----

----

----

----

----

----

----

----

|   | 1. | Psychosocial      factors |
|--------|----|---------------------------|

|   | a. | impact      of stress on motor function of the GItract |
|--------|----|--------------------------------------------------------|

|   | b. | approximately      60% of patients seen at referral centers have psychiatric      symptoms. |
|--------|----|---------------------------------------------------------------------------------------------|

|   | 2. | Visceral      hypersensitivity - lower threshold for abdominal  pain |
|--------|----|----------------------------------------------------------------------|

|   | 3. | Altered      bowel motility - abnormal motility of the small  intestine |
|--------|----|-------------------------------------------------------------------------|

|   | 4. | Infection      and inflammation |
|--------|----|---------------------------------|

|   | 5. | Autonomic      nervous system dysfunction |
|--------|----|-------------------------------------------|

|   | a. | studies      show that IBS patients have aberrant autonomic nervous system      activity |
|--------|----|------------------------------------------------------------------------------------------|

|   | b. | altering      autonomic nervous system activity in volunteers produces symptoms of      IBS. |
|--------|----|----------------------------------------------------------------------------------------------|

----

|   | 1. | Improvement      with defecation |
|--------|----|----------------------------------|

|   | 2. | Onset      associated with a change in frequency ofstool |
|--------|----|----------------------------------------------------------|

|   | 3. | Onset      associated with a change in form (appearance) of  stool |
|--------|----|--------------------------------------------------------------------|

----

----

----

----

|   | · | Reduce      relapse rates |
|--------|--------|---------------------------|

|   | · | Prevent      fixed disability directly associated torelapse |
|--------|--------|-------------------------------------------------------------|

|   | · | Provide      symptomatic management of fixed neurological  deficits |
|--------|--------|---------------------------------------------------------------------|

|   | · | Prevent      disability arising from diseaseprogression |
|--------|--------|---------------------------------------------------------|

----

----

----

Government Regulation

----

----

----

----

We have certainobligations to indemnify our officers and directors and to advance expenses tosuch officers and directors. Although we have purchased liability insurance forour directors and officers, if our insurance carriers should deny coverage, orif the indemnification costs exceed the insurance coverage, we may be forced tobear some or all of these indemnification costs directly, which could besubstantial and may have an adverse effect on our business, financial condition,results of operations and cash flows. If the cost of our liability insuranceincreases significantly, or if this insurance becomes unavailable, we may not beable to maintain or increase our levels of insurance coverage for our directorsand officers, which could make it difficult to attract or retain qualifieddirectors and officers.

| • | the      size of the patient population, |
|---------|------------------------------------------|

| • | the      proximity of patients to clinical sites,and |
|---------|------------------------------------------------------|

----

|   | • | injunctions;                           |   |
|--------|---------|----------------------------------------|--------|
|   | • | criminal      prosecution;   |

----

|   | • | refusals      to approve new products and withdrawal of existing approvals;      and |
|--------|---------|--------------------------------------------------------------------------------------|
|   | • |     enhanced      exposure to product liabilities.               |   |

----

----

----

| Year ended December      31, 2008 |   | HIGH   |   |   | LOW    |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|
|                              |   |   |   |   |   |   |
| 4th      Quarter                  |   | $      | .20    |   |   | $      | .08 |   |
| 3rd      Quarter                  |   |   | .39    |   |   |   | .16 |   |
| 2nd      Quarter                  |   |   | .53    |   |   |   | .36 |   |
| 1st      Quarter                  |   |   | .94    |   |   |   | .32 |   |
|                              |   |   |   |   |   |   |   |   |
| Year ended December      31, 2007 |   | HIGH   |   |   | LOW    |   |
|                              |   |   |   |   |   |   |   |   |
| 4th      Quarter                  |   | $      | .96    |   |   | $      | .31 |   |
| 3rd      Quarter                  |   |   | 1.45   |   |   |   | .79 |   |
| 2nd      Quarter                  |   |   | 2.28   |   |   |   | 1.33 |   |
| 1st      Quarter                  |   |   | 1.88   |   |   |   | 1.36 |   |

----

|                                                                               |   | Year      Ended December 31, |        |
|------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                               |   | 2008                         |        |   | 2007 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| Revenues                                                                           |   |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Operating      expenses                                                            |   | $                            | (11,100,184 | ) |   | $ | (17,579,259 | ) |   | $  | (37,542,519 | )      (1)  |   | $ | (15,708,888 | )  |   | $ | (19,880,151 | )  |
| Other      income (expense), net                                                   |   |                         | (193,348    | ) |   |   | 997,652 |   |   |   | 1,792,775 |   |   |   | 12,288,382 |        (2) |   |   | (2,532,390 | )  |
| Loss      before income taxes                                                      |   |                         | (11,293,532 | ) |   |   | (16,581,607 | ) |   |   | (35,749,744 | )  |   |   | (3,420,506 | )  |   |   | (22,412,541 | )  |
| Net      loss                                                                      |   |                         | (10,089,406 | ) |   |   | (15,625,825 | )   |   |   | (35,136,969 | ) |   |   | (2,929,872 | ) |   |   | (21,967,767 | )  |
| Net      loss applicable to common shareholders                                    |   | $                            | (10,089,406 | )      (3) |   | $ | (15,625,825 | )      (3) |   | $ | (35,136,969 | ) (3) |   | $ | (2,929,872 | )      (3) |   | $ | (21,967,767 | )      (3)  |
| Net      loss per share applicable to common shareholders - basic and      diluted |   | $                            | (0.39       | ) |   | $ | (0.61 |  ) |   | $ | (1.74 | ) |   | $ | (0.15 | )  |   | $ | (1.22 | )  |
| Total      assets                                                                  |   | $                            | 5,972,164   |   |   | $ | (12,374,959 | ) |   | $ | 28,393,338 |   |   | $ | 48,990,772 |   |   | $ | 57,664,842 |   |
| Long      term obligations                                                         |   | $                            | 4,044,316   |   |   | $ | 410,594 |   |   | $ | 1,388,306 |   |   | $ | 1,125,551 |   |   | $ | 1,236,451 |   |
| Cash      dividends declared                                                       |   |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Average      shares outstanding - basic and diluted                                |   |                         | 25,934,973  |   |   |   | 25,591,660 |   |   |   | 20,249,714 |   |   |   | 18,974,175 |   |   |   | 18,033,358 |   |

|   | 1. | The      Company acquired in-process research and development in the Vela      acquisition in October 2006. Vela results are consolidated from October      26, 2006 forward. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Includes      a $10.7 million milestone payment received in 2005 related to the sale of      the ophthalmic product line in October2001. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Includes      benefit of sales of Pharmos NJ Net Operating Loss in 2008, 2007, 2006,      2005 and 2004 of $1,204,126, $955,782, $612,775, $490,634 and $444,744,      respectively. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Item      7.  Management’s Discussion and Analysis of Financial Condition      and Results of Operations |
|--------|--------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

|                                        |   | December 31, 2008 |      |   | December 31, 2007 |   |
|---------------------------------------------|--------|-------------------|-----------|--------|-------------------|--------|
| Working      capital                        |   | $                 | 4,232,549 |   |              | $      | 9,504,348 |   |
| Cash      and cash equivalents              |   | $                 | 4,730,282 |   |              | $      | 7,481,741 |   |
| Short      term investments                 |   | $                 | -         |   |              | $      | 3,686,568 |   |
| Total      cash, cash equivalents and short |   |              |      |   |              |   |   |   |
|   term      investments           |   | $                 | 4,730,282 |   |              | $      | 11,168,309 |   |
| Convertible      debentures                 |   | $                 | 4,000,000 |   |              | $      | - |   |

----

----

----

|                                |   | Payments      Due by Period |       |
|-------------------------------------|--------|-----------------------------|------------|
|                                |   |  Total                 |       |   | Less      than 1 Year |   |   | 1 –      3Years |   |   | 3 –      5Years |   |   | More      Than5 Years |   |   |  Undetermined |   |
| Operating      Leases               |   | $                           | 235,399    |   |   | $ | 232,654 |   |   | $ | 2,745 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| ICON      CRO Vendor                |   |                        | 1,332,401  |   |   |   | 1,332,401 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Essential      CRO Vendor           |   |                        | 3,610,518  |   |   |   | 3,610,518 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible      Debenture Interest |   |                        | 1,533,333  |   |   |   | 400,000 |   |   |   | 800,000 |   |   |   | 333,333 |   |   |   |   |   |   |   |   |   |
| Convertible      Debenture          |   |                        | 4,000,000  |   |   |   | - |   |   |   | - |   |   |   | 4,000,000 |   |   |   | - |   |   |   | - |   |
| Total                               |   | $                           | 10,711,651 |   |   | $ | 5,575,573 |   |   | $ | 802,745 |   |   | $ | 4,333,333 |   |   | $ | - |   |   | $ |  - |   |

|   | · | $1      million cash + 2 million shares of Pharmos common stock: Final patient      enrolled in Phase 2b trial (1) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | · | $2      million cash + 2.25 million shares: Successful completion of Phase 2b(1) |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | $2      million + 2 million shares: NDAsubmission |
|--------|--------|---------------------------------------------------|

|   | · | $2      million cash +2.25 million shares: FDAapproval |
|--------|--------|--------------------------------------------------------|

|   | · | 1      million shares: Approval to market in Europe or  Japan |
|--------|--------|---------------------------------------------------------------|

|   | · | 4      million shares: $100 million sales of dextofisopam, when and if approved,      in any 12-month period |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

