investor  or its  nominee  in such  denominations  as
          reasonably requested by such Investor, and such Investor shall deliver
          to the  Company  fifty  percent  (50%) of the  Purchase  Price for the
          Debentures  purchased by such  Investor  hereunder by wire transfer in
          immediately available funds to an account designated in writing by the
          Company,  with each investor funding the remaining 50% of its Purchase
          Price to the Escrow Agent (as defined  below) as provided in paragraph
          (c)(iii)  below.  The  delivery  of  payment by each  Investor  of the
          Purchase Price  applicable to it as set forth in paragraphs  c(ii) and
          c(iii)  shall  constitute  a  payment  delivered  to  the  Company  in
          satisfaction of such  Investor's  obligation to pay the Purchase Price
          hereunder.  In  addition,  each party  shall  deliver  all  documents,
          instruments  and  writings  required  to be  delivered  by such  party
          pursuant to this Agreement at or prior to the Closing. In addition, at
          the Closing, the Company shall pay (or Millennium Partners, LP ("MLP")
          shall pay for the  account of the  Company,  with such  payment  being
          credited  towards  MLP's  payment  of the  Purchase  Price  under this
          paragraph  c(ii))  to  the  Investors'  Counsel  its  legal  fees  and
          disbursements as set forth in Section 3.4.

               (iii) On the Closing Date, each Investor  severally shall deliver
          fifty percent (50%) of its Purchase Price to Kleinberg,  Kaplan, Wolff
          & Cohen,  P.C. (the "Escrow  Agent") for deposit in an escrow  account
          pursuant to the terms of an escrow agreement,  dated the Closing Date,
          by and among the Company,  the  Investors  and the Escrow Agent in the
          form of Exhibit 1C attached (the "Escrow Agreement").

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                                   ARTICLE 2
                         Representations and Warranties

     Section 2.1  Representations  and  Warranties  of the Company.  The Company
hereby  makes  the  following  representations  and  warranties  to  each of the
Investors as of the date hereof and on the Closing Date:

          (a)  Organization  and  Qualification;  Material  Adverse Effect.  The
Company is a corporation  duly  incorporated and existing in good standing under
the laws of the State of Nevada and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any direct or indirect subsidiaries (defined as any entity of which the
Company owns, directly or indirectly, 50% or more of the equity or voting power)
other than the subsidiaries  listed on Schedule 2.1(a) attached  hereto.  Except
where specifically  indicated to the contrary,  all references in this Agreement
to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries
of the  Company.  Except  where  specifically  indicated  to the  contrary,  all
references  in this  Article  2 to the  Company  shall be deemed to refer to the
Company  and  its  consolidated  subsidiaries.  Each  of  the  Company  and  its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good  standing  in  every  jurisdiction  in which  the  nature  of the  business
conducted or property owned by it makes such qualification  necessary other than
those in which the  failure  so to  qualify  would not have a  Material  Adverse
Effect.  "Material  Adverse  Effect"  means any adverse  effect on the business,
operations,  properties  or  financial  condition  of the entity with respect to
which such term is used and which is (either  alone or  together  with all other
adverse  effects)  material to such  entity and other  entities  controlling  or
controlled by such entity taken as a whole,  and any material  adverse effect on
the transactions  contemplated  under this Agreement,  the  Registration  Rights
Agreement or any other agreement or document contemplated hereby or thereby.

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

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

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

          (e)  No  Conflicts.  The  execution,   delivery  and  performance  the
Transaction  Documents by the Company and the consummation by the Company of the
transactions  contemplated hereby and thereby and the issuance of the Debentures
and the Warrants (collectively, the "Securities") do not and will not (i) result
in a violation of the  Company's  Charter or By-Laws or (ii)  conflict  with, or
constitute  a default  (or an event  which with  notice or lapse of time or both
would  become a default)  under,  or give to others  any rights of  termination,
amendment,  acceleration or cancellation of, any agreement,  indenture,  patent,
patent license or instrument to which the Company or any of its  subsidiaries is
a party (collectively,  "Company Agreements"), or (iii) result in a violation of
any federal,  state, local or foreign law, rule, regulation,  order, judgment or

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decree (including federal and state securities laws and regulations)  applicable
to the Company or any of its  subsidiaries  or by which any property or asset of
the Company or any of its subsidiaries is bound or affected,  except (other than
in the case of clause (i) above) where such  violation  would not  reasonably be
expected to have a Material Adverse Effect.  The business of the Company and its
direct and indirect  subsidiaries is being conducted in material compliance with
(i) its  Charter  and  By-Laws,  (ii)  all  Company  Agreements  and  (iii)  all
applicable laws,  ordinances or regulations of any governmental  entity,  except
(other  than in the case of clause (i) above)  where  such  violation  would not
reasonably be expected to have a Material  Adverse  Effect.  Except for filings,
consents and approvals  required under applicable  state and federal  securities
laws or the rules and regulations of the applicable Approved Markets and covered
by the Registration Rights Agreement, the Company is not required under federal,
state,  local  or  foreign  law,  rule or  regulation  to  obtain  any  consent,
authorization or order of, or make any filing or registration with, any court or
governmental  agency in order for it to  execute,  deliver or perform any of its
obligations  under  this  Agreement,  the  Registration  Rights  Agreement,  the
Debentures and the Warrants or to issue and sell the Debentures, Warrants or the
Common Shares and Warrants Shares  issuable upon conversion or exercise  thereof
except for the  registration  provisions  provided  in the  Registration  Rights
Agreement.

          (f) SEC Documents;  No Non-Public  Information;  Financial Statements.
The Common Stock of the Company is  registered  pursuant to Section 12(g) of the
Exchange  Act and the  Company  and its  subsidiaries  have  filed all  reports,
schedules, forms, statements and other documents required to be filed by it with
the  Securities  and  Exchange  Commission  ("SEC")  pursuant  to the  reporting
requirements  of  the  Exchange  Act,  including  all  such  proxy  information,
solicitation statements and registration statements,  and any amendments thereto
required to have been filed (all of the foregoing including filings incorporated
by  reference  therein  being  referred to herein as the "SEC  Documents").  The
Company  has not  directly  or  indirectly  provided,  and will not  directly or
indirectly provide, to the Investors any material non-public  information or any
information which, according to applicable law, rule or regulation,  should have
been disclosed  publicly by the Company but which has not been so disclosed.  As
of their respective  dates, the SEC Documents  complied in all material respects
with the  requirements  of the Exchange Act and the rules and regulations of the
SEC promulgated  thereunder and other federal,  state and local laws,  rules and
regulations  applicable  to such SEC  Documents,  and none of the SEC  Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  The SEC Documents contain all material  information  concerning the
Company and its subsidiaries, and no event or circumstance has occurred prior to
the date hereof or will have  occurred on the Closing  Date which would  require
the  Company  to  disclose  such  event  or  circumstance  in  order to make the
statements in the SEC Documents not  misleading  but which has not, or will have
not, been so disclosed.

          (g) Financial Statements.  The financial statements of the Company and
its  subsidiaries  included in the SEC Documents comply as to form and substance
in

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

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

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

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

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

          (l) No  General  Solicitation.  Neither  the  Company,  nor any of its
affiliates,  or, to its knowledge,  any person acting on its or their behalf has
engaged in any form of general  solicitation or general  advertising (within the
meaning of Regulation D

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under  the  Securities  Act)  in  connection  with  the  offer  or  sale  of the
Debentures, the Warrants, Common Shares or the Warrant Shares.

