UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-Q x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the
quarterly period ended September 30, 2005 or o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 Commission file number 0-11550 Pharmos Corporation(Exact name of
  registrant as specified in its charter)  Nevada
  
  
  36-3207413(State or other
  jurisdiction of
  incorporation or organization)
  (IRS Employer Id. No.) 99 Wood Avenue South, Suite 311
Iselin, NJ 08830(Address of principal executive offices) Registrants
telephone number, including area code:(732) 452-9556 Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o. Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o. Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x. As of November 7, 2005 the Registrant had outstanding 19,027,809 shares of its $.03 par value Common
Stock. 1    Part I. Financial Information
Item 1 Financial Statements PHARMOS
  CORPORATION
  (Unaudited)
  Condensed Consolidated Balance Sheets

September 30,
  
  December 31,2005
  
  2004AssetsCash and cash equivalents
  
  $
  34,678,382
  
  $
  49,014,530Short-term investments
  
  
  13,551,278
  
  
  Restricted cash
  
  
  
  
  
  4,846,155Research and development grants
receivable
  
  
  589,396
  
  
  1,537,782Prepaid expenses and other current
assets
  
  
  963,039
  
  
  262,810Debt issuance costs
  
  
  
  
  
  45,648Total current assets
  
  
  49,782,095
  
  
  55,706,925Fixed assets, net
  
  
  812,698
  
  
  987,451Restricted cash
  
  
  141,563
  
  
  139,594Severance pay funded
  
  
  779,820
  
  
  811,926Other assets
  
  
  18,496
  
  
  18,946Total assets
  
  $
  51,534,672
  
  $
  57,664,842Liabilities
  and Shareholders EquityAccounts payable
  
  $
  295,448
  
  $
  2,462,162Accrued expenses
  
  
  910,689
  
  
  1,155,413Warrant liability
  
  
  43,709
  
  
  297,955Accrued wages and other compensation
  
  
  1,164,477
  
  
  756,488Convertible debentures, net
  
  
  
  
  
  4,765,540Total current liabilities
  
  
  2,414,323
  
  
  9,437,558Other liability
  
  
  137,797
  
  
  39,412Severance pay
  
  
  1,048,069
  
  
  1,197,039Total liabilities
  
  
  3,600,189
  
  
  10,674,009Commitments and contingenciesShareholders
  EquityPreferred stock, $.03 par value, 1,250,000
shares authorized, none
  issued and outstanding
  
  
  
  
  
  Common stock, $.03 par value; 60,000,000 shares
authorized, 19,027,809
  issued
  
  
  570,834
  
  
  2,854,112Deferred compensation
  
  
  (805,132
  )
  
  (1,701,122
  )Paid-in capital in excess of par
  
  
  191,094,477
  
  
  188,809,955Accumulated deficit
  
  
  (142,925,270
  )
  
  (142,971,686
  )Treasury stock, at cost, 2,838 shares
  
  
  (426
  )
  
  (426
  )Total shareholders equity
  
  
  47,934,483
  
  
  46,990,833Total liabilities and shareholders
equity
  
  $
  51,534,672
  
  $
  57,664,842The accompanying notes
are an integral part of these condensed consolidated
financial statements

2


PHARMOS
CORPORATION(Unaudited)CondensedConsolidated
Statements of Operations

Three months ended
  September 30,
  
  Nine months ended
  September 30,2005
  
  2004
  
  2005
  
  2004ExpensesResearch and development, gross
  
  $
  2,180,137
  
  $
  4,811,747
  
  $
  7,225,373
  
  $
  12,316,830Grants
  
  
  (284,185
  )
  
  (1,032,813
  )
  
  (1,015,640
  )
  
  (2,739,958
  )Research and development, net of
grants
  
  
  1,895,952
  
  
  3,778,934
  
  
  6,209,733
  
  
  9,576,872Selling, general and administrative
  
  
  1,734,493
  
  
  1,739,679
  
  
  5,265,239
  
  
  4,490,024Depreciation and amortization
  
  
  87,841
  
  
  143,300
  
  
  301,518
  
  
  443,370Total operating expenses
  
  
  3,718,286
  
  
  5,661,913
  
  
  11,776,490
  
  
  14,510,266Loss from
  operations
  
  
  (3,718,286
  )
  