----

----

----

----

| Name                              | Age | Position                                                         |
|-----------------------------------|-----|------------------------------------------------------------------|
| Robert      F. Johnston           | 72  | Executive      Chairman of the Board of Directors                |
| S.      Colin Neill               | 62  | President,      Chief Financial Officer, Secretary and Treasurer |
| Srinivas      Akkaraju, MD, Ph.D* | 40  | Director                                                         |
| Anthony      B. Evnin, Ph.D*      | 67  | Director                                                         |
| Charles      W. Newhall III       | 64  | Director                                                         |

| * | Members      of the Audit Committee |
|---|-------------------------------------|

----

----

----

|   | The      Compensation and Stock Option Committee of the Board of Directors      establishes the general compensation policies of the Company, the      compensation plans and specific compensation levels for executive      officers, and administers the Company’s 2001 Employee Stock Purchase Plan,      as well as the 2000, 1997 and 1992 Incentive and Non-Qualified Stock      Option Plans. The Compensation and Stock Option Committee is composed of      two independent, non-employee Directors who have no interlocking      relationships as defined by the Securities and Exchange      Commission. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| Name/Principal Position         | Year   | Salary   |   | Bonus   |   |  OptionAwards        | All      OtherCompensation |   | TotalCompensation |
|---------------------------------|--------|----------|--------|---------|--------|---------------------------|----------------------------|--------|-------------------|
|                            |   |     |   |    |   |                      |                       |   |              |
| S.      Colin Neill             | 2008   | $300,000 |   | -       |   | $      38,426             |   $21,517        | (3)    | $359,943          |
| President,                      | 2007   | $265,000 |   | $75,000 | (2)    | $      31,036             |   $20,712        | (3)    | $391,748          |
| Chief      Financial Officer,   | 2006   | $62,938  | (1)    | $38,750 |   | $      40,199             |  $      2,800         | (3)    | $144,687          |
| Secretary      & Treasurer  |   |     |   |    |   |                      |                       |   |              |
|                            |   |     |   |    |   |                      |                       |   |              |
| Elkan      R. Gamzu, Ph.D,      | 2008   | -        |   | -       |   | -                         | -                          |   | -                 |
| Former      Director and former | 2007   | $452,500 | (4)    |    |   | $18,346                   | $6,750                     | (5)    | $477,596          |
| Chief      Executive Officer    | 2006   | -        |   | -       |   | -                         | -                          |   | -                 |
|                            |   |     |   |    |   |                      |                       |   |              |
| Robert      F. Johnston         | 2008   | -        |   | -       |   | $      27,681   | -                          |   | $27,681           |
| Executive      Chairman         | 2007   | -        |   | -       |   | -                         | -                          |   | -                 |
|                            | 2006   | -        |   | -       |   | -                         | -                          |   | -                 |
|                            |   |     |   |    |   |                      |                       |   |              |

| (1) | Mr.      Neill joined Pharmos Corporation in October 2006. He became President in      January 2008. |
|-----|------------------------------------------------------------------------------------------------------|

| (2) | Consists      of $50,000 in cash and 75,000 shares of common stock valued at      $25,000. |
|-----|--------------------------------------------------------------------------------------------|

| (3) | In      2008, consists of $6,900 in 401k employer contribution, $5,617 in life      insurance and $9,000 in automobile allowance.  In 2007, consists      of $6,750 in 401k employer contribution, $4,962 in life insurance and      $9,000 in automobile allowance.  In 2006, consists of $662 in      401k employer contribution and $2,138 in automobile    allowance. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Dr.      Gamzu served as Chief Executive Officer from March 2007 to January      2008.  Dr. Gamzu’s compensation consists of $252,500 in salary      and $200,000 in employment contract severance  payments. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Consists      of 401k employer contribution. |
|-----|----------------------------------------------|

|   | GRANTS      OF PLAN-BASED AWARDS IN 2008 |
|--------|------------------------------------------|

|                        |       |                                                                      |                                               |                                                              |
|-----------------------------|------------|---------------------------------------------------------------------------|----------------------------------------------------|-------------------------------------------------------------------|
| Name                        | Grant Date | All other Option Awards: Number of Securities Underlying Options      (#) | Exercise or Base Price of OptionAwards      ($/Sh) | Grant      Date Fair Value ofStock      and OptionAwards      ($) |
|                        |       |                                                                      |                                               |                                                              |
| S.      Colin Neill (1)     | 1/23/2008  | 130,000                                                                   | $0.35                                              | $30,844                                                           |
| Robert      F. Johnston (2) | 1/23/2008  | 350,000                                                                   | $0.35                                              | $83,042                                                           |

----

| OPTION      EXERCISES AND STOCK VESTED IN 2008 |
|------------------------------------------------|
|                                           |   |   |   |   |   |
|                                           | Option Awards |   | Stock Awards |
|                                           |   |   |   |   |   |
| Name                                           | Number      ofShares      Acquiredon      Exercise (#) | Value      Realizedon Exercise ($) |   | Number      of SharesAcquired      onVesting      (#) | ValueRealized      onVesting      ($) |
| S.      Colin Neill                            | - | $      - |   | 75,000      (1) | $      26,250 |

| (1) | Mr.      Neill  received 75,000 shares of common stock in January 2008,      with a fair market value of $26,250 as part of his 2007 bonus      compensation. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| OUTSTANDING      EQUITY AWARDS AT 2008 FISCAL YEAR-END |
|--------------------------------------------------------|
|                                                   |   |   |   |   |   |   |   |
|                                                   | Option      Awards | Stock Awards |
| Name                                                   | Number      ofsecuritiesunderlyingunexercisedoptions      (#)Exercisable | Number      ofsecuritiesunderlyingunexercisedoptions (#)Unexercisable | EquityIncentive      Planawards:Number      ofsecuritiesunderlyingunexercsiedUnearnedOptions      (#) | OptionExercisePrice      ($) | OptionExpirationDate | Number      ofShares      orUnits      ofStock      ThatHave NotVested | MarketValue      ofShares      orUnits      ofStock      Thathave notvested      ($) |
|                                                   |   |   |   |   |   |   |   |
|                                                   |   |   |   |   |   |   |   |
| S.      Colin Neill                                    | 0 | 130,000      (1) | 130,000 | $0.35 | 1/23/2018 |   |   |
|                                                   | 17,500 | 22,500      (2) | 40,000 | $1.84 | 1/17/2017 |   |   |
|                                                   | 55,000 | 35,000      (3) | 90,000 | $1.75 | 10/5/2016 |   |   |
|                                                   | 72,500 | 187,500      | 260,000 |   |   |   |   |
|                                                   |   |   |   |   |   |   |   |
| Robert      F. Johnston                                | 116,667 | 233,333      (4) | 350,000 | $0.35 | 1/23/2018 |   |   |

----

----

----

----

----

|   | 1. | At      the election of each Director, either (i) 20,000 fully vested ten-year      stock options are granted in January and 20,000 fully vested ten-year      stock options are granted on July 1, or (ii) a cash payment of $6,000 is      made in January and $6,000 on July 1;and |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | The      Chairman of the Audit Committee will be granted an additional 5,000 fully      vested ten-year stock options in January and 5,000 fully vested ten-year      stock options on July 1; and the Chairmen of the Compensation and the      Governance and Nominating Committees will each be granted an additional      2,500 fully vested ten-year stock options in January and 2,500 fully      vested ten-year stock options on July1. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  Name                                       |   | Fees Earned or Paid      in Cash($) |   |   | Option      Awards |   |   | Total  |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|--------|--------------------|--------|--------|--------|--------|
|  Srinivas      Akkaraju, M.D., Ph.D.        |   |                                | 0      |   |               | $      | 16,711 |   |   | $ | 16,711 |   |
|  Anthony B.      Evnin, Ph.D.          |   |                                | 0      |   |               | $      | 17,967 |   |   | $ | 17,967 |   |
|  Elkan R.      Gamzu, Ph.D. (2)        |   |                                | 0      |   |               | $      | 22,457 |   |   | $ | 22,457 |   |
|  Lloyd I.      Miller, III (3)    |   |                                | 0      |   |               | $      | 17,001 |   |   | $ | 17,001 |   |
|  Charles W.      Newhall, III          |   |                                | 0      |   |               | $      | 17,967 |   |   | $ | 17,967 |   |

|        (1)  | Reflects      the dollar amount recognized for financial statement reporting purposes      for the fiscal year ended December 31, 2008 in accordance with FAS 123(R),      and thus includes amounts from awards granted in and prior to      2008.  Other than the options issued to Mr. Miller, which      expired 90 days after his departure from the Board on August 5, 2008, all      options awarded to Directors in 2008 remained outstanding at fiscal      year-end. |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|        (2)  | Dr.      Gamzu retired from the Board at the end of his elected term on December      30, 2008. |
|-----------------------|-------------------------------------------------------------------------------------------------|

|        (3)  |  Mr.      Miller retired from the Board effective August 5,  2008. |
|-----------------------|-------------------------------------------------------------------------|

| Plan      Category                                              | Number      of securities to be issued upon exercise of outstanding options, warrants      and rights(a) |   | Weighted      average exercise price of outstanding options, warrants and      rights(b) |   | Number      of securities remaining available for future issuance under equity      compensation plans (excluding securities reflected in column      (a)(c) |
|-----------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity      compensation plans approved by security holders     |   2,775,081                                                                                    |   |   $3.27                                                                        |   |  1,799,017                                                                                                                                              |
| Equity      compensation plans not approved by security holders |   N/A                                                                                          |   |   N/A                                                                          |   |  N/A                                                                                                                                                    |
| Total                                                           |  2,775,081                                                                                          |   |  $3.27                                                                              |   | 1,799,017                                                                                                                                                    |