          (m) No  Integrated  Offering.  Neither  the  Company,  nor  any of its
affiliates,  nor to its  knowledge any person acting on its or their behalf has,
directly or  indirectly,  made any offers or sales of any  security or solicited
any  offers  to  buy  any  security,  under  circumstances  that  would  require
registration  of the  Debentures,  the  Warrants,  the Common  Shares or Warrant
Shares under the Act.

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

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

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

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

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

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Material  Adverse  Effect on the  Company or could  reasonably  be  expected  to
materially and adversely affect the transactions  contemplated  hereby. There is
no legal  proceeding  described in the  Pre-Agreement  SEC Documents  that could
reasonably be expected to have a Material Adverse Effect on the Company.

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

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

          (t) Certain Transactions. Except as disclosed in the Pre-Agreement SEC
Documents,  none of the officers,  directors, or key employees of the Company is
presently a party to any transaction with the Company or any of its subsidiaries
(other than for services as employees,  officers and  directors),  including any
contract,  agreement  or  other  arrangement  providing  for the  furnishing  of
services to or by, providing for rental of real or personal property to or from,
or  otherwise  requiring  payments  to or from  any  officer,  director  or such
employee  or, to the  knowledge of the Company,  any  corporation,  partnership,
trust or other entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.

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

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          (v) Insurance. The Company and each of its subsidiaries are insured by
insurers of recognized  financial  responsibility  against such losses and risks
and in such  amounts as  management  of the  Company  believes to be prudent and
customary  in the  businesses  in which the Company and its direct and  indirect
subsidiaries  are engaged.  Neither the Company nor any such  subsidiary has any
reason  to  believe  that it will not be able to renew  its  existing  insurance
coverage as and when such coverage  expires or to obtain  similar  coverage from
similar  insurers  as may be  necessary  to  continue  its  business  without  a
significant increase in cost.

          (w)  Internal  Accounting  Controls.  The  Company  and  each  of  its
subsidiaries  maintain a system of internal accounting controls  sufficient,  in
the judgment of the Company's  management,  to provide reasonable assurance that
(i)  transactions  are  executed  in  accordance  with  management's  general or
specific  authorizations,  (ii) transactions are recorded as necessary to permit
preparation  of financial  statements  in  conformity  with  generally  accepted
accounting  principles  and to maintain  asset  accountability,  (iii) access to
assets is permitted  only in accordance  with  management's  general or specific
authorization and (iv) the recorded  accountability  for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

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

          (y) Solvency.

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

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

               (iii) The  Company  does not  intend to incur  debts  beyond  its
          ability to pay such debts as they  mature  (taking  into  account  the
          timing

                                       9
<PAGE>

          and amounts of cash to be payable on or in respect of its debt). Based
          on the financial  condition of the Company as of the Closing Date, the
          current  cash flow of the  Company,  together  with the  proceeds  the
          Company would receive,  were it to liquidate all of its assets,  after
          taking  into  account  all  anticipated  uses of the  cash,  would  be
          sufficient  to pay all  amounts on or in respect of its debt when such
          amounts are required to be paid.

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

          (z) Taxes. All federal, state, city and other tax returns, reports and
declarations required to be filed or extended by or on behalf of the Company and
each of its subsidiaries  have been filed or extended and all such filed returns
are complete and  accurate  and disclose all taxes  (whether  based upon income,
operations,   purchases,  sales,  payroll,  licenses,  compensation,   business,
capital,  properties or assets or otherwise)  required to be paid in the periods
covered  thereby.  All  taxes  required  to be  withheld  by or on behalf of the
Company or any such  subsidiary in connection  with amounts paid or owing to any
employees,  independent contractor,  creditor or other party have been withheld,
and such  withheld  taxes have  either  been duly and timely  paid to the proper
governmental authorities or set aside in accounts for such purposes.

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

          (bb) No Reliance on  Investors.  The Company  acknowledges  and agrees
that each Investor is acting solely in the capacity of an arm's length purchaser
with respect to this  Agreement and the  Registration  Rights  Agreement and the
performance

                                       10
<PAGE>

under the Debentures and the Warrants and the transactions  contemplated  hereby
and thereby.  The Company further  acknowledges  that no Investor is acting as a
financial  advisor or fiduciary of the Company (or in any similar capacity) with
respect  to  this  Agreement  and  the  Registration  Rights  Agreement  and the
performance   under  the  Debentures  and  the  Warrants  and  the  transactions
contemplated hereby and thereby.  The Company further represents to the Investor
that the Company's  decision to enter into this  Agreement and the  Registration
Rights  Agreement and the performance  under the Debentures and the Warrants has
been  based  solely  on the  independent  evaluation  by  the  Company  and  its
representatives.

          (cc) Foreign  Corrupt  Practices  Act.  Neither the  Company,  nor any
director,  officer,  agent,  employee  or other  person  acting on behalf of the
Company or any Subsidiary has, in the course of acting for, or on behalf of, the
Company,  directly  or  indirectly  used any  corporate  funds for any  unlawful
contribution,  gift,  entertainment  or  other  unlawful  expenses  relating  to
political activity;  directly or indirectly made any direct or indirect unlawful
payment to any foreign or domestic government or party official or employee from
corporate  funds;  violated  or is in  violation  of any  provision  of the U.S.
Foreign Corrupt  Practices Act of 1977, as amended,  or any similar  treaties of
the United States;  or directly or indirectly  made any bribe,  rebate,  payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government or party official or employee.

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

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

                                  11
<PAGE>

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

     Section 2.2  Representations  and Warranties of the Investors.  Each of the
Investors,  severally (as to itself) and not jointly  hereby makes the following
representations  and  warranties to the Company as of the date hereof and on the
Closing Date:

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

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

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

          (d) Investment Representations.

               (i) Access to Other Information.  Such Investor acknowledges that
          the Company has made  available to such  Investor the  opportunity  to

                                       12
<PAGE>

          examine  such  additional  documents  from  the  Company  and  to  ask
          questions of, and receive full answers from,  the Company  concerning,
          among  other  things,  the  Company,  its  financial  condition,   its
          management,  its prior activities and any other information which such
          Investor considers relevant or appropriate in connection with entering
          into this Agreement.

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

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

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

                                       13
<PAGE>

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

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

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

          (e) Brokers.  Such  Investor  has taken no written  action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar  payments by the Company  relating to this Agreement or the transactions
contemplated hereby.

                                    ARTICLE 3
                                    Covenants

     Section 3.1 Registration and Listing;  Effective Registration.  For so long
as the  Securities  are  outstanding,  the Company  will cause the Common  Stock
issuable upon the exercise or  conversion  of the  Securities to continue at all
times to be registered under Section 12(b) or Section 12(g) of the Exchange Act,
will comply in all respects with its reporting and filing  obligations under the
Exchange Act, and will not take any action or file any document  (whether or not
permitted by the Exchange Act or the rules  thereunder)  to terminate or suspend
such  reporting and filing  obligations.  Until such time as no  Securities  are
outstanding,  the Company  shall  continue  the listing or trading of the Common
Stock on the Nasdaq  Small Cap Market or one of the other  Approved  Markets and
comply  in  all  respects  with  the  Company's  reporting,   filing  and  other
obligations under the bylaws or rules of the Approved Market on which the Common
Stock is listed.  The Company  shall cause the Common  Stock to be listed on the
Nasdaq Small Cap Market no later than the registration of the Common Stock under
the Act, and at all times shall continue such  listing(s) on one of the Approved
Markets. As used herein and in the Registration Rights Agreement,  the Debenture
and the Warrants, the term "Effective

                                       14
<PAGE>

Registration"  shall mean: (i) the Company is in compliance with the Transaction
Documents;  (ii)  the  resale  of  Registrable  Securities  (as  defined  in the
Registration Rights Agreement) is covered by an effective registration statement
and such registration statement is not subject to any suspension or stop orders;
(iii) the resale of such  securities  may be effected  pursuant to a current and
deliverable   prospectus  that  is  not  subject  to  any  blackout  or  similar
circumstance;  (iv) the securities are listed on an Approved  Market and are not
subject to any trading suspension; (v) no Interfering Event (as described in the
Registration  Rights Agreement) then exists; and (vi) none of the Company or any
direct or  indirect  subsidiary  of the  Company is  subject to any  bankruptcy,
insolvency or similar proceeding.