  (5,661,913
  )
  
  (11,776,490
  )
  
  (14,510,266
  )Other income
  (expense)Bausch & Lomb payment
  
  
  
  
  
  
  
  
  10,725,688
  
  
  Interest income
  
  
  416,267
  
  
  147,294
  
  
  1,043,283
  
  
  450,143Interest expense
  
  
  (2,219
  )
  
  (756,804
  )
  
  (165,591
  )
  
  (3,244,379
  )Change in value of warrants
  
  
  11,562
  
  
  345,284
  
  
  254,246
  
  
  143,577Other (expense) income
  
  
  0
  
  
  (16,770
  )
  
  (34,723
  )
  
  (8,086
  )Other income (expense), net
  
  
  425,610
  
  
  (280,996
  )
  
  11,822,903
  
  
  (2,658,745
  )Net income
  (loss)
  
  ($
  3,292,676
  )
  ($
  5,942,909
  )
  $
  46,413
  
  ($
  17,169,011
  )Net income
  (loss) per share- basic
  
  ($
  0.17
  )
  ($
  0.33
  )
  $
  0.00
  
  ($
  0.97
  )- diluted
  
  ($
  0.17
  )
  ($
  0.33
  )
  $
  0.00
  
  ($
  0.97
  )Weighted
  average shares outstanding- basic
  
  
  18,974,338
  
  
  18,150,939
  
  
  18,974,120
  
  
  17,754,459- diluted
  
  
  18,974,338
  
  
  18,150,939
  
  
  18,974,954
  
  
  17,754,459The accompanying
notes are an integral part of these condensed consolidated financial statements

3


Pharmos
Corporation
(Unaudited)CondensedConsolidated Statements of Cash Flows

Nine months Ended September 30,2005
  
  2004Cash
  flows from operating activitiesNet
  income (loss)
  
  $
  46,413
  
  $
  (17,169,011
  )Adjustments to reconcile net income (loss) loss
  to net cash used in operating activities:Depreciation and amortization
  
  
  301,518
  
  
  443,370Interest expense on convertible debentures
  converted into common stock
  
  
  
  
  
  10,555Provision for severance pay
  
  
  (148,970
  )
  
  91,168Change in the value of warrants
  
  
  (254,246
  )
  
  (143,577
  )Amortization of debt discount and issuance
costs
  
  
  126,256
  
  
  2,748,274Amortization of stock options issuances below
  fair market value
  
  
  68,772
  
  
  53,936Option expense  consultant
compensation
  
  
  1,244
  
  
  558,206Amortization of restricted shares
issuance
  
  
  827,217
  
  
  91,913Income from Bausch & Lomb milestone payment,
  net
  
  
  (10,725,688
  )
  
  Changes
  in operating assets and liabilities:Research and development grants
receivable
  
  
  948,386
  
  
  (1,069,381
  )Prepaid expenses and other current
assets
  
  
  (700,229
  )
  
  49,060Severance pay funding
  
  
  32,106
  
  
  (81,640
  )Other assets
  
  
  450
  
  
  1,645Accounts payable
  
  
  (634,186
  )
  
  (794,546
  )Accrued expenses
  
  
  (244,724
  )
  
  (122,294
  )Accrued wages and other compensation
  
  
  407,989
  
  
  (185,409
  )Other liabilities
  
  
  98,385
  
  
  22,978Net
  cash used in operating activities
  
  
  (9,849,307
  )
  
  (15,494,753
  )Cash
  flows from investing activitiesPurchases of fixed assets
  
  
  (126,761
  )
  
  (238,671
  )Proceeds from Bausch & Lomb milestone
  payment
  
  
  12,275,000
  
  
  Payment to Bausch & Lomb related to sale of
  ophthalmic business
  
  
  (1,532,528
  )
  