----

|  Name and Address of Beneficial      Owner                                                                                                                                                                          | Amount      of Beneficial Ownership |   |             | Percentage      of Total (1) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------|-----------------------|------------------------------|
|  Robert      F. Johnston c/o      Pharmos Corporation99 Wood Avenue South, Suite 311,      Iselin, NJ 08830                                                                                                    |  1,488,806                |   | (2)         |  5.5%                   |
| Srinivas      Akkaraju, M.D., Ph.D.c/o      Panorama Management, LLC2440 Sand Hill Road, Suite 302,      Menlo Park, CA 94025                                                                                            | 2,915,160                           |   | (3)    | 10.8%                        |
| Anthony      B. Evninc/o Venrock      Associates530 Fifth Avenue, 22nd Floor, New York, NY      10036                                                                                                                    | 1,656,376                           |   | (4)         | 6.2%                         |
| Charles      W. Newhall, III    c/o New Enterprise      Associates   1119 St. Paul Street,      Baltimore, MD 21202                                                                   | 2,253,988                           |   | (5)         | 8.4%                         |
| S.      Colin Neillc/o Pharmos      Corporation99 Wood Avenue South, Suite 311,      Iselin, NJ 08830                                                                                                                    | 187,500                             |   | (6)         | *                            |
| All      Current Directors andExecutive Officers as a group      (five persons)                                                                                                                                          | 8,501,830                           |   | (7)              | 30.8%                        |
| JP      Morgan Partners BHCA LLPc/o JP Morgan Partners,      LLC270 Park Avenue, 39th Floor, New York, NY      10017                                                                                                     | 2,845,160                           |   |             | 10.6%                        |
|  New      Enterprise Associates 10, LP    1119 St. Paul Street, Baltimore, MD  21202                                                                                                       | 2,176,488                      |   |                  | 8.1%                    |
|  Venrock      Assoicates    Venrock Associates III LP    Venrock Entrepreneurs Fund III LP    530 Fifth Avenue, 22nd Floor, New York, NY    10036  | 1,578,876                      |   |                  | 5.9%                    |

| (1) | Based      on 26,798,526 shares of common stock outstanding, plus each individual’s      warrants or options which are either currently exercisable or will be      exercisable within 60 days of the date set forth above.  Assumes      that no other individual will exercise any warrants and/or      options. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Consists      of 1,043,099 outstanding shares, 136,111 shares issuable upon exercise of      currently exercisable options, and 309,596 shares issuable upon conversion      of a debenture. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Consists      of shares beneficially owned by JP Morgan Partners BHCA LLP and 70,000      shares issuable upon exercise of currently exercisable      options. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Consists      of shares beneficially owned by Venrock Associates, Venrock Associates III      LP and Venrock Entrepreneurs Fund III LP and 77,500 shares issuable upon      exercise of currently exercisableoptions. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Consists      of shares beneficially owned by New Enterprise Associates 10, LP and      77,500 shares issuable upon exercise of currently exercisable      options. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Consists      of 75,000 outstanding shares and 112,500 shares issuable upon exercise of      currently exercisable options. |
|-----|-----------------------------------------------------------------------------------------------------------------------------|

| (7) | Consists      of 7,718,623 outstanding shares, 473,611 shares issuable upon exercise of      currently exercisable options, and 309,596 shares issuable upon conversion      of a debenture. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| (a) | Financial      Statements and Exhibits |
|-----|----------------------------------------|

| (1) | FINANCIAL      STATEMENTS |
|-----|---------------------------|

| (2) | FINANCIAL      STATEMENT SCHEDULES |
|-----|------------------------------------|

| (3) | EXHIBITS |
|-----|----------|

| 2 | Plan      of purchase, sale, reorganization, arrangement, liquidation, or      succession |
|---|-------------------------------------------------------------------------------------------|

|   | 2(a) | Agreement      and Plan of Merger by and among Pharmos Corporation, Vela Acquisition      Corporation and Vela Pharmaceuticals Inc. dated March 14, 2006      (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report      on Form 8-K filed March 15, 2006). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2(b) | Amendment      to Agreement and Plan of Merger by and among Pharmos Corporation, Vela      Acquisition Corporation and Vela Pharmaceuticals Inc. dated August 31,      2006 (incorporated by reference to Exhibit 2.1 of the registrant’s Current      Report on Form 8-K filed September 5,2006). |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2(c) | Amendment      No.2 to Agreement and Plan of Merger by and among Pharmos Corporation,      Vela Acquisition Corporation, Vela Acquisition No.2 Corporation and Vela      Pharmaceuticals Inc. dated September 29, 2006 (incorporated by reference      to Exhibit 2.1 of the registrant’s Current Report on Form 8-K filed      October 5, 2006). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2(d) | Amendment      No. 3 to Agreement and Plan of Merger dated as of January 3, 2008 by and      among Pharmos Corporation and the Representatives named therein (incorporated by      reference to Exhibit 4.5 of the registrant’s Current Report on Form 8-K      filed January 4, 2008). |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3 | Articles      of Incorporation and By-Laws |
|---|--------------------------------------------|

|   | 3(a) | Restated      Articles of Incorporation (Incorporated by reference to Appendix E to the      Joint Proxy Statement/Prospectus included in the Form S-4 Registration      Statement of the Company dated September 28, 1992 (No.      33-52398) |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(b) | Certificate      of Amendment of Restated Articles of Incorporation dated January 30, 1995      (Incorporated by reference to Annual Report on Form 10-K for the year      ended December 31, 1994). |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(c) | Certificate      of Amendment of Restated Articles of Incorporation dated January 16, 1998      (Incorporated by reference to the Company’s Current Report on Form 8-K,      dated February 6, 1998). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 3(d) | Certificate      of Amendment of Restated Articles of Incorporation dated October 21, 1999      (Incorporated by reference to exhibit 4(e) to the Form S-3 Registration      Statement of the Company filed September 28, 2000 (No.      333-46818)). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(e) | Certificate      of Amendment of Restated Articles of Incorporation dated July 19, 2002      (Incorporated by reference to Exhibit 3 to the Company’s Report on Form      10-Q for the quarter ended June 30,2002). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(f) | Certificate      of Amendment of Restated Articles of Incorporation dated July 7, 2004      (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form      10-Q for the quarter ended June 30,2004). |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(g) | Certificate      of Amendment to Articles of Incorporation dated September 23, 2005      (Incorporated by reference to exhibit 3.1 to the Company’s Quarterly      Report on Form 10-Q for the quarter ended September 30,    2005). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3(h) | Amended      and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the      Company’s Quarterly Report on Form 10-Q for the quarter ended September      30, 2007. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4 | Instruments      defining the rights of security holders, including    indentures |
|---|-----------------------------------------------------------------------------------|