     Section 3.2 Debentures on Conversion and Warrants on Exercise.

          (a) Upon any  conversion by an Investor (or then holder of Debentures)
of the  Debentures  pursuant to the terms  thereof,  the Company shall issue and
deliver to such  Investor  (or  holder)  within  three (3)  Trading  Days of the
Conversion  Date, a new Debenture for the principal  amount of Debentures  which
such  Investor (or holder) has not yet elected to convert but which is evidenced
in part by the  Debenture(s)  submitted to the Company in  connection  with such
conversion  (with  the  number  of and  denomination  of such  new  Debenture(s)
designated by such Investor or holder).

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

     Section 3.3 Replacement Debentures and Warrants.

          (a) The  Debentures  held by any  Investor  (or  then  holder)  may be
exchanged  by such  Investor  (or such holder) at any time and from time to time
for Debentures with different denominations of at least $500,000 representing an
equal aggregate  number of Debentures or to reflect the actual  Conversion Price
pursuant to Section 5(c) of the  Debentures,  as requested by such  Investor (or
such holder) upon surrendering the same. No service charge will be made for such
registration or transfer or exchange.

          (b) The Warrants  will be  exchangeable  at the option of the Investor
(or then holder of the Warrants) at the office of the Company for other Warrants
of  different  denominations  entitling  the holder  thereof to  purchase in the
aggregate the same number of Warrant  Shares and/or Common  Shares,  as the case
may be, as are purchasable  under such Warrants.  No service charge will be made
for such transfer or exchange.

     Section 3.4 Expenses.  The Company shall pay to the  Investors'  Counsel in
immediately  available  funds,  at the Closing the sum of $15,000  ($20,000 less
$5,000  previously  paid) for the  payment of  expenses  (including  legal fees)
incurred by the

                                       15
<PAGE>

Investors in connection with the transactions contemplated by this Agreement. In
lieu  thereof,  MLP may  allocate  $15,000 of its  payment  of the  non-escrowed
portion of its Purchase  Price to the payment of such counsel,  and such payment
to  Investors'  Counsel  shall be credited  towards the payment of the  Purchase
Price due from MLP.

     Section 3.5  Securities  Compliance.  The Company  shall notify the SEC, in
accordance with their  requirements,  of the  transactions  contemplated by this
Agreement,  the Debentures,  the Registration Rights Agreement and the Warrants,
and shall take all other necessary action and proceedings as may be required and
permitted  by  applicable  law,  rule and  regulation,  for the  legal and valid
issuance of the Debentures hereunder, the Common Shares issuable upon conversion
thereof,  the  Warrants and the Warrant  Shares  issuable  upon  exercise of the
Warrants.

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

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

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

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

     Section  3.10  Reservation  of  Stock  Issuable  Upon  Conversion  and Upon
Exercise  of the  Warrants.  The  Company  shall at all times  reserve  and keep
available out of its authorized but unissued shares of Common Stock,  solely for
the purpose of effecting the  conversion of the  Debentures  and the exercise of
the  Warrants,  such number of its shares of Common  Stock as shall from time to
time be sufficient to effect the  conversion of all  outstanding  Debentures and
the full  exercise of the Warrants  and if at

                                       16
<PAGE>

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

     Section  3.11 Best  Efforts.  The parties  shall use their best  efforts to
satisfy timely each of the conditions described in Article 4 of this Agreement.

     Section 3.12 Limitations on Issuance of Debt, Liens and Transfers

          (a) So long as any Debentures remain  outstanding,  the Company agrees
that neither the Company nor any of its  subsidiaries  shall (i) create,  incur,
assume, guarantee,  secure or in any manner become liable in respect of any debt
financing (other than purchase money financings, not to exceed $1,000,000 in the
aggregate),  which is senior to the Debentures;  or (ii) create, incur or permit
to exist any security interest,  lien or other encumbrance on or with respect to
any  of the  assets  of the  Company  or its  subsidiaries  other  (1)  than  in
connection  with  the  purchase  money   financings   referred  to  above;   (2)
non-consensual  statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of the Company's business to the extent: (A) such
liens  secure  indebtedness  which  is not  overdue  or (B)  such  liens  secure
indebtedness relating to claims or liabilities which are fully insured and being
contested  in good  faith by  appropriate  proceedings  diligently  pursued  and
available to the Company,  in each case prior to the commencement of foreclosure
or other similar  proceedings  and with respect to which adequate  reserves have
been set aside on its  books;  (3)  zoning  restrictions,  easements,  licenses,
covenants and other restrictions affecting the use of real property which do not
interfere in any material respect with the use of such real property or ordinary
conduct  of the  business  of the  Company  as  presently  conducted  thereon or
materially  impair the value of the real property which may be subject  thereto;
and (4) liens  arising by operation of law  securing tax  obligations,  worker's
compensations,  and lease  obligations.  No subsidiary of the Company shall have
any liability for any obligations under any debt financing.

                                       17
<PAGE>

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

     Section  3.13 Form D; Blue Sky Laws.  The  Company  agrees to file a Form D
with respect to the Debentures,  Warrants,  Common Shares and Warrant Shares, as
required  under  Regulation  D and to provide a copy  thereof  to each  Investor
promptly after such filing.  The Company shall,  on or before each Closing Date,
take such action as the Company shall have reasonably determined is necessary to
qualify the Debentures,  Warrants,  Common Shares and Warrant Shares for sale to
the  Investors  at the  Closing  pursuant  to this  Agreement  under  applicable
securities  or "blue sky" laws of the states of the United  States (or to obtain
an exemption from such  qualification),  and shall provide  evidence of any such
action so taken to each Investor on or prior to the Closing Date.