  Royalty payment and grant reimbursement related
  to Bausch & Lomb milestone payment
  
  
  (1,549,312
  )
  
  Purchase of short-term investments
  
  
  (13,551,278
  )
  
  Decrease in restricted cash
  
  
  4,844,186
  
  
  6,729,798Net
  cash provided by investing activities
  
  
  359,307
  
  
  6,491,127Cash
  flows from financing activitiesProceeds from issuance of common stock and
  exercise of options and warrants, net of issuance costs
  
  
  
  
  
  20,812,716Repayment of convertible debentures
  
  
  (4,846,148
  )
  
  (9,692,308
  )Net
  cash used in financing activities
  
  
  (4,846,148
  )
  
  11,120,408Net
  increase (decrease) in cash and cash equivalents
  
  
  (14,336,148
  )
  
  2,116,782Cash
  and cash equivalents at beginning of year
  
  
  49,014,530
  
  
  49,292,640Cash
  and cash equivalents at end of period
  
  $
  34,678,382
  
  $
  51,409,422Supplemental information:Interest paid
  
  $
  39,042
  
  $
  479,828Supplemental disclosure of
  non-cash financing activities:Conversion of convertible debt
  
  $
  
  
  $
  2,000,000The accompanying
notes are an integral part of these condensed consolidated financial
statements

4


Basis of Presentation

The accompanying unaudited interim financial
  statements have been prepared in accordance with generally accepted
  accounting principles for interim financial information pursuant to the
  instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
  do not include all of the information and footnotes required by generally
  accepted accounting principles for complete financial statements. In the
  opinion of management, all adjustments, consisting of normal recurring
  accrual adjustments, considered necessary for a fair statement have been
  included. Operating results and cash flows for the three month and nine month
  periods ended September 30, 2005 are not necessarily indicative of the
  results that may be expected for the year ending December 31, 2005. The
  year-end condensed balance sheet was derived from audited financial
  statements but does not include all disclosures required by accounting
  principles generally accepted in the United States of America and included in
  the Form 10-K filing.1. The
  CompanyPharmos Corporation (the Company or Pharmos) is a
  bio-pharmaceutical company that discovers and develops novel therapeutics to
  treat a range of indications, in particular, central and peripheral
  neurological and inflammatory disorders. The Companys core proprietary
  technology platform focuses on discovery and development of synthetic
  cannabinoid compounds. Cannabinor, the lead CB2-selective receptor agonist
  candidate, began Phase I safety studies in the third quarter of 2005 and, if
  successful, will enter Phase II testing in pain indications in early 2006.
  From the dextrocannabinoid family, the neuroprotective drug candidate
  dexanabinol completed a Phase IIa trial as a preventive agent against
  post-surgical cognitive impairment in the fourth quarter of 2004. Other
  compounds from Pharmos proprietary synthetic cannabinoid library are in
  pre-clinical studies targeting pain, multiple sclerosis, rheumatoid arthritis
  and other disorders. The Companys NanoEmulsion drug delivery system is in
  clinical-stage development for topical application of analgesic and
  anti-inflammatory agents. The Company has executive offices in Iselin, New
  Jersey and conducts research and development through its wholly owned
  subsidiary, Pharmos, Ltd., in Rehovot, Israel.2.
  Liquidity and Business RisksThe Company was not profitable in 2002, 2003, or
  2004. During the nine months ended September 30, 2005, the Company funded all
  of its expenses through other income of $10.7 million as a result of the
  receipt of a non-recurring milestone payment in January 2005 from Bausch &
  Lomb (B&L) related to the FDA approval and subsequent product launch of
  Zylet and income from the Office of the Chief Scientist of Israel. At September 30, 2005, the Company had an accumulated deficit of
  $142.9 million and expects to continue to incur losses going forward. Such
  losses have resulted principally from costs incurred in research and
  development and from general and administrative expenses. The Company has
  financed its operations with public and private offerings of securities,
  advances and other funding pursuant to a marketing agreement with Bausch &
  Lomb, grants from the Office of the Chief Scientist of Israel, research
  contracts, the sale of a portion of its New Jersey net operating loss
  carryforwards, and interest income. Management believes that the current
  cash, cash equivalents and short term investments, totaling of $48.2 million
  as of September 30, 2005, will be sufficient to support the Companys
  continuing operations beyond September 30, 2006.The Company is continuing to actively pursue various
  funding options, including equity offerings, strategic corporate alliances,
  business combinations and the establishment of product related research and
  development limited partnerships, to obtain additional financing to continue
  the development of its products and bring them to commercial markets. Should
  the Company be unable to raise adequate financing or generate revenue in the
  future, long-term operations will need to be scaled back or discontinued.5