|   | 4(a) | Form      of Employee Warrant Agreement, dated April 11, 1995, between the Company      and Oculon Corporation (Incorporated by reference to the Company’s Current      Report on Form 8-K, dated April 11, 1995, as  amended). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(b) | Form      of Warrant Agreement dated as of April 30, 1995 between the Company and      Charles Stolper (Incorporated by reference to Form S-3 Registration      Statement of the Company dated November 14, 1995, as amended [No.      33-64289]). |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4      (c) | Form      of Stock Purchase Warrant dated as of March 31, 1997 between the Company      and the Investor (Incorporated by reference to Form S-3 Registration      Statement of the Company dated March 5, 1998 [No.    333-47359]). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(d) | Form      of Common Stock Purchase Warrant exercisable until September 1, 2005      (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report      on Form 8-K filed on September 11,2000). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(e) | Form      of placement agent warrant with Ladenburg Thalmann & Co. Inc.      (Incorporated by reference to Form S-3 Registration Statement of the      Company dated September 28, 2000 (No.  333-46818). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(f) | Form      of placement agent warrant with SmallCaps OnLine LLC (Incorporated by      reference to Form S-3 Registration Statement of the Company dated      September 28, 2000 (No. 333-46818). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(g) | Form      of consulting warrant with SmallCaps OnLine LLC (Incorporated by reference      to Form S-3 Registration Statement of the Company dated September 28, 2000      (No. 333-46818). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(h) | Certificate      of Designation, Rights Preferences and Privileges of Series D Preferred      Stock of the Company (Incorporated by reference to Exhibit 99.3 to the      Company’s Current Report on Form 8-K filed on October 24,      2002). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(i) | Rights      Agreement dated as of October 23, 2002 between the Company and American      Stock Transfer & Trust Company, as Rights Agent (Incorporated by      reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K      filed on October 24, 2002). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(j) | Form      of Investor Warrant dated March 4, 2003 (Incorporated by reference to      Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 4,      2003). |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(k) | Form      of Placement Agent’s Warrant dated March 4, 2003 (Incorporated by      reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K      filed on March 4, 2003). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(l) | Registration      Rights Agreement dated as of May 30, 2003 between the Company and the      purchasers. (Incorporated by reference to Exhibit 4.2 to the Company’s      Current Report on Form 8-K filed on June 3,  2003). |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(m) | Form      of Investor Warrant dated June 2, 2003 (Incorporated by reference to      Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on June 3,      2003). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 4(n) | Securities      Purchase Agreement dated as of September 26, 2003 between the Company and      the purchasers identified on the signature pages thereto 2003      (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report      on Form 8-K filed on September 30,2003). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(o) | Form      of 4% convertible debenture due March 31, 2005 (Incorporated by reference      to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on      September 30, 2003). |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(p) | Registration      Rights Agreement dated as of September 26, 2003 between the Company and      the purchasers signatory thereto (Incorporated by reference to Exhibit 4.3      to the Company’s Current Report on Form 8-K filed on September 30,      2003). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(q) | Form      of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.4      to the Company’s Current Report on Form 8-K filed on September 30,      2003). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(r) | Escrow      Agreement dated as of September 26, 2003 between the Company, the      purchasers signatory thereto and Feldman Weinstein LLP (Incorporated by      reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed      on September 30, 2003). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(s) | Form      of Placement Agent Common Stock Purchase Warrant (Incorporated by      reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed      on September 30, 2003). |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(t) | Rights      Agreement Amendment, dated October 23, 2006, between Pharmos Corporation      and American Stock Transfer & Trust Co. (Incorporated by reference to      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October      27, 2006). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(u) | Registration      Rights Agreement, dated as of October 25, 2006, by and among Pharmos      Corporation and the Representatives named therein (Incorporated by      reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed      on October 31, 2006). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(v) | 10% Convertible      Debenture dated as of January 3, 2008 of Pharmos Corporation (Incorporated      by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K      filed on January 4, 2008). |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(w) | Registration      Rights Agreement dated as of January 3, 2008 by and among Pharmos      Corporation and the Purchasers named therein (Incorporated by reference to      Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on January      4, 2008). |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(x) | Amendment      No. 2 dated as of January 3, 2008 to the Rights Agreement, dated as of      September 5, 2002, as amended on October 23, 2006 (the ÒRights      AgreementÓ), between Pharmos Corporation and American Stock Transfer &      Trust Co., as Rights Agent (Incorporated by      reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed      on January 4, 2008). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(y) | Amendment      No. 1 to Registration Rights Agreement dated as of April 25, 2008 by and      among Pharmos Corporation and the Purchasers named therein (Incorporated by      reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed      on May 1, 2008). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(z) | Amendment No. 2 to      Registration Rights Agreement by and among Pharmos Corporation and the      Purchasers named therein (Incorporated by reference to Exhibit 4.2      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June      30, 2008). |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4(aa) | Form of waiver under      Pharmos Corporation 10% Convertible Debentures Due November 1, 2012      (Incorporated by reference to exhibit 4.3 to the Company’s      Quarterly Report on Form 10-Q for the quarter ended June 30, 2008). |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10 | Material      Contracts |
|----|-------------------------|

|   | 10(a) | Employment      Agreement dated as of April 2, 2001, between Pharmos Corporation and Haim      Aviv (Incorporated by reference to Exhibit 10(n) to the Company’s Annual      Report on Form 10-K for the year ended December 31,    2001).** |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(b) | Amendment      of Employment Agreement with Haim Aviv, dated as of January 25, 2006      (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly      Report on Form 10-Q for the quarter ended March 31,    2006).** |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 10(c) | Employment      Agreement dated as of April 2, 2001, between Pharmos Corporation and Gad      Riesenfeld (Incorporated by reference to Exhibit 10(o) to the Company’s      Annual Report on Form 10-K for the year ended December 31,      2001).** |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(d) | Amendment      of Employment Agreement dated as of April 23, 2001, between Pharmos      Corporation and Gad Riesenfeld (Incorporated by reference to Exhibit 10(p)      to the Company’s Annual Report on Form 10-K for the year ended December      31, 2001).** |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(e) | Amendment      of Employment Agreement dated as of February 16, 2005 between Pharmos      Corporation and Gad Riesenfeld (Incorporated by reference to Exhibit 10(w)      to the Company’s Annual Report on Form 10-K for the year ended December      31, 2004).** |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(f) | Employment      Agreement dated as of July 19, 2004 between Pharmos Corporation and James      A. Meer (Incorporated by reference to Exhibit 10.1 to the Company’s      Quarterly Report on Form 10-Q for the quarter ended September 30,      2004).** |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(g) | Employment      Agreement dated as of November 7, 2005, between Pharmos Corporation and      Alan L. Rubino (Incorporated by reference to exhibit 10.1 to the Company’s      Quarterly Report on Form 10-Q for the quarter ended September 30,      2005).** |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(h) | Employment      Agreement between Pharmos Corporation and S. Colin Neill, dated as of      October 5, 2006 (Incorporated by reference to Exhibit 10.1 to the      Company’s Current Report on Form 8-K filed on October 6,      2006).** |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(i) | Retention      Award Agreement dated as of September 6, 2004 between Pharmos Corporation      and Dr. Haim Aviv (Incorporated by reference to Exhibit 10.1 to the      Company’s Current Report on Form 8-K filed on September 10,      2004).** |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(j) | Retention      Award Agreement dated as of September 6, 2004 between Pharmos Corporation      and Dr. Gad Riesenfeld (Incorporated by reference to Exhibit 10.2 to the      Company’s Current Report on Form 8-K filed on September 10,      2004).** |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(k) | Consulting      Agreement between Pharmos Corporation and Dr. Georges Anthony Marcel,      dated October 17, 2006 (Incorporated by reference to Exhibit 10.1 to the      Company’s Current Report on Form 8-K filed on October 20,      2006).** |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(l) | Consulting      Agreement between Pharmos Corporation and Dr. Lawrence F. Marshall, dated      October 17, 2006 (Incorporated by reference to Exhibit 10.2 to the      Company’s Current Report on Form 8-K filed on October 20,      2006).** |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(m) | 1997      Incentive and Non-Qualified Stock Option Plan (Annexed as Appendix B to      the Proxy Statement on Form 14A filed November 5,  1997).** |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(n) | Amended      and Restated 2000 Incentive and Non-Qualified Stock Option      Plan.** |
|--------|-------|--------------------------------------------------------------------------------------|