     Section  3.14 Nasdaq  Rule.  The  Investors  shall,  in the  aggregate,  be
entitled to convert  Debentures into a total of 10,538,342 Common Shares (19.99%
of the Common Stock  issued and  outstanding  on the date  hereof,  which number
shall be  subject  to  readjustment  for any  stock  split,  stock  dividend  or
reclassification  of the Common Stock) (the "20% Cap").  Each Investor  shall be
entitled to convert  that  amount of its  Debentures  into such total  number of
Common  Shares equal to such  Investor's  pro rata share of the 20% Cap. Once an
Investor  has  received  its  total  pro  rata  share  upon  conversion  of  its
Debentures, it may request that the Company redeem its remaining Debentures at a
price equal to the  Premium  Redemption  Price (as  defined in the  Registration
Rights  Agreement)  plus  accrued but unpaid  interest  and default  payments in
effect at that time. If an Investor has converted all of its Debentures, but has
not depleted the total number of pro rata shares  allocated to it, its remaining
pro rata  shares  shall be  reallocated  amongst  the  Investors  still  holding
Debentures on a pro rata basis. The restrictions and redemption  obligations set
forth in this Section 3.14 (including,  without limitation,  an Investor's right
to redeem  Debentures at the Premium  Redemption  Price) shall cease to apply if
(a) the Company obtains written  shareholder  approval to issue Common Shares in
excess of the 20% Cap  pursuant to Nasdaq Rule 4460 or (b) the Company  provides
the Investors  with  irrevocable  written  notice,  based upon the advice of its
counsel,  that any  such  issuance  of  Common  Shares  upon  conversion  of the
Debentures  is not subject to the 20% Cap  pursuant to Nasdaq Rule 4460.  In the
event that the number of Common Shares issued or issuable upon conversion of the
Debentures  exceeds 75% of the 20% Cap,  the Company  will use its best  efforts
promptly to obtain either the  shareholder  approval or the  irrevocable  notice
described in the preceding  sentence and to provide the Investors with a copy of
same  without   limiting  the   foregoing,   the  Company   shall   solicit  the
aforementioned  shareholder  approval  at the  next  shareholders  meeting  (for
whatever purpose it may be called) which, in any event,  shall not be later than
within  75  days  of  such  event,   in  which  the  Company  will  solicit  the
aforementioned  shareholder  approval,  will solicit proxies in favor of issuing
Common Shares in excess of the 20% Cap and will use its best efforts to have all
affiliates  of the Company  which own or control  shares of Common Stock to vote
their shares in favor of such resolution.

                                       18
<PAGE>

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

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

     Section 3.17 Form 8-K. Within 15 calendar days of the Closing,  the Company
shall file a Form 8-K with the SEC which discloses the transactions contemplated
hereby  and by the  Registration  Rights  Agreement,  Warrants  and  Debentures.
Investors  shall  have the  opportunity  to  review  such  Form 8-K prior to its
filing.

     Section 3.18  Limitation on Sales.  Notwithstanding  any other provision of
this  Agreement,  the Company  shall not, for as long as any  Debentures  remain
outstanding,   sell  any  Common  Stock  (or  securities   convertible  into  or
exchangeable  for,  Common Stock) during any 30 calendar day period in an amount
that would exceed (on a fully converted or exercised  basis) in excess of 10% of
real average trading volume (determined as 50% of the trading volume reported by
Bloomberg,  LP) for the immediately preceding 30 calendar day period;  provided,
that the foregoing limitation shall not apply to sales by the Company, after the
three  month  anniversary  of the  Closing  Date,  to  purchasers  who  are  not
"underwriters"  (within the meaning of the  Securities  Act) pursuant to a shelf
registration  under  Rule 415 under  the Act,  and  which  transactions  are not
Variable  Rate  Transactions.  This  provision  shall be of no further  force or
effect, if following and during Effective  Registration,  the price per share of
Common  Stock  shall have  closed  above $5.00 (as  adjusted  for stock  splits,
consolidation or stock dividends) for 20 consecutive Trading Days (as defined in
the Debentures).

                                    ARTICLE 4
                             Conditions to Closings

     Section 4.1  Conditions  Precedent to the Obligation of the Company to Sell
the  Debentures and Warrants.  The obligation  hereunder of the Company to issue
and/or sell the Debentures and Warrants to the Investors at the Closing  (unless
otherwise  specified) is subject to the satisfaction,  at or before the Closing,
of each of the applicable  conditions set forth below.  These conditions are for
the  Company's  sole benefit and may be waived by the Company at any time in its
sole discretion.

          (a) Accuracy of the Investors'  Representations  and  Warranties.  The
representations  and  warranties of each Investor will be true and correct as of
the date

                                       19
<PAGE>

when made and as of the  Closing  Date as though  made at that time  (except for
representations  and  warranties as of an earlier  date,  which will be true and
correct as of such date).

          (b)  Performance by the Investors.  Each Investor shall have performed
all  agreements  and  satisfied  all  conditions  required  to be  performed  or
satisfied by such Investor at or prior to the Closing.

          (c) No Injunction. No statute, rule, regulation,  executive,  judicial
or administrative  order, decree,  ruling or injunction shall have been enacted,
entered,  promulgated  or endorsed  by any court or  governmental  authority  of
competent   jurisdiction   which  prohibits  the  consummation  of  any  of  the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debentures or the Warrants.

          (d) Purchase  Price.  The Company  shall have  received the  aggregate
Purchase Price from the Investors.

     Section 4.2  Conditions  Precedent to the  Obligation  of the  Investors to
Purchase the Debentures and Warrants.  The obligation hereunder of each Investor
to acquire  and pay for the  Debentures  and  Warrants  at the  Closing  (unless
otherwise  specified) is subject to the satisfaction,  at or before the Closing,
of each of the applicable  conditions set forth below.  These conditions are for
each  Investor's  benefit and may be waived by each  Investor at any time in its
sole discretion.

          (a) Accuracy of the  Company's  Representations  and  Warranties.  The
representations  and  warranties  of the Company shall be true and correct as of
the date  when  made and as of the  Closing  Date as  though  made at that  time
(except for representations and warranties as of an earlier date, which shall be
true and correct as of such date).

          (b)  Performance by the Company.  The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing.

          (c) No Injunction. No statute, rule, regulation,  executive,  judicial
or administrative  order, decree,  ruling or injunction shall have been enacted,
entered,  promulgated  or endorsed  by any court or  governmental  authority  of
competent   jurisdiction   which  prohibits  the  consummation  of  any  of  the
transactions contemplated by this Agreement or the Registration Rights Agreement
or the Debentures or the Warrants.

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

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

                                       20
<PAGE>

          (f) Adverse  Changes.  No event which had or is likely to have, in the
reasonable  judgment of the Investors,  a Material Adverse Effect on the Company
or any of its direct or indirect subsidiaries shall have occurred.

          (g) Officer's  Certificate.  The Company  shall have  delivered to the
Investors a certificate in form and substance of Exhibit 4.2(g) attached hereto,
executed by an officer of the Company,  certifying as to satisfaction of closing
conditions,  incumbency of signing officers,  and the true, correct and complete
nature of the Charter, By-Laws, good standing and authorizing resolutions of the
Company.

          (h)  Debentures  and  Warrants.  The  Investors  shall  have  received
certificates  representing the Debentures and Warrants in the form and substance
of Exhibit 1A and Exhibit 1B hereto.

          (i)  Escrow  Agreement.  The  Company  and the  Investors  shall  have
executed and delivered the Escrow Agreement in the form of Exhibit 1C hereto.

                                    ARTICLE 5
                                Legend and Stock

     The Company will issue one or more certificates representing the Debentures
and the  Warrants in the name of the Investor  and in such  denominations  to be
specified by the Investor prior to (or from time to time subsequent to) Closing.
Each certificate  representing the Debentures and the Warrants and any shares of
Common Stock  issued upon  conversion  or exercise  thereof  initially  shall be
stamped or otherwise  imprinted  with a legend  substantially  in the  following
form:

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

     The Company agrees to reissue Debentures and reissue or issue Warrants,  as
the case may be,  without  the  legend  set forth  above at such time as (i) the
holder thereof is permitted to dispose of such  Debentures  and/or  Warrants and
Common Stock issuable upon conversion or exercise  thereof  pursuant to Rule 144
under the Act, or (ii) such  Debentures  and/or Warrants are sold to a purchaser
or purchasers who (in the opinion of counsel to the seller or such purchaser(s),
in form and substance  reasonably  satisfactory  to the Company and its counsel)
are  able  to  dispose  of  such  shares  publicly   pursuant  to  an  Effective
Registration or exemption.