3.
  Significant Accounting PoliciesReverse Stock SplitOn May 26, 2005, Pharmos Corporation filed a
  Certificate of Change with the Nevada Secretary of State which served to
  effect, as of May 31, 2005, a 1-for-5 reverse split of Pharmos common stock.
  As a result of the reverse stock split, every five shares of Pharmos common
  stock were combined into one share of common stock; any fractional shares
  created by the reverse stock split were rounded up to whole shares. The
  reverse stock split affected all of Pharmos common stock, stock options and
  warrants outstanding immediately prior to the effective date of the reverse
  stock split. The reverse split reduced the number of shares of Pharmos
  common stock outstanding from 95,137,076 shares to 19,027,809 shares, and the
  number of authorized shares of common stock was reduced from 150,000,000 shares
  to 30,000,000 shares. All references to common share and per common share
  amounts for all periods presented have been retroactively restated to reflect
  this reverse split. At the Annual Meeting in September 2005, the shareholders
  voted to increase the number of authorized shares of common stock to
  60,000,000 shares.ReclassificationsThe consolidated statement of
  cash flows for the nine months ended September 30, 2005 includes in cash
  flows from investing activities a $1.5 million payment made during the three
  months ended March 31, 2005 to Bausch & Lomb related to the sale of
  the ophthalmic business. For the
  three months ended March 31, 2005 such payment was included in cash flow used
  in operating activities. This reclass was recorded in the three month period
  ended June 30, 2005 and had no impact on the Consolidated Balance Sheet or
  Consolidated Statement of Operations for any period.Research and development grants receivableAs of September 30, 2005 and December 31, 2004,
  research and development grant receivables consist of grants for research and
  development relating to certain projects. Research and development grants are
  recognized as a reduction of research and development expenses.InvestmentsThe Company considers all investments that are not
  considered cash equivalents and with a maturity of less than one year from
  the balance sheet date to be short-term investments. The Company considers
  all investments with a maturity of greater than one year to be long-term investments.
  All investments are considered as held-to-maturity and are carried at
  amortized cost, as the Company has both the positive intent and ability to
  hold them to maturity. Interest income includes interest, amortization of
  investment purchases premiums and discounts, and realized gains and losses on
  sales of securities. Realized gains and losses on sales of investment
  securities are determined based on the specific identification method.Restricted cashIn connection with the September 2003 Convertible
  Debenture offering, the terms of the agreement required the Company to
  establish an escrow account. The escrow account is shown as Restricted Cash
  on the Companys balance sheet and had been released to the Company generally
  in proportion to the amount of Convertible Debentures converted into common
  shares or in connection with the repayment of the debt that began in March
  2004. The short-term balance represents debt repayment due within 12 months.
  During the first quarter of 2004, one of the investors converted a total of
  $2 million plus interest into shares of common stock. As part of the escrow
  agreement, $2 million of restricted cash was released to the Company during
  April 2004. The Company repaid in full the debenture holders approximately
  $4.8 million from its escrow account during the nine months ended September
  30, 2005.The remaining restricted cash represents deposits
  held for or by landlords.6