|   | 10(o) | Amendment      to the 2000 Stock Option Plan (incorporated by reference to Appendix D to      the Company’s Definitive Proxy Statement on Schedule 14A filed on      September 10, 2007).** |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(p) | 2001      Employee Stock Purchase Plan (Incorporated by reference to Exhibit B to      the Company’s Definitive Proxy Statement on Form 14A filed on June 6,      2001).** |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(q)(1) | Agreement      between Avitek Ltd. (“Avitek”) and Yissum Research Development Company of      the Hebrew University of Jerusalem (“Yissum”) dated November 20, 1986      (Incorporated by reference to Annual Report on Form 10-K, as amended by      Form10-K/A, for year ended December 31,    1992).  (1) |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(q)(2) | Supplement      to Agreement (Incorporated by reference to Annual Report on Form 10-K, as      amended by Form 10-K/A, for year ended December 31,      1992).  (1) |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(q)(3) | Hebrew      language original executed version of Agreement (Incorporated by reference      to Annual Report on Form 10-K, as amended by Form 10-K/A, for year ended      December 31, 1992).  (1) |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(r)(1) | Agreement      between Avitek and Yissum dated January 25, 1987 (Incorporated by      reference to Annual Report on Form 10-K, as amended by Form 10-K/A, for      year ended December 31,1992).  (1) |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 10(r)(2) | Schedules      and Appendixes to Agreement (Incorporated by reference to Annual Report on      Form 10-K, as amended by Form 10-K/A, for year ended December 31,      1992).  (1) |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(r)(3) | Hebrew      language original executed version of Agreement (Incorporated by reference      to Annual Report on Form 10-K, as amended by Form 10-K/A, for year ended      December 31, 1992).  (1) |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(s)(1) | Research,      Development and License Agreement between Pharmos Ltd., Pharmos      Corporation (“Old Pharmos”) and Yissum dated February 5, 1991      (Incorporated by reference to Annual Report on Form 10-K, as amended by      Form 10-K/A, for year ended December 31,    1992).  (1) |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(s)(2) | Schedules      and Appendixes to Agreement (Incorporated by reference to Annual Report on      Form 10-K, as amended by Form 10-K/A, for year ended December 31,      1992).  (1) |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(s)(3) | Amendment      No.1 to Research, Development and License Agreement between Pharmos      Corporation, Pharmos Ltd. and Yissum Research Development Company of the      Hebrew University of Jerusalem, dated May 31, 2006 (incorporated by      reference to exhibit 99.1 to the registrant’s Current Report on Form 8-K      filed June 6, 2006). |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(t) | License      Assignment and Amendment Agreement dated as of October 9, 2001 by and      among Dr. Nicholas S. Bodor, Pharmos Corporation and Bausch & Lomb      Incorporated (Incorporated by reference to Exhibit 2.2 to the Company’s      Current Report on Form 8-K filed on October 16,  2001). |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(u) | Asset      Purchase Agreement between Bausch & Lomb Incorporated and Pharmos      Corporation dated October 9, 2001 (Incorporated by reference to Exhibit      2.1 to the Company’s Current Report on Form 8-K filed on October 16,      2001). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(v) | Amendment      No. 1 to Asset Purchase Agreement dated as of December 28, 2001 between      Bausch & Lomb Incorporated and Pharmos Corporation (Incorporated by      reference to Exhibit 10(v) to the Company’s Annual Report on Form 10-K for      the year ended December 31, 2001). |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(w) | Amendment      No. 2 to Asset Purchase Agreement dated as of December 30, 2004 between      Bausch & Lomb Incorporated and Pharmos Corporation (Incorporated by      reference to Exhibit 10(v) to the Company’s Annual Report on Form 10-K for      the year ended December 31, 2004). |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(x) | License      Agreement dated as of December 18, 2001 between Pharmos Ltd. and Herbamed      Ltd. (Incorporated by reference to Exhibit 10(p) to the Annual Report on      Form 10-K for year ended December 31,2002). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(y) | Amendment      No. 1, dated as of June 30, 2005, to the License Agreement by and between      Pharmos Ltd. and Herbamed Ltd., dated as of December 18, 2001      (Incorporated by reference to exhibit 99.1 to the Company’s Quarterly      Report on Form 10-Q for the quarter ended June 30,  2005). |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(z) | Settlement      Agreement between the Company and Lloyd I. Miller, III dated August 31,      2006 (incorporated by reference to Exhibit 10.1 of the registrant’s      Current Report on Form 8-K filed September 5,  2006). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(aa) | Voting      Agreement and Waiver by and among the Company, Lloyd I. Miller, III, Trust      A-4 - Lloyd I. Miller, Milfam II L.P. and Milfam LLC dated August 31, 2006      (incorporated by reference to Exhibit 10.2 of the registrant’s Current      Report on Form 8-K filed September 5,2006). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(bb) | Employment      Agreement between Pharmos Corporation and Elkan R. Gamzu, dated as of      March 20, 2007 (incorporated by reference to Exhibit 10.1 of the      registrant’s Current Report on Form 8-K filed March 26,    2007). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(cc) | Letter      of Agreement between Pharmos Corporation and Haim Aviv, dated March 20,      2007 (incorporated by reference to Exhitit 10.2 of the registrant’s      Current Report on Form 8-K filed March 26,2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 10(dd) | Securities      Purchase Agreement dated as of January 3, 2008 by and among Pharmos      Corporation and the Purchasers named therein (incorporated by reference to      Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed January      4, 2008). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(ee) | Letter      Agreement dated January 3, 2008 regarding Additional Debenture Investment      among Pharmos Corporation, New Enterprise Associates 10, Limited      Partnership, Lloyd I. Miller, III and Robert F. Johnston (incorporated by      reference to Exhibit 4.2 of the registrant’s Current Report on Form 8-K      filed January 4, 2008). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(ff) | Agreement dated      January 3, 2008 between Pharmos Corporation and Mony Ben Dor      (incorporated by reference to Exhibit 10.1 of the registrant’s      Current Report on Form 8-K filed January 4,  2008). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(gg) | Agreement dated      January 3, 2008 between Pharmos Corporation and David Schlachet      (incorporated by reference to Exhibit 10.2 of the registrant’s      Current Report on Form 8-K filed January 4,  2008). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10(hh) | Agreement dated      January 3, 2008 between Pharmos Corporation and Haim Aviv (incorporated      by reference to Exhibit 10.3 of the registrant’s Current Report on Form      8-K filed January 4, 2008). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21 | Subsidiaries      of the Registrant |
|----|-------------------------------------|

|   | 21(a) | Subsidiaries      of the Registrant (Incorporated by reference to Annual Report on      Form |
|--------|-------|----------------------------------------------------------------------------------------------|

|   | 10-K,      as amended by Form 10-K/A, for year ended December 31,    1992). |
|--------|-----------------------------------------------------------------------------|

| 23 | Consents      of Experts and Counsel |
|----|--------------------------------------|

| 23(a)      *** | Consent      of PricewaterhouseCoopers LLP |
|----------------|--------------------------------------------|

| 32(a)*** | Section      1350 Certification of Principal Executive      Officer and Chief Financial      Officer |
|----------|------------------------------------------------------------------------------------------------------|

| (1) | Confidential      information is omitted and identified by a * and filed separately with the      SEC. |
|-----|--------------------------------------------------------------------------------------------------------|

| (**) | This      document is a management contract or compensatory plan or      arrangement. |
|------|---------------------------------------------------------------------------------------|

| (***) | Filed      herewith |
|-------|---------------------|

----

----

| Report of Independent Registered Public Accounting      Firm                                                                   | F-2    |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated balance sheets as of December 31, 2008      and 2007                                                              | F-3    |
| Consolidated statements of operations for the years      ended                                                                 |   |
| December 31, 2008, 2007 and 2006                                                                                               | F-4    |
| Consolidated statements of changes in shareholders’      equityfor the years ended December 31, 2008, 2007 and      2006 | F-5    |
| Consolidated statements of cash flows for the years      endedDecember 31, 2008, 2007, and 2006                                | F-6    |
| Notes to consolidated financial    statements                                                                                  | F-7    |

----

Report 

----

| PHARMOS      CORPORATION                                                                                                                        |   |              |         |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------------|--------|--------|--------|
| Consolidated Balance Sheets                                                                                                                     |   |              |         |   |   |   |
|                                                                                                                                            |   | December      31, |         |
|                                                                                                                                            |   | 2008              |         |   | 2007   |   |
| Assets                                                                                                                                          |   |              |         |   |   |   |
| Current      Assets                                                                                                                             |   |              |         |   |   |   |
| Cash      and cash equivalents                                                                                                                  |   | $                 | 4,730,282    |   |   | $      | 7,481,741 |   |
| Short-term      investments                                                                                                                     |   |              | -            |   |   |   | 3,686,568 |   |
| Restricted      cash                                                                                                                            |   |              | 38,998       |   |   |   | 86,695 |   |
| Research      and development grants receivable                                                                                                 |   |              | -            |   |   |   | 3,859 |   |
| Prepaid      expenses and other current assets                                                                                                  |   |              | 1,049,898    |   |   |   | 225,185 |   |
| Total      current assets                                                                                                                       |   |              | 5,819,178    |   |   |   | 11,484,048 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Fixed      assets, net                                                                                                                          |   |              | 9,692        |   |   |   | 424,458 |   |
| Restricted      cash                                                                                                                            |   |              | -            |   |   |   | 65,031 |   |
| Severance      pay funded                                                                                                                       |   |              | -            |   |   |   | 264,934 |   |
| Other      assets                                                                                                                               |   |              | 143,294      |   |   |   | 136,488 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Total      assets                                                                                                                               |   | $                 | 5,972,164    |   |   | $      | 12,374,959 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Liabilities      and Shareholder's Equity                                                                                                       |   |              |         |   |   |   |   |   |
| Current      liabilities                                                                                                                        |   |              |         |   |   |   |   |   |
| Accounts      payable                                                                                                                           |   | $                 | 883,966      |   |   | $      | 768,768 |   |
| Accrued      expenses                                                                                                                           |   |              | 615,663      |   |   |   | 404,937 |   |
| Accrued      wages and other compensation                                                                                                       |   |              | 87,000       |   |   |   | 805,995 |   |
| Total      current liabilities                                                                                                                  |   |              | 1,586,629    |   |   |   | 1,979,700 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Other      liability                                                                                                                            |   |              | 44,316       |   |   |   | 51,888 |   |
| Severance      pay                                                                                                                              |   |              | -            |   |   |   | 358,706 |   |
| Convertible      debentures                                                                                                                     |   |              | 4,000,000    |   |   |   | - |   |
| Total      liabilities                                                                                                                          |   |              | 5,630,945    |   |   |   | 2,390,294 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Shareholders’      Equity                                                                                                                 |   |              |         |   |   |   |   |   |
| Preferred      stock, $.03 par value, 1,250,000 shares authorized, none issued and      outstanding                                             |   |              | -            |   |   |   | - |   |
| Common      stock, $.03 par value; 60,000,000 shares authorized, 26,210,290 and      25,603,759  issued in 2008 and 2007,respectively |   |              | 786,307      |   |   |   | 768,112 |   |
| Paid-in      capital in excess of par                                                                                                           |   |              | 206,309,096  |   |   |   | 205,881,331 |   |
| Accumulated      deficit                                                                                                                        |   |              | (206,753,758 | )      |   |   | (196,664,352 | ) |
| Treasury      stock, at cost, 2,838 shares                                                                                                      |   |              | (426         | )      |   |   | (426 | ) |
| Total      shareholders' equity                                                                                                                 |   |              | 341,219      |   |   |   | 9,984,665 |   |
|                                                                                                                                            |   |              |         |   |   |   |   |   |
| Total      liabilities and shareholders' equity                                                                                                 |   | $                 | 5,972,164    |   |   | $      | 12,374,959 |   |
|                                                                                                                                            |   |