     Prior to the Registration  Statement (as defined in the Registration Rights
Agreement)  being  declared  effective,  any Common  Shares  issued  pursuant to
conversion

                                       21
<PAGE>

of  Debentures  or Warrant  Shares or Common  Shares issued upon exercise of the
Warrants  shall  bear a legend in the same form as the legend  indicated  above.
Upon such Registration  Statement becoming effective,  or Rule 144 under the Act
becoming  available the Company agrees to promptly,  but no later than three (3)
Trading Days thereafter,  issue new certificates representing such Common Shares
and Warrant  Shares  without such legend.  Except as provided in Section 2(f) of
the  Registration  Rights  Agreement,  any  Common  Shares  issued  pursuant  to
conversion  of  Debentures or shares of Common Stock issued upon exercise of the
Warrants after the Registration Statement has become effective shall be free and
clear of any legends, transfer restrictions and stop orders. Notwithstanding the
removal of such  legend,  each  Investor  agrees to sell the  Common  Shares and
Warrant  Shares  represented  by the new  certificates  in  accordance  with the
applicable  prospectus delivery  requirements (if copies of a current prospectus
are provided to such Investor by the Company) or in accordance with an exemption
from the registration requirements of the Act.

     Nothing  herein  shall  limit  the  right of any  holder  to  pledge  these
securities pursuant to a bona fide margin account or lending arrangement.

                                    ARTICLE 6
                                   Termination

     Section 6.1 Termination by Mutual Consent. This Agreement may be terminated
at any time prior to the  Closing by the mutual  written  consent of the Company
and a majority in interest of the Investors.

     Section 6.2 Other  Termination.  This Agreement may be terminated by action
of the Board of Directors of the Company or by any of the  Investors at any time
if the  Closing  shall  not have been  consummated  by the  third  business  day
following  the date of this  Agreement;  provided,  however,  that the party (or
parties)  prepared  to close  shall  retain its (or their)  right to sue for any
breach by the other party (or parties).

                                    ARTICLE 7
                                  Miscellaneous

     Section 7.1 Stamp  Taxes.  The Company  shall pay all stamp and other taxes
and duties  levied in  connection  with the issuance of the  Securities  and the
shares of Common Stock issued upon conversion or exercise thereof.

     Section 7.2 Specific Performance; Consent to Jurisdiction; Jury Trial.

          (a)  The  Company  and  the  Investors   acknowledge  and  agree  that
irreparable  damage would occur in the event that any of the  provisions of this
Agreement,  the Debentures,  the Registration  Rights Agreement and the Warrants
were not performed in accordance  with their  specific  terms or were  otherwise
breached.  It is  accordingly  agreed that the  parties  shall be entitled to an
injunction or  injunctions to prevent or cure breaches of the provisions of this
Agreement and to enforce  specifically  the terms and

                                       22
<PAGE>

provisions  hereof,  this being in addition to any other  remedy to which any of
them may be entitled by law or equity.

          (B) THE  COMPANY  AND EACH OF THE  INVESTORS  (I)  HEREBY  IRREVOCABLY
SUBMITS TO THE EXCLUSIVE  JURISDICTION OF THE UNITED STATES DISTRICT COURT,  THE
NEW YORK STATE COURTS AND OTHER COURTS OF THE UNITED STATES  SITTING IN NEW YORK
COUNTY,  NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR  RELATING TO THIS  AGREEMENT  AND (II)  HEREBY  WAIVES,  AND AGREES NOT TO
ASSERT  IN ANY  SUCH  SUIT  ACTION  OR  PROCEEDING,  ANY  CLAIM  THAT  IT IS NOT
PERSONALLY  SUBJECT TO THE JURISDICTION OF SUCH COURT,  THAT THE SUIT, ACTION OR
PROCEEDING  IS BROUGHT IN AN  INCONVENIENT  FORUM OR THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
COMPANY AND EACH OF THE  INVESTORS  CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT,  ACTION OR  PROCEEDING  BY  MAILING A COPY  THEREOF  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  IN THIS  PARAGRAPH  SHALL  AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

          (C) THE COMPANY AND EACH INVESTOR  HEREBY WAIVES ALL RIGHTS TO A TRIAL
BY JURY.

     Section 7.3 Entire Agreement;  Amendment. This Agreement, together with the
Registration  Rights  Agreement,  the  Warrants,  the  Debentures,   the  Escrow
Agreement and the agreements and documents  executed in connection  herewith and
therewith,  contains the entire understanding of the parties with respect to the
matters  covered  hereby  and  thereby,   supercedes  any  prior  understanding,
memoranda  or other  written  or oral  agreements  between  or among any of them
respecting the matters  covered hereby and thereby and,  except as  specifically
set forth  herein or therein,  neither the  Company nor any  Investor  makes any
representation,  warranty, covenant or undertaking with respect to such matters.
No  provision  of this  Agreement  may be waived or amended  except by a written
instrument  signed by both the Company and Investors holding at least a majority
of the then  outstanding  principal  amount  of  Debentures;  provided  that for
purposes  hereof,  Debentures held by the Company or an affiliate of the Company
shall not be deemed outstanding. No provision of this Agreement may be waived or
amended  other than by a written  instrument  signed by the party  against  whom
enforcement of any such amendment or waiver is sought.

     Section  7.4  Notices.  Any  notice  or  other  communication  required  or
permitted  to be given  hereunder  shall be in  writing  by mail,  facsimile  or
personal delivery and shall be effective upon actual receipt of such notice. The
addresses for such communications shall be:

                  to the Company:

                                99 Wood Avenue South
                                Suite 301
                                Iselin, New Jersey  08830

                                       23
<PAGE>

                                Phone: (732) 452-9556
                                Attn: Robert W. Cook, Chief Financial Officer

                  with copies to:

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

                  to the Investors:

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

                  with copies to:

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

Any party  hereto may from time to time change its address for notices by giving
at least 10 days'  written  notice of such changed  address to the other parties
hereto.

     Section 7.5 Indemnity.  In  consideration  of the Investors'  execution and
delivery of this Agreement,  the Escrow  Agreement and the  Registration  Rights
Agreement and in addition to all of the Company's  other  obligations  under the
Transaction  Documents,  the Company shall defend,  protect,  indemnify and hold
harmless  the  Investors  and  all  of  their  partners,  officers,   directors,
employees,  members and direct or indirect  investors  and any of the  foregoing
persons' agents or other representatives (including,  without limitation,  those
retained in connection  with the  transactions  contemplated  by this Agreement)
(collectively,  the "Indemnitees") from and against any and all actions,  causes
of action,  suits,  claims,  losses,  costs,  penalties,  fees,  liabilities and
damages, and expenses in connection therewith  (irrespective of whether any such
Indemnitee  is a party to the  action  for which  indemnification  hereunder  is
sought),  and  including  reasonable  attorneys'  fees  and  disbursements  (the
"Indemnified  Liabilities"),  incurred  by any  Indemnitee  as a result  of,  or
arising  out of,  or  relating  to (a) any  misrepresentation  or  breach of any
representation  or warranty made by the Company in the Transaction  Documents or
any other certificate or document contemplated hereby or thereby, (b) any breach
of any  covenant,  agreement  or  obligation  of the  Company  contained  in the
Transaction  Documents or any other certificate or document  contemplated hereby
or thereby,  (c) any cause of action, suit or claim brought or made against such
Indemnitee  by a third  party  and  arising  out of or  resulting  from  (i) the