Impairment of Long-Lived AssetsThe Company reviews long-lived assets for impairment
  whenever events or changes in business circumstances indicate that the
  carrying amount of the assets may not be fully recoverable or that the useful
  lives of these assets are no longer appropriate. Each impairment test is
  based on a comparison of the undiscounted cash flow to the recorded value of
  the asset. Subsequent impairment assessments could result in future
  impairment charges. Any impairment charge would result in the reduction in
  the carrying value of long-lived assets to its fair market value and would
  reduce its operating results in the period in which the charge arose.Tax ProvisionNo tax provision is required
  at this time since the company expects to be in a tax loss position at
  year-end December 31, 2005 and has net operating losses from previous years.
  The Company has established a 100% valuation allowance against the deferred
  tax asset.7


Equity based compensationThe Company accounts for its employee stock option
  plans in accordance with the provisions of Accounting Principles Board
  Opinion No. 25, Accounting for Stock Issued to Employees, and related
  interpretations. As such, compensation expense related to employee stock
  options is recorded if, on the date of grant, the fair value of the
  underlying stock exceeds the exercise price. The Company adopted the
  disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based
  Compensation, which allows entities to continue to apply the provisions of
  APB Opinion No. 25 for transactions with employees and provide pro forma
  operating results and pro forma per share disclosures for employee stock
  grants as if the fair-value-based method of accounting in SFAS No. 123 (as
  amended by SFAS 148) has been applied to these transactions. Options issued
  to non-employees are valued using the fair value methodology under SFAS 123.On June 28, 2005, the Company accelerated the
  vesting of unvested stock options awarded under its stock option plans that
  had exercise prices greater than $9.00; the closing price was $2.43 on June
  28, 2005. Unvested options to purchase approximately 200 thousand shares
  became exercisable as a result of the vesting acceleration. Typically, the
  Company grants stock options that vest over a four-year period. The purpose
  of the accelerated vesting was to enable the Company to avoid recognizing, in
  its consolidated statement of operations, compensation expense associated
  with these options in future periods, upon adoption of SFAS 123R (Share-Based
  Payment) in January 2006. The impact of this acceleration resulted in a $2.6
  million increase in proforma stock-based compensation expense.The following table illustrates the effect on net
  income (loss) and net income (loss) per share if the Company had applied the
  fair value recognition provisions of SFAS No. 123 to stock-based employee
  compensation. The estimated fair value of each option is calculated using the
  Black-Scholes option-pricing model.Three months ended,September 30,
  
  Nine months ended,September 30,2005
  
  2004
  
  2005
  
  2004Net loss (income) as reported
  

  ($

  3,292,676
  )
  ($

  5,942,909
  )
  $
  46,413
  

  ($

  17,169,011
  )Add: Stock-based employee compensation expense included in reported
  net income (loss)
  
  
  274,199
  
  
  109,865
  
  
  895,989
  
  
  145,849Deduct: Total stock-based employee compensation expense determined
  under fair value based method for all awards
  
  
  (352,097
  )
  
  (466,715
  )
  
  (4,168,379
  )
  
  (1,172,919
  )Pro forma net loss
  

  ($

  3,370,574
  )
  ($

  6,299,759
  )

  ($

  3,225,977
  )

  ($

  18,196,081
  )Loss (earnings) per share:Basic - as reported
  
  ($
  0.17
  )
  ($
  0.35
  )
  $
  0.00
  
  ($
  0.97
  )Diluted - as reported
  
  ($
  0.17
  )
  ($
  0.35
  )
  $
  0.00
  
  ($
  0.97
  )Basic - pro forma
  
  ($
  0.18
  )
  ($
  0.35
  )
  ($
  0.17
  )
  ($
  1.02
  )Diluted  pro forma
  
  ($
  0.18
  )
  ($
  0.35
  )
  ($
  0.17
  )
  ($
  1.02
  )For disclosure purposes under SFAS No. 123, the fair
  value of each option grant was estimated on the date of grant using the
  Black-Scholes option valuation model with the following weighted-average
  assumption:Three
  months ended, 
  September 30,
  