----

----

| PHARMOS      CORPORATIONConsolidated Statements of  Operations |
|----------------------------------------------------------------|
|                                                           |   | Year      ended December 31, |   |
| Expenses                                                       |   |   | 2008  |   |   |   | 2007  |   |   |   | 2006  |   |
|  Research      and development, gross                     |   |  $ | 9,028,705  |   |   |  $ | 11,457,566  |   |   |  $ | 8,956,821  |   |
| Grants                                                         |   |   | - |   |   |   | (812,042 | ) |   |   | (1,445,513 | ) |
| Research      and development, net of grants                   |   |   | 9,028,705 |   |   |   | 10,645,524 |   |   |   | 7,511,308 |   |
| In-process      acquired research and development              |   |   | - |   |   |   | - |   |   |   | 20,607,575 |   |
| General      and administrative                                |   |   | 1,965,243 |   |   |   | 6,698,601 |   |   |   | 9,108,867 |   |
| Depreciation      and amortization                             |   |   | 106,236 |   |   |   | 235,134 |   |   |   | 314,769 |   |
| Total      operating expenses                                  |   |   | 11,100,184 |   |   |   | 17,579,259 |   |   |   | 37,542,519 |   |
|                                                           |   |   |   |   |   |   |   |   |
| Loss      from operations                                      |   |   | (11,100,184 | ) |   |   | (17,579,259 | ) |   |   | (37,542,519 | ) |
|                                                           |   |   |   |   |   |   |   |   |
| Other      income (expense)                                    |   |   |   |   |   |   |   |   |
|                                                           |   |   |   |   |   |   |   |   |
| Interest      income                                           |   |   | 255,751 |   |   |   | 938,312 |   |   |   | 1,778,042 |   |
| Interest      expense                                          |   |   | (490,537 | ) |   |   | - |   |   |   | - |   |
| Change      in value of warrants                               |   |   | - |   |   |   | 11,435 |   |   |   | 27,445 |   |
| Other      income (expense)                                    |   |   | 41,438 |   |   |   | 47,905 |   |   |   | (12,712 | ) |
| Other      (expense) income, net                               |   |   | (193,348 | ) |   |   | 997,652 |   |   |   | 1,792,775 |   |
|                                                           |   |   |   |   |   |   |   |   |
| Loss      before income taxes                                  |   | $ | (11,293,532 | ) |   | $ | (16,581,607 | ) |   | $ | (35,749,744 | ) |
| Income      tax benefit                                        |   |   | (1,204,126 | ) |   |   | (955,782 | ) |   |   | (612,775 | ) |
|                                                           |   |   |   |   |   |   |   |   |
|                                                           |   |   |   |   |   |   |   |   |
| Net      loss                                                  |   | $ | (10,089,406 | ) |   | $ | (15,625,825 | ) |   | $ | (35,136,969 | ) |
|                                                           |   |   |   |   |   |   |   |   |
| Net      loss per share                                        |   |   |   |   |   |   |   |   |
| -      basic and diluted                                       |   | $ | (0.39 | ) |   | $ | (0.61 | ) |   | $ | (1.74 | ) |
|                                                           |   |   |   |   |   |   |   |   |
| Weighted      average shares outstanding                       |   |   |   |   |   |   |   |   |
| -      basic and diluted                                       |   |   | 25,934,973 |   |   |   | 25,591,660 |   |   |   | 20,249,714 |   |

----

----

Consolidated 

|                                                                                              | Common      Stock     |                | Treasury      Stock        |                                        |                     |
|---------------------------------------------------------------------------------------------------|-----------------------|---------------------|----------------------------|---------------------------------------------|--------------------------|
|                                                                                              |   Shares    |   Amount  |  DeferredCompensation |  Paid-in      Capital in Excess of Par |  AccumulatedDeficit |   Shares |   Amount | Total      Stockholders’Equity |
| December      31, 2005                                                                            | 19,065,784       | $571,973            | $(529,393)                 | $191,093,338                           | $(145,901,558)           | 2,838 | $(426) |  $45,233,934 |
|                                                                                              |                  |                |                       |                                        |                     |   |   |   |
| Stock      and option issuance for employee compensation and amortization of      retention award |                  |                |                       |   1,363,092                  |                     |   |   |   1,363,092  |
| Issuance      of Common Stock for Vela Acquisition, ne t of direct costs of      $32,007          |   6,500,000 |   195,000 |                       |   12,772,993       |                     |   |   | 12,967,993  |
| Reclassify      deferred Compensation to Paid in Capital                                          |                  |                |  529,393         |  (529,393)                             |                     |   |   |   |
|                                                                                              |                  |                |                       |                                        |                     |   |   |   |
| Net      loss                                                                                     |                  |                |                       |                                        | (35,136,969)             |   |   | (35,136,969) |
| December      31, 2006                                                                            | 25,565,784       | 766,973             | 0                          | 204,700,030                            | (181,038,527)            | 2,838 | (426) |  24,428,050 |
|                                                                                              |                  |                |                       |                                        |                     |   |   |   |
| Stock      and option issuance for employee compensation and amortization of      retention award |                  |                |                       |   1,182,440                       |                     |   |   |   1,182,440  |
| Issuance      of Retention Award Shares                                                           |  37,975          |  1,139         |                       |  (1,139)                               |                     |   |   |   |
| Net      Loss                                                                                     |                  |                |                       |                                        | (15,625,825)             |   |   |  (15,625,825) |
| December      31, 2007                                                                            | 25,603,759            | 768,112             | $0                         | 205,881,331                                 | (196,664,352)            | 2,838 | (426) | 9,984,665  |
|                                                                                              |                  |                |                       |                                        |                     |   |   |   |
| Stock      and option issuance for employee compensation                                          |  160,716         |  4,821         |                       |  281,561                               |                     |   |   |  286,382  |
| Issuance      of  Common Stock for Debenture Interest payment                           |  445,815         |  13,374        |                       |  146,204                               |                     |   |   |  159,578  |
| Net      Loss                                                                                     |                  |                |                       |                                        | (10,089,406)             |   |   |  (10,089,406) |
| December      31, 2008                                                                            | 26,210,290            | $786,307            | $0                         | $206,309,096                                | $(206,753,758)           | 2,838 | $(426) | $341,219 |
|                                                                                              |                  |                |                       |                                        |                     |   |   |   |

| The      accompanying notes are an integral part of these consolidated financial      statements. |
|---------------------------------------------------------------------------------------------------|

----

----

| Pharmos      Corporation              |                         |   |
|---------------------------------------|------------------------------|--------|
| Consolidated Statements of Cash Flows |                         |   |
|                                  | Year      Ended December 31, |

|                                                                                  |   | 2008   |        |   | 2007   |   |        | 2006   |   |
|---------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|-------------|--------|--------|
| Cash      flows from operating activities                                             |   |   |        |   |   |   |        |   |   |
| Net      loss                                                                         |   | $      | (10,089,406 | )      |   | $      | (15,625,825 | )      |   | $ | (35,136,969 | ) |
| Adjustments      to reconcile net loss to net cash used in operating      activities: |   |   |        |   |   |   |        |   |   |   |   |   |
| Depreciation      and amortization                                                    |   |   | 106,236     |   |   |   | 235,134     |   |   |   | 314,769 |   |
| Provision      for severance pay                                                      |   |   | (358,706    | )      |   |   | (961,918    | )      |   |   | 305,977 |   |
| Change      in the value of warrants                                                  |   |   | -           |   |   |   | (11,435     | )      |   |   | (27,445 | ) |
| Share-based      compensation                                                         |   |   | 286,382     |   |   |   | 1,182,441   |   |   |   | 1,363,092 |   |
| Debenture      interest paid in common stock                                          |   |   | 159,578     |   |   |   |        |   |   |   |   |   |
| Non      cash portion of in-process research and development charge                   |   |   | -           |   |   |   | -           |   |   |   | 13,000,000 |   |
|     Gain      on disposition of fixed assets                      |   |   | (213,677    | )      |   |   | (12,383     | )      |   |   | - |   |
| Changes      in operating assets and liabilities:                                     |   |   |        |   |   |   |        |   |   |   |   |   |
| Research      and development grants receivable                                       |   |   | 3,859       |   |   |   | 294,006     |   |   |   | 436,372 |   |
| Prepaid      expenses and other current assets                                        |   |   | (454,713    | )      |   |   | 199,473     |   |   |   | 118,451 |   |
| Other      assets                                                                     |   |   | (6,806      | )      |   |   | (111,474    | )      |   |   | 3,482 |   |
| Accounts      payable                                                                 |   |   | 115,198     |   |   |   | 105,576     |   |   |   | 143,788 |   |
| Accrued      expenses                                                                 |   |   | 210,726     |   |   |   | (484,846    | )      |   |   | 314,561 |   |
| Accrued      wages and other compensation                                             |   |   | (718,995    | )      |   |   | (196,577    | )      |   |   | (495,209 | ) |
| Other      liabilities                                                                |   |   | (7,572      | )      |   |   | (25,794     | )      |   |   | (43,222 | ) |
| Net      cash used in operating activities                                            |   |   | (10,967,896 | )      |   |   | (15,413,622 | )      |   |   | (19,702,353 | ) |