                                       24
<PAGE>

execution,  delivery,  performance,  breach by the Company or enforcement of the
Transaction   Documents  or  any  other  certificate,   instrument  or  document
contemplated hereby or thereby,  (ii) any transaction financed or to be financed
in whole or in part,  directly or indirectly,  with the proceeds of the issuance
of the  Securities  or  (iii)  the  status  of the  Investor  or  holder  of the
Securities as investors in the Company, and (d) the enforcement of this Section.
Notwithstanding  the foregoing,  Indemnified  Liabilities  shall not include any
liability  of any  Indemnitee  to the extent it arises out of such  Indemnitee's
willful misconduct,  gross negligence,  or fraudulent  action(s).  To the extent
that the  foregoing  undertaking  by the  Company may be  unenforceable  for any
reason,  the  Company  shall make the  maximum  contribution  to the payment and
satisfaction of each of the Indemnified  Liabilities  which is permissible under
applicable  law.  Except  as  otherwise  set forth  herein,  the  mechanics  and
procedures  with  respect to the rights and  obligations  under this Section 7.5
shall be the same as those set forth in Section 6 (other than  Section  6(b)) of
the  Registration  Rights  Agreement,   including,   without  limitation,  those
procedures  with  respect to the  settlement  of claims and  Company's  right to
assume the defense of claims.

     Section 7.6 Waivers.  No waiver by any party 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 other provision,  condition
or requirement  hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.

     Section 7.7 Headings.  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.

     Section 7.8 Successors and Assigns.  Except as otherwise  provided  herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their  successors  and  permitted  assigns.  The  parties  hereto may amend this
Agreement  without notice to or the consent of any third party.  The Company may
not assign this  Agreement or any rights or  obligations  hereunder  without the
prior written  consent of all Investors  (which  consent may be withheld for any
reason in their sole  discretion).  No Investor  may assign this  Agreement  (in
whole or in part) or any rights or obligations  hereunder without the consent of
the Company (which shall not be unreasonably withheld),  except that an Investor
may assign its rights  hereunder in connection  with an assignment of Debentures
or Warrants;  provided that: (i) no Investor may assign  Debentures in an amount
less than $500,000 in principal amount, and (ii) any transferee of Debentures or
Warrants  must  agree in  writing  to be bound  by the  applicable  terms of the
Transaction Documents.

     Section 7.9 No Third Party  Beneficiaries.  This  Agreement is intended for
the benefit of the parties hereto and their respective  permitted successors and
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other person.

     Section  7.10  Governing  Law.  THIS  AGREEMENT  SHALL BE  GOVERNED  BY AND
CONSTRUED  AND  ENFORCED  IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK

                                       25
<PAGE>

APPLICABLE  TO  AGREEMENTS  EXECUTED  AND TO BE PERFORMED  ENTIRELY  WITHIN SUCH
STATE.

     Section  7.11  Survival.   The   representations  and  warranties  and  the
agreements and covenants of the Company and each Investor contained herein shall
survive the Closing.

     Section  7.12  Execution.  This  Agreement  may be  executed in two or more
counterparts,  all of which shall be considered one and the same  agreement,  it
being understood that all parties need not sign the same counterpart.

     Section 7.13 Publicity.  The Company agrees that it will not disclose,  and
will not include in any public  announcement,  the name of any Investor  without
the express written agreement of such Investor, unless and until such disclosure
is required by law or applicable regulation, and then only to the extent of such
requirement.  The  Company  agrees  that it will  deliver  a copy of any  public
announcement  regarding the matters  covered by this  Agreement or any agreement
and document  executed  herewith to each  Investor  and any public  announcement
including the name of an Investor to such Investor, reasonably in advance of the
release of such announcements.

     Section  7.14  Severability.  The  parties  acknowledge  and agree that the
Investors  are not  agents,  affiliates  or  partners  of each  other,  that all
representations,  warranties, covenants and agreements of the Investor hereunder
are several and not joint,  that no Investor  shall have any  responsibility  or
liability for the representations,  warrants,  agreements,  acts or omissions of
any other Investor,  and that any rights granted to "Investors"  hereunder shall
be enforceable by each Investor hereunder.

     Section 7.15 Like Treatment of Holders; Redemption. Neither the Company nor
any of its affiliates shall, directly or indirectly, pay or cause to be paid any
consideration  (immediate  or  contingent),  whether  by way of  interest,  fee,
payment  for the  redemption  or  conversion  of  Debentures  or exercise of the
Warrants,  or otherwise,  to any holder of Debentures or Warrants,  for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions  of the Debenture or this  Agreement or the
Registration  Rights  Agreement or the Warrants,  unless such  consideration  is
required  to be paid to all holders of  Debentures  and  Warrants  bound by such
consent,  waiver or amendment  whether or not such holders so consent,  waive or
agree to amend and  whether  or not such  holders  tender  their  Debentures  or
Warrants for redemption, conversion or exercise. The Company shall not, directly
or indirectly, redeem any Debentures or Warrants unless such offer of redemption
is made pro rata to all holders of Debentures  or Warrants,  as the case may be,
on identical terms.

     Section 7.16 No Strict  Construction.  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.

     Section 7.17 Rescission and Withdrawal Right.  Notwithstanding  anything to
the contrary  contained in (and without limiting any similar  provisions of) the
Transaction

                                       26
<PAGE>

Documents,  wherever the Investors exercise 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 the Investors may rescind
or withdraw,  in their sole  discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

     Section 7.18  Obligations  Absolute.  The Company's  obligations  under the
Transaction  Documents  are  unconditional  and  absolute and not subject to any
right of set off, counterclaim, delay or reduction.

                             Signature Page Follows

                                       27
<PAGE>

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

                                     COMPANY:

                                     PHARMOS CORPORATION

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

                                     INVESTORS:

                                     MILLENNIUM PARTNERS, L.P.

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

                                     STRONG RIVER INVESTMENTS, INC.

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

                                     ST. ALBANS PARTNERS, LTD.

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

            Signature page to Pharmos Corporation Purchase Agreement

                                       28
<PAGE>

                             EXHIBITS AND SCHEDULES

Schedule 1                List of Investors
Exhibit 1.1A              Form of Debenture
Exhibit 1.1B              Form of Warrant
Schedule 2.1(a)           List of Subsidiaries
Schedule 2.1(c)           Capitalization
Schedule 2.1(c)(i)        Capitalization
Exhibit 2.1(c)(i)         Certificate of Incorporation of the Company
Exhibit 2.1(c)(ii)        By-Laws of the Company
Schedule 2.1 (s)(i)       Outstanding securities entitled to registration rights
Schedule 2.1 (s)(ii)      Outstanding securities affected by the issuance of
                            Debentures, etc.
Schedule 2.1(aa)          Real Property
Schedule 3.16             Press Release
Exhibit 4.2(d)            Opinion of Company Counsel
Exhibit 4.2(e)            Registration Rights Agreement
Schedule 4.2(g)           Officer's Certificate

<PAGE>

                                   SCHEDULE I

<TABLE>
<CAPTION>
                                            Outstanding
                                             Principal               Number
                                               Amount                  Of
Investor                                    Of Debentures           Warrants           Purchase Price         Pro Rata Share
--------                                    -------------           --------           --------------         --------------
<S>                                          <C>                     <C>                 <C>                      <C>
Millennium Partners, L.P.                    $5,000,000              172,662             $5,000,000               62.5%
c/o Millennium Management, LLC
666 Fifth Avenue
New York, New York 10103
Fax: (212) 841-6302
Attn: Dan Cardella