  Nine
  months ended, 
  September 30,2005
  
  2004
  
  2005
  
  2004Risk-free interest rate
  
  n/a*
  
  3.69
  %
  
  3.71-3.72%
  
  3.07  3.69%Expected lives (in years)
  
  n/a*
  
  5
  
  
  5
  
  5Dividend yield
  
  n/a*
  
  0
  %
  
  0%
  
  0%Expected volatility
  
  n/a*
  
  87
  %
  
  99-107%
  
  87-88%* No options were granted in the
third quarter of 2005

8


New Accounting PronouncementsNew pronouncements issued by the FASB and not
  effective until after September 30, 2005 are not expected to have a
  significant effect on the companys financial position or results of
  operations, with the possible exception of the following, which are currently
  being evaluated by management:In May 2005, the FASB has issued Statement No. 154,
  Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
  and FASB Statement No. 3. The Statement applies to all voluntary changes in
  accounting principle, and changes the requirements for accounting for and
  reporting of a change in accounting principle. Statement 154 requires
  retrospective application to prior periods financial statements of a
  voluntary change in accounting principle unless it is impracticable. Opinion
  20 previously required that most voluntary changes in accounting principle be
  recognized by including in net income of the period of the change the
  cumulative effect of changing to the new accounting principle. Statement 154
  improves financial reporting because its requirements enhance the consistency
  of financial information between periods. Statement 154 is effective for
  accounting changes and corrections of errors made in fiscal years beginning
  after December 15, 2005.In December 2004, the FASB issued SFAS No. 123
  (revised 2004), Share-Based Payment
  (SFAS 123R), which replaces SFAS 123 and supersedes APB No. 25. Under the
  new standard, companies will no longer be allowed to account for stock-based
  compensation transactions using the intrinsic value method in accordance with
  APB 25. Instead, companies will be required to account for such transactions
  using a fair value method and to recognize the expense in the statements of
  operations. The adoption of SFAS 123R will require additional accounting
  related to the income tax effects of share-based payment arrangements and
  additional disclosure of their cash flow impacts. SFAS 123R also allows, but
  does not require, companies to restate prior periods. The Company expects to
  adopt the provisions of SFAS 123R, prospectively, beginning January 1, 2006.In March 2005, the FASB issued FASB Interpretation
  No. (FIN) 47  Accounting for Conditional
  Asset Retirement Obligations, an interpretation of FASB Statement No. 143,
  that clarifies the term conditional asset retirement obligation as used in
  Statement of Financial Accounting Standards (SFAS) No. 143  Accounting for Asset Retirement Obligations.
  Specifically, FIN 47 provides that an asset retirement obligation is
  conditional when either the timing and (or) method of settling the obligation
  is conditioned on a future event. Accordingly, an entity is required to
  recognize a liability for the fair value of a conditional asset retirement
  obligation if the fair value of the liability can be reasonably estimated.
  Uncertainty about the timing and (or) method of settlement of a conditional
  asset retirement obligation should be factored into the measurement of the
  liability when sufficient information exists. This interpretation also
  clarifies when an entity would have sufficient information to reasonably
  estimate the fair value of an asset retirement obligation. FIN 47 is
  effective for fiscal years ending after December 15, 2005. The adoption of
  FIN 47 is not expected to have a material impact on our consolidated
  financial position or results of operations.9


4. Net
  Income (Loss) Per Common ShareBasic and diluted net income (loss) per common share
  was computed by dividing the net income (loss) for the period by the weighted
  average number of shares of common stock issued and outstanding. For the
  period ending September 30, 2004, other potential common stock has been
  excluded from the calculation of diluted net loss per common share, as their
  inclusion would be anti-dilutive. In accordance with the requirements of
  Statement of Financial Accounting Standards No. 128, a limited number of the
  stock options or warrants as of September 30, 2005 were in the money or
  would be considered other potential common stock and have been included in
  the calculation of diluted net earnings per share. The basis for the shares
  used in determining the diluted shares include in the calculation of diluted
  income per share for September 30, 2005 is illustrated below.September 30,2005
  
  September 30,2004Weighted average shares
  outstanding  basic
  
  
  18,974,120
  
  
  17,754,459Restricted shares  non-vested
  
  
  