| Cash      flows from investing activities                                    |   |   |       |   |   |   |       |   |   |
|------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
| Purchases      of fixed assets                                               |   |   | (1,730     | )      |   |   | (176,592   | )      |   |   | (165,366 | ) |
| Proceeds      from disposition of fixed assets                               |   |   | 153,937    |   |   |   | 122,839    |   |   |   | - |   |
| Purchase      of short-term investments                                      |   |   | -          |   |   |   | (6,933,488 | )      |   |   | (23,312,980 | ) |
| Proceeds      from sale of short-term investments                            |   |   | 3,686,568  |   |   |   | 16,419,593 |   |   |   | 45,888,650 |   |
| Severance      pay funding                                                   |   |   | 264,934    |   |   |   | 710,876    |   |   |   | (203,611 | ) |
| Decrease      (increase) in restricted cash                                  |   |   | 112,728    |   |   |   | (4,878     | )      |   |   | (4,447 | ) |
| Net      cash provided by investing activities                               |   |   | 4,216,437  |   |   |   | 10,138,350 |   |   |   | 22,202,246 |   |
|                                                                         |   |   |       |   |   |   |       |   |   |   |   |   |
| Cash      flows from financing activities                                    |   |   |       |   |   |   |       |   |   |   |   |   |
| Costs      from registration of common stock issued with Vela    Acquisition |   |   | -          |   |   |   | -          |   |   |   | (32,007 | ) |
| Proceeds      from issuance of convertible debentures                        |   |   | 4,000,000  |   |   |   | -          |   |   |   | - |   |
| Net      cash provided by (used in) financing activities                     |   |   | 4,000,000  |   |   |   | -          |   |   |   | (32,007 | ) |
|                                                                         |   |   |       |   |   |   |       |   |   |   |   |   |
| Net      increase (decrease) in cash and cash equivalents                    |   |   | (2,751,459 | )      |   |   | (5,275,272 | )      |   |   | 2,467,886 |   |
|                                                                         |   |   |       |   |   |   |       |   |   |   |   |   |
| Cash      and cash equivalents at beginning of year                          |   |   | 7,481,741  |   |   |   | 12,757,013 |   |   |   | 10,289,127 |   |
|                                                                         |   |   |       |   |   |   |       |   |   |   |   |   |
| Cash      and cash equivalents at end of year                                |   | $      | 4,730,282  |   |   | $      | 7,481,741  |   |   | $ | 12,757,013 |   |

| Supplemental      information:                                               |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest      paid                                                           |   | $      | 53,201 |   |   |   | -      |   |   |   | - |   |
| Supplemental      disclosure of non-cash investing and financing activities: |   |   |   |   |   |   |   |   |   |   |   |   |
| Common      stock issued with Vela acquisition                               |   |   | -      |   |   |   | -      |   |   | $ | 13,000,000 |   |
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |

----

----

| 1. | The      Company |
|----|------------------|

| 2. | Liquidity      and Business Risks |
|----|-----------------------------------|

----

----

| 4. | Significant      Accounting Policies |
|----|--------------------------------------|

|                                                                       |   | 2008   |      |   | 2007   |   |
|----------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| Stock      options                                                         |   |   | 2,737,106 |   |   |   | 2,420,386 |   |
| Warrants                                                                   |   |   | -         |   |   |   | 297,739 |   |
| Total      potential dilutive securities not included in loss per    share |   |   | 2,737,106 |   |   |   | 2,718,125 |   |

----

|                                       |   | 2007 |      |
|--------------------------------------------|--------|------|-----------|
|  Securities      greater than 90 days |   | $    | 1,036,568 |   |
|  Auction Rate      Securities         |   | $    | 2,650,000 |   |
|  Total Short      Term Investments    |   | $    | 3,686,568 |   |

----

| Laboratory,      pilot plant and other equipment | 7      years to 14 years |
|--------------------------------------------------|--------------------------|
|   Leasehold      improvements               | 5      years to 14 years |
|   Office      furniture and fixtures        | 3      years to 17 years |
|   Computer      equipment                   | 3      years to 4 years  |
|   Vehicles                                  | 5      years to 7 years  |

----

----

----

|   | 5.     Acquisition      of Vela Pharmaceuticals, Inc. |
|--------|--------------------------------------------------------------------------------|

| In      March 2006, the Company announced an agreement to acquire Vela      Pharmaceuticals, Inc. (“Vela”), which has a Phase II product candidate,      dextofisopam, in development to treat irritable bowel syndrome. The      Company is dedicating substantial resources to complete clinical      development of this product candidate. The Vela acquisition also includes      additional compounds in preclinical and/or clinical development for      neuropathic pain, inflammation and sexual dysfunction. The final merger      agreement, as amended, was announced on September 5, 2006 and approved by      the Company’s shareholders on October 25,2006. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | $1      million cash + 2 million shares of Pharmos common stock: Final patient      enrolled in Phase 2b trial (1) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | · | $2      million cash + 2.25 million shares: Successful completion of Phase 2b(1) |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | $2      million + 2 million shares: NDAsubmission |
|--------|--------|---------------------------------------------------|

|   | · | $2      million cash +2.25 million shares: FDAapproval |
|--------|--------|--------------------------------------------------------|

|   | · | 1      million shares: Approval to market in Europe or  Japan |
|--------|--------|---------------------------------------------------------------|

|   | · | 4      million shares: $100 million sales of dextofisopam, when and if approved,      in any 12-month period |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

| F  Fair      value of Pharmos shares issued at closing |   | $      | 13,000 |   |
|------------------------------------------------------------------|--------|--------|--------|--------|
| Cash      and advances paid                                      |   |   | 6,679  |   |
|                                                             |   |   | 19,679 |   |
| Transaction      costs incurred by Pharmos                       |   |   | 1,422  |   |
| Purchase      price                                              |   | $      | 21,101 |   |

| Proceeds      receivable from sale of New Jersey State net operating    losses |   | $      | 493    |   |
|--------------------------------------------------------------------------------|--------|--------|--------|--------|
| In-process      research and development                                       |   |   | 20,608 |   |
| Total                                                                          |   | $      | 21,101 |   |

----

|                                                                   |   |   |   |   |   | December      31, 2006 |   |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|--------|------------------------|--------|--------|
| Net      loss attributable to common shareholders                      |   |   |   |   |   |                   |   | $      | (37,760,577 | ) |   |
| Net      loss per share attributable to common shareholders:           |   |   |   |   |   |                   |   |   |   |   |   |
|      Basic      and diluted                   |   |   |   |   |   |                   |   | $      | (1.48 | ) |   |
|      Weighted      average shares outstanding |   |   |   |   |   |                   |   |   | 25,565,783 |   |   |

| 6. | Fixed      Assets |
|----|-------------------|

|                                                         |   | December      31, |          |
|--------------------------------------------------------------|--------|-------------------|---------------|
|                                                         |   | 2008              |          |   | 2007 |   |
|  Laboratory,      pilot plant and other equipment  |   | $                 | -             |   |   | $ | 2,727,055 |   |
|  Leasehold      improvements                       |   |              | 158,023  |   |   |   | 839,713  |   |
|  Office      furniture and fixtures                     |   |              | 87,229        |   |   |   | 288,965 |   |
|  Computer      equipment                                |   |              | 234,538       |   |   |   | 822,835 |   |
|                                                         |   |              | 479,790       |   |   |   | 4,678,568 |   |
|  Less -      Accumulated depreciation                   |   |              | (470,098      | ) |   |   | (4,254,110 | ) |
|  Fixed Assets,      net                                 |   | $                 | 9,692         |   |   | $ | 424,458 |   |

| 7.    Grants      for Research and Development |
|--------------------------------------------------------------------|

----

----

|                                  |   |          |   |   |                                |   |
|---------------------------------------|--------|---------------|--------|--------|-------------------------------------|--------|
|                                  |   |          |   |   |                                |   |
|                                  |   | Warrants      |   |   | Weighted      Average ExercisePrice |   |
|                                  |   |          |   |   |                                |   |
| Warrants      Outstanding at 12/31/05 |   | 1,176,310     |   |   | $                                   | 9.05   |   |
| Cancelled                             |   | (751,541      | )      |   | $                                   | 2.04   |   |
| Warrants      Outstanding at 12/31/06 |   | 424,769       |   |   | $                                   | 7.02   |   |
| Cancelled                             |   | (127,030      | )      |   | $                                   | 7.10   |   |
| Warrants      Outstanding at 12/31/07 |   | 297,739       |   |   | $                                   | 6.99   |   |
| Cancelled                             |   | (297,739      | )      |   | $                                   | 7.10   |   |
| Warrants      Outstanding at 12/31/08 |   |  -       |   |   |                                | -      |   |
|                                  |   |          |   |   |                                |   |   |
| Warrants      Exercisable at 12/31/08 |   |  -       |   |   | $                                   | 0.00   |   |
| Warrants      Exercisable at 12/31/07 |   |  297,739 |   |   | $                                   | 6.99   |   |
| Warrants      Exercisable at 12/31/06 |   | 424,769       |   |   | $                                   | 7.02   |   |

----

|                                 |   | Option |      |   | Weighted      Average ExercisePrice |   |
|--------------------------------------|--------|--------|-----------|--------|-------------------------------------|--------|
|                                 |   |   |      |   |                                |   |
| Options      Outstanding at 12/31/05 |   |   | 1,198,299 |   |                                | $      | 8.63 |   |
|                                 |   |   |      |   |                                |   |   |   |
| Granted                              |   |   | 881,000   |   |                                | $      | 2.09 |   |
| Cancelled                            |   |   | (154,677  | )      |                                | $      | 8.82 |   |
| Options      Outstanding at 12/31/06 |   |   | 1,924,622 |   |                                | $      | 5.62 |   |
|                                 |   |   |      |   |                                |   |   |   |
| Granted                              |   |   | 870,000   |   |                                | $      | 1.70 |   |
| Cancelled                            |   |   | (374,236  | )      |                                | $      | 7.06 |   |
| Options      Outstanding at 12/31/07 |   |   | 2,420,386 |   |                                | $      | 3.99 |   |
|                                 |   |   |      |   |                                |   |   |   |
| Granted                              |   |   | 854,000   |   |                                | $      | 0.36 |   |
| Cancelled                            |   |   | (537,280  | )      |                                | $      | 2.76 |   |
| Options      Outstanding at 12/31/08 |   |   | 2,737,106 |   |                                | $      | 3.10 |   |
|                                 |   |   |      |   |                                |   |   |   |
|                                 |   |   |      |   |                                |   |   |   |
|                                 |   |   |      |   |                                |   |   |   |
|                                 |   |   |      |   |                                |   |   |   |
| Options      exercisable at 12/31/08 |   |   | 2,244,735 |   |                                | $      | 3.63 |   |
|                                 |   |   |      |   |                                |   |   |   |
| Options      exercisable at 12/31/07 |   |   | 1,606,763 |   |                                | $      | 5.12 |   |
|                                 |   |   |      |   |                                |   |   |   |
| Options      exercisable at 12/31/06 |   |   | 879,467   |   |                                | $      | 9.62 |   |