Strong River Investments, Inc.               $2,000,000               69,065             $2,000,000                25%
c/o Icaza, Gonzalez-Ruiz & Aleman
(BVI) Ltd.
Vanterpool Plaza, 2nd Floor
Wickhams Cay 1, Road Town
Tortola, British Virgin Islands

With copies to:

Cavallo Capital Corp.
660 Madison Avenue
18th Floor
New York, New York 10021
Phone: (212) 651-9000
Fax: (212) 651-9010

Attn: Mor Sagi

St. Albans Partners, Ltd.                    $1,000,000              34,532              $1,000,000                12.5%
c/o Camden Asset Management
2049 Century Park East
Suite 330
Los Angeles, California 90067
Phone: (310) 785-9755
Fax: (310) 785-9780
Attn: Janice Brooks
</TABLE>EXHIBIT 4.2

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

         No. [_]                                                      $[_______]

         Dated: September 1, 2000

                               PHARMOS CORPORATION

                 6% CONVERTIBLE DEBENTURE DUE FEBRUARY 28, 2002

     THIS  DEBENTURE  ("Debenture")  is  one  of  a  duly  authorized  issue  of
Debentures of PHARMOS CORPORATION (the "Company"),  a corporation duly organized
and existing under the laws of the state of Nevada,  designated as the Company's
6%  Convertible  Debentures  Due February 28,  2002,  in an aggregate  principal
amount of Eight Million U.S. Dollars (U.S. $8,000,000) (the "Debentures").

     FOR VALUE RECEIVED,  the Company promises to pay to  [____________________]
the initial holder hereof, or its order (including  successors-in-interest,  the
"Holder"),  the principal sum of  [_________________]  on February 28, 2002 (the
"Maturity Date") and to pay interest on the principal sum outstanding under this
Debenture  ("Outstanding  Principal  Amount"),  at the  rate  of 6%  per  annum,
compounded  semi-annually,  payable  in  arrears  on the  first day of March and
September  of each year and on the  Maturity  Date  (each an  "Interest  Payment
Date"),  with the first such payment due on March 1, 2000. Interest shall accrue
daily  commencing on the date hereof and shall continue until payment in full of
all amounts due under this  Debenture.  The  interest so payable will be paid to
the person in whose name this  Debenture  is  registered  on the  records of the
Company  regarding  registration  and transfers of the Debenture (the "Debenture
Register").  Capitalized  terms used herein and not otherwise defined shall have
the meanings set forth in the Purchase  Agreement  dated as of September 1, 2000
between  the  Company  and  the  Holder  (the   "Purchase   Agreement")  or  the
Registration  Rights Agreement dated as of September 1, 2000 between the Company
and the Holder (the "Registration Rights Agreement").

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

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

<PAGE>

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

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

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

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

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

     Additional cash payments  (referred to as "delay payments") may be required
pursuant to the  Registration  Rights  Agreement if there occurs an "Interfering
Event" (as defined  therein),  or pursuant to the Purchase  Agreement  under the
terms set forth in Section 3.14  therein.  Such delay  payments,  if not paid in
cash when due,  may be  treated by the  Holder in its sole  discretion  as being
added to the Outstanding Principal Amount due under this Debenture.

     Subject to applicable law, any interest  otherwise payable that is not paid
for any applicable  period because it would exceed the highest rate permitted by
law shall become

                                       2
<PAGE>

payable whenever the payment  thereof,  together with other interest due for any
such subsequent period, would not exceed such highest legal rate.

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

     This Debenture is subject to the following additional provisions:

     1. Exchange.

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

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

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

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

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

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

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

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

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

          "NYSE" shall mean the New York Stock Exchange.

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

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

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

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

                                       5
<PAGE>

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

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

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

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

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

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

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

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

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

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

     4. Change in Control, Etc.

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

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

               (i)  following  the  closing of the  transaction  covered by such
Public  Announcement,  to  convert  its  Debentures  into the  Change in Control

                                       6
<PAGE>

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

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

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

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

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

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

                                       7
<PAGE>

                                    P + I + D
                         ------------------------------

                                Conversion Price

     P = Outstanding Principal Amount of this Debenture submitted for conversion
         as of the Holder Conversion Date
     I = accrued but unpaid interest (not previously added to principal) on P as
         of the Holder Conversion Date
     D = delay payments (not previously added to principal) on P as of the
         Holder Conversion Date

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

          (c) Conversion  Price.  Subject to adjustments  pursuant to Sections 4
and 7, this  Debenture  will have a conversion  price (the  "Conversion  Price")
equal to 105% of the average of the Market Prices for Shares of Common Stock for
the 7  Trading  Days  leading  up to and  ending  on,  and  the 7  Trading  Days
immediately following, the Closing Date (the "Pricing Period").

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

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

                                       8
<PAGE>

the foregoing,  if this Debenture is converted as aforesaid,  the Holder may not
transfer  this  Debenture  unless the Holder first  physically  surrenders  this
Debenture to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new  Debenture of like tenor,  registered  as the
Holder may request,  representing  in the aggregate  the  remaining  Outstanding
Principal Amount represented by this Debenture.  The Holder and any assignee, by
acceptance of this Debenture or a new Debenture,  acknowledge and agree that, by
reason of the provisions of this paragraph,  following conversion of any portion
of  this  Debenture,  the  Outstanding  Principal  Amount  represented  by  this
Debenture  may be less than the  Outstanding  Principal  Amount and the  accrued
interest set forth on the face hereof.

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

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

     6. Company Option to Redeem.

          (a) In the  event  that,  during  the one year  period  following  the
Closing  Date,  the Market Price for Shares of Common Stock  exceeds 200% of the
Conversion  Price for 20 consecutive  Trading Days (a "Redemption  Occurrence"),
then the

                                       9
<PAGE>

Company may state its  intention  to redeem  all,  but not less than all, of the
Debentures  (all or none) for a cash price  equal to the  Outstanding  Principal
Amount of the Debentures plus all accrued but unpaid interest and delay payments
thereon (the "Call  Amount") by providing an  irrevocable,  written  notice (the
"Redemption  Notice") to the Holder;  provided that such Redemption Notice shall
be sent within 20 days of a Redemption  Occurrence and must be sent concurrently
to the holders of all Debentures.  The Redemption Notice shall indicate that the
Company  seeks to redeem the  Debenture and shall set the date for the Company's
redemption of the Debenture  (the  "Redemption  Date"),  which date shall be not
less than 10 Trading  Days,  [nor more than 20  Trading  Days] from the date the
Redemption Notice is delivered (the "Post-Notice Period").

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

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

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

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

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

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

                                       10
<PAGE>

     7. Stock Splits; Dividends; Adjustments; Reorganizations.

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

               As used herein, the Affected Conversion Prices (each an "Affected
Conversion  Price")  shall  refer to: (i) the  Conversion  Price;  and (ii) each
Market Price for Shares of Common Stock occurring on any Trading Day included in
the Pricing  Period,  which  Trading Day occurred  before the record date in the
case of events  referred to in clause (i) of this Section 7(a) and the effective
date in the case of the events  referred  to in  clauses  (ii) and (iii) of this
Section 7(a).

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

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

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

                                       11
<PAGE>

upon the actual  issuance of Common Stock upon exercise,  exchange or conversion
of such Convertible Securities.