  
  
  Weighted average of options
  that are in the money
  
  
  834
  
  
  Weighted average shares
  outstanding  diluted
  
  
  18,974,954
  
  
  17,754,459The following table sets forth the number of
  potential shares of common stock that have been excluded from diluted income
  (loss) per share because the exercise price was greater than the average
  market price of our common stock, and therefore, the effect on diluted income
  (loss) per share would have been anti-dilutive.September 30,
  
  September 30,2005
  
  2004Stock options
  
  
  909,158
  
  
  1,065,993Warrants
  
  
  1,176,310
  
  
  1,361,288Shares issuable upon exercise of convertible debt
  
  

  
  
  

  466,373Restricted stock  non vested
  
  
  126,582
  
  
  126,582Total potential dilutive securities not included in loss (income) per
  share
  
  
  2,212,050
  
  
  3,020,23610


5.
  Collaborative AgreementsIn October 2001, the Company sold its ophthalmic
  product line to Bausch & Lomb. Future payments were subject to certain
  milestones related to product approvals by the FDA and the royalties on the
  sales of these products.At the time of the sale in 2001, Pharmos received
  gross proceeds of approximately $25 million in cash. In January 2005, Pharmos
  received additional gross proceeds of approximately $12.275 million from
  Bausch & Lomb in connection with their successful commercial launch of
  the Zylet product. The net proceeds to Pharmos from this payment were
  approximately $9.2 million, after making the payments to Bausch & Lomb,
  Dr. Nicholas Bodor and the Israel-U.S. Binational Industrial Research and
  Development Foundation as described below. In addition, Pharmos may receive a
  royalty payment of up to $10 million if actual Zylet sales during the first
  two years after commercialization exceed agreed-upon amounts.As part of the original agreement with Bausch &
  Lomb, Pharmos agreed to pay up to $3.75 million of the costs of developing
  Zylet. In January 2005, Pharmos paid approximately $1.56 million (included
  in accounts payable on December 31, 2004) which was the remaining balance
  owed to Bausch & Lomb for the Zylet project development under the terms
  of the agreement.Dr. Nicholas Bodor, a former director of and
  consultant to Pharmos, is the patent owner and licensor of the technology
  underlying the ophthalmic product line sold to Bausch & Lomb. In January
  2005, Pharmos paid Dr. Bodor approximately $1.338 million in connection with
  the commercialization of Zylet, per the license agreement with Dr. Bodor.
  Pharmos owes Dr. Bodor an additional 14.3% of any payments the Company may
  receive from Bausch & Lomb in the event that certain sales levels are
  exceeded in the first two years following commencement of Zylet sales in the
  U.S.In February 2005, the Company paid the Israel-U.S.
  Binational Industrial Research and Development Foundation (BIRDF) $.212 million,
  which represented the maximum amount the Company owed the foundation for
  Zylet.Pharmos subsidiary, Pharmos Ltd., licensed its
  patents related to the oral delivery of lipophilic substances in the limited
  field of use of nutraceuticals to Herbamed, Ltd., a company in Israel
  controlled by the Chairman and Chief Executive Officer of Pharmos. In the
  three and nine months ending September 30, 2005, the Company recorded in
  other income royalties of $2,219 and $22,710, compared with $59 and $4,813 in
  the same periods in 2004, per the licensing agreement with Herbamed.11


6.
  Private Placement of Convertible DebtOn September 26, 2003, the Company completed a
  private placement of convertible debentures and warrants to six institutional
  investors, generating total gross proceeds of $21.0 million. Five million
  dollars of the proceeds was to be used for working capital purposes, and
  $16.0 million was to be available to fund acquisitions upon the approval of
  the investors. The convertible debentures were convertible into common stock
  of the Company at a fixed price of $20.20, or 205% above the closing bid
  price of the stock for the five days preceding the closing date. The
  debentures, which bore an interest rate of 4%, were redeemed in 13 substantially
  equal monthly increments which began March 31, 2004. Amounts converted into
  shares of