----

|                                |   |   | Options      Outstanding       |      |                                                   | Options      Exercisable |
|-------------------------------------|--------|--------|--------------------------------|-----------|--------------------------------------------------------|--------------------------|
|  Range      of Exercise Prices |   |   |  Options      Outstanding |      |  Weighted      Average Remaining Contractual Life |                     | Weighted      Average Exercise Price |   |   |  Options      Exercisable |   |   | Weighted      Average Exercise Price |
| $0.35      - $0.39                  |   |   |                           | 751,000   |                                                   | 8.4      years           |   | $ | 0.35 |   |   |   | 361,666 |   |   | $ | 0.36 |
| $1.46      - $2.01                  |   |   |                           | 625,063   |                                                   | 5.1      years           |   | $ | 1.78 |   |   |   | 522,936 |   |   | $ | 1.78 |
| $2.15      - $3.95                  |   |   |                           | 1,020,588 |                                                   | 5.8      years           |   | $ | 2.41 |   |   |   | 1,019,678 |   |   | $ | 2.41 |
| $5.10      - $8.75                  |   |   |                           | 83,467    |                                                   | 3.3      years           |   | $ | 5.33 |   |   |   | 83,467 |   |   | $ | 5.33 |
| $9.38      - $21.20                 |   |   |                           | 256,988   |                                                   | 3.7      years           |   | $ | 16.30 |   |   |   | 256,988 |   |   | $ | 16.30 |
|                                |   |   |                           | 2,737,106 |                                                   | 6.1      years           |   | $ | 3.10 |   |   |   | 2,244,735 |   |   | $ | 3.63 |

|   |                           | 2008          |   | 2007          |   | 2006          |
|--------|--------------------------------|---------------|--------|---------------|--------|---------------|
|   | Risk-free      interest rate   | 2.48-3.30%    |   | 4.20-4.75%    |   | 4.35-4.69%    |
|   | Expected      lives (in years) | 5.2           |   | 6.16          |   | 5             |
|   | Dividend      yield            | 0      %      |   | 0      %      |   | 0      %      |
|   | Expected      volatility       | 80      -83 % |   | 79      -80 % |   | 80      -84 % |
|   | Fair      value                | $0.36         |   | $1.28         |   | $1.60         |

----

| 12. | Income      Taxes |
|-----|-------------------|

----

|                                               |   | 2008   |            |   | 2007 (1) |   |
|----------------------------------------------------|--------|--------|-----------------|--------|---------------|--------|
| Domestic      NOLs                                 |   | $      | 79,876,000      |   |          | $      | 75,906,000 |   |
| Israeli      NOLs                                  |   |   | 827,000         |   |          |   | 877,000 |   |
| Research      and Development Credit Carryforwards |   |   |  6,990,000 |   |          |   | 6,831,000 |   |
| Accrued      expenses, compensation and other      |   |   | 1,322,000       |   |          |   | 1,204,000 |   |
| Net      Deferred Tax Assets                       |   |   | 89,015,000      |   |          |   | 84,818,000 |   |
| Valuation      allowance                           |   |   | (89,015,000     | )      |          |   | (84,818,000 | ) |
|                                               |   | $      | -               |   |          | $      | - |   |

| 13. | Commitments      and Contingencies |
|-----|------------------------------------|

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | LeaseCommitments |
|   | 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |  $          | 232,654 |
|   | 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |             | 2,745 |
|   | 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |             | - |
|   | 2012                                                                                                   |   |             | - |
|   | 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |             | - |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                | 235,399 |

----

| 14. | Employee      Benefit Plans |
|-----|-----------------------------|

| 15. | Segment      and Geographic Information |
|-----|-----------------------------------------|

|                           |   | 2008    |              |   | 2007   |   |              | 2006   |   |
|--------------------------------|--------|---------|-------------------|--------|--------|--------|-------------------|--------|--------|
| Net      loss                  |   |    |              |   |   |   |              |   |   |
| United      States             |   | $       | (10,      286,538 | )      |   | $      | (15,      553,864 | )      |   | $ | (34,848,770 | ) |
| Israel                         |   |    | 197,132           |   |   |   | (71,961           | )      |   |   | (288,199 | ) |
|                           |   |  $ | (10,089,406       | )      |   | $      | (15,625,825       | )      |   | $ | (35,136,969 | ) |
| Total      assets              |   |    |              |   |   |   |              |   |   |   |   |   |
| United      States             |   |  $ | 5,417,338         |   |   | $      | 10,827,747        |   |   | $ | 25,245,098 |   |
| Israel                         |   |    | 554,826           |   |   |   | 1,547,212         |   |   |   | 3,148,240 |   |
|                           |   |  $ | 5,972,164         |   |   | $      | 12,374,959        |   |   | $ | 28,393,338 |   |
| Long      lived assets, net    |   |    |              |   |   |   |              |   |   |   |   |   |
| United      States             |   |  $ | 9,692             |   |   | $      | 18,280            |   |   | $ | 38,368 |   |
| Israel                         |   |    | -                 |   |   |   | 406,178           |   |   |   | 555,089 |   |
|                           |   |  $ | 9,692             |   |   | $      | 424,458           |   |   | $ | 593,457 |   |
| Capital      expenditures, net |   |    |              |   |   |   |              |   |   |   |   |   |
| United      States             |   |  $ | 1,730             |   |   | $      | 9,100             |   |   | $ | 1,155 |   |
| Israel                         |   |    | -                 |   |   |   | 167,492           |   |   |   | 164,211 |   |
|                           |   |  $ | 1,730             |   |   | $      | 176,592           |   |   | $ | 165,366 |   |

----

| 16. | Quarterly      Information (Unaudited) |
|-----|----------------------------------------|

| Year      ended                                    |   |             |       |   |             |   |       |             |   |   |             |   |
|----------------------------------------------------|--------|------------------|------------|--------|------------------|--------|------------|------------------|--------|--------|------------------|--------|
| December      31, 2008                             |   | 1st      Quarter |       |   | 2nd      Quarter |   |       | 3rd      Quarter |   |   | 4th      Quarter |   |
| Operating      Expenses                            |   | $                | 3,609,710  |   |             | $      | 2,613,967  |             |   | $      | 2,760,493        |   |   | $ | 2,116,014 |   |
| Loss      from Operations                          |   |             | (3,609,710 | )      |             |   | (2,613,967 | )                |   |   | (2,760,493       | )      |   |   | (2,116,014 | ) |
| Other      income (loss)                           |   |             | 14,827     |   |             |   | (53,591    | )                |   |   | (83,859          | )      |   |   | (70,725 | ) |
| Net      loss1                                     |   | $                | (3,594,883 | )      |             | $      | (2,667,558 | )                |   | $      | (2,844,352       | )      |   | $ | (982,613 | ) |
| Net      loss per share – basic and diluted* |   | $                | (.14       | )      |             | $      | (.10       | )                |   | $      | (.11             | )      |   | $ | (.04 | ) |
|                                               |   |             |       |   |             |   |       |             |   |   |             |   |   |   |   |   |
|                                               |   |             |       |   |             |   |       |             |   |   |             |   |   |   |   |   |
| Year      ended                                    |   |             |       |   |             |   |       |             |   |   |             |   |   |   |   |   |
| December      31, 2007                             |   | 1st      Quarter |       |   | 2nd      Quarter |   |       | 3rd      Quarter |   |   | 4th      Quarter |   |
| Operating      Expenses                            |   | $                | 5,100,362  |   |             | $      | 4,877,224  |             |   | $      | 3,732,191        |   |   | $ | 3,869,482 |   |
| Loss      from Operations                          |   |             | (5,100,362 | )      |             |   | (4,877,224 | )                |   |   | (3,732,191       | )      |   |   | (3,869,482 | ) |
| Other      income                                  |   |             | 347,267    |   |             |   | 239,821    |             |   |   | 193,636          |   |   |   | 216,928 |   |
| Net      loss1                                     |   | $                | (4,753,095 | )      |             | $      | (4,637,403 | )                |   | $      | (3,538,555       | )      |   | $ | (2,696,772 | ) |
| Net      loss per share – basic and diluted* |   | $                | (.19       | )      |             | $      | (.18       | )                |   | $      | (.14             | )      |   | $ | (.11 | ) |

|   | 1. | Includes      the sale of the NJ Net Operating Losses in the fourth quarters of 2008 and      2007 of $1,204,126, and $955,782,respectively. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

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