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

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

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

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

                                       12
<PAGE>

          (f) If the Company,  at any time while the Debentures are outstanding,
shall  distribute  to all  holders of Shares of Common  Stock  evidences  of its
indebtedness  or assets or rights or warrants to  subscribe  for or purchase any
security  (excluding  those  referred to in Section  7(b) above) then the Holder
shall  participate in such  distribution on a pro rata basis with the holders of
shares  of  Common  Stock  entitled  to  receive  such  dividend,  distribution,
issuance, subdivision or combination as if the Holder held that number of shares
of Common  Stock that the Holder would have been  entitled to receive  hereunder
upon  conversion of the  Debenture  (without  regard to Section 12)  immediately
prior to the record date fixed for  determination  of  shareholders  entitled to
receive such dividend, at the Conversion Price then in existence.

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

     9. Reservation of Stock Issuable Upon Conversion.

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

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

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

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

     12. Limitations on Holder's Right to Convert.

                                       13
<PAGE>

          (a)  Notwithstanding  anything to the contrary  contained herein,  the
number of shares  of  Common  Stock  that may be  acquired  by the  Holder  upon
conversion  of this  Debenture  pursuant to the terms  hereof shall not exceed a
number  that,  when added to the total  number of shares of Common  Stock deemed
beneficially  owned by such  Holder  (other than by virtue of the  ownership  of
securities or rights to acquire securities that have limitations on the holder's
right to  convert,  exercise  or purchase  similar to the  limitation  set forth
herein),  together  with all shares of Common  Stock deemed  beneficially  owned
(other  than by virtue  of the  ownership  of  securities  or rights to  acquire
securities that have  limitations on the right to convert,  exercise or purchase
similar to the  limitation  set forth herein) by the Holder's  "affiliates"  (as
defined in Rule 144 of the Act) ("Aggregation Parties") that would be aggregated
for  purposes  of  determining  whether  a  group  under  Section  13(d)  of the
Securities  Exchange Act of 1934 as amended,  exists,  would exceed 9.99% of the
total  issued  and  outstanding  shares of the  Common  Stock  (the  "Restricted
Ownership  Percentage").  Each  Holder  shall have the right (i) at any time and
from time to time to reduce its Restricted Ownership Percentage immediately upon
notice to the Company and (ii)  (subject to waiver) at any time and from time to
time, to increase its Restricted Ownership  Percentage  immediately in the event
of the announcement as pending or planned, of a Change of Control Transaction.

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

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

               minus

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

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

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

                                       14
<PAGE>

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

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

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

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

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

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

          (b)  any of the  representations  or warranties made by the Company in
               any of the  Debentures,  in the  Purchase  Agreement,  the Escrow
               Agreement,  the Registration Rights Agreement,  any Warrant or in
               any  certificate or financial or other  statements  heretofore or
               hereafter  furnished by or on behalf of the Company in connection

                                       15
<PAGE>

               with the execution  and delivery of this  Debenture or such other
               documents shall be false or misleading at the time made; or

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

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

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

                                       17
<PAGE>

     21. No Waiver.  No failure  on the part of the Holder to  exercise,  and no
delay in  exercising  any right,  remedy or power  hereunder  shall operate as a
waiver  thereof,  nor shall any single or partial  exercise by the Holder of any
right,  remedy or power  hereunder  preclude any other or future exercise of any
other  right,  remedy or power.  Each and every  right,  remedy or power  hereby
granted  to the  Holder  or  allowed  it by  law or  other  agreement  shall  be
cumulative  and not  exclusive of any other,  and may be exercised by the Holder
from time to time.

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

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

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

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

     26.  GOVERNING  LAW;  CONSENT  TO  JURISDICTION.  THIS  DEBENTURE  SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE  WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED

                                       18
<PAGE>

ENTIRELY WITHIN SUCH STATE.  THE COMPANY (I) HEREBY  IRREVOCABLY  SUBMITS TO THE
EXCLUSIVE  JURISDICTION  OF THE STATE AND  FEDERAL  COURTS  LOCATED  IN NEW YORK
COUNTY,  NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATED TO THIS DEBENTURE AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT
IN ANY SUCH SUIT,  ACTION OR  PROCEEDING,  ANY CLAIM  THAT IT IS NOT  PERSONALLY
SUBJECT TO THE JURISDICTION OF SUCH COURT,  THAT THE SUIT,  ACTION OR PROCEEDING
IS BROUGHT  IN AN  INCONVENIENT  FORUM OR THAT THE VENUE OF THE SUIT,  ACTION OR
PROCEEDING IS IMPROPER. THE COMPANY CONSENTS TO PROCESS BEING SERVED IN ANY SUCH
SUIT,  ACTION OR  PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED
HEREIN AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE
OF PROCESS AND NOTICE  THEREOF.  NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT
ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

                             Signature Page Follows

                                       19
<PAGE>

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

                                      PHARMOS CORPORATION

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

        Signature page to 6% Convertible Debenture of PHARMOS CORPORATION

                                       20
<PAGE>

                                    EXHIBIT 1

                                PAYMENT STATEMENT

Date:______________

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

Re: 6%  Convertible  Debenture  Due February 28, 2002  ("Debenture")  of PHARMOS
CORPORATION (the "Company"), in the Outstanding Principal Amount of US$________.

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

          ____ cash interest; or

          ____ PIK Interest.

          Interest Payment Date: _________________________

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

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

          PIK Interest:                                        US$_____________

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

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

<PAGE>

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

                                               PHARMOS CORPORATION

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

                                       22
<PAGE>

                                    EXHIBIT 2

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

                                CONVERSION NOTICE
                                       FOR
                 6% CONVERTIBLE DEBENTURE DUE FEBRUARY 28, 2002

     The undersigned, as Holder of the 6% Convertible Debenture Due February 28,
2002 of PHARMOS CORPORATION (the "Company"), in the outstanding principal amount
of U.S. $_____________ (the "Debenture"),  hereby elects to convert that portion
of the outstanding principal amount of the Debenture shown on the next page into
shares of Common Stock,  $0.03 par value per share (the "Common Stock"),  of the
Company  according to the  conditions of the  Debenture,  as of the date written
below.  The undersigned  hereby requests that share  certificates for the Common
Stock to be issued to the  undersigned  pursuant  to this  Conversion  Notice be
issued in the name of, and  delivered  to, the  undersigned  or its  designee as
indicated  below.  If shares are to be issued in the name of a person other than
the  undersigned,  the  undersigned  will pay all  transfer  taxes  payable with
respect thereto. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any.

Conversion Information:      NAME OF HOLDER:____________________________________

                         By:____________________________________________________
                             Print Name:
                             Print Title:

                             Print Address of Holder:

                             ___________________________________________________

                             ___________________________________________________

                             Issue Common Stock to:_____________________________
                             at:________________________________________________

                             Electronically transmit and credit Common Stock to:
                             [________________} at:

                             ___________________________________________________
                             Date of Conversion

                             ___________________________________________________
                             Applicable Conversion Rate

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

<PAGE>

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

              COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED

A. Outstanding Principal Amount converted:                          $__________
B. Accrued, unpaid interest on Outstanding Principal
     Amount converted:                                              $__________
C. Delay payments due Holder on Outstanding Principal
     Amount converted:                                              $__________

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

                                                                    ============

Exchange Price                                                      $__________

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

Number of shares of Common Stock  = ________________________________

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

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

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

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

                                       2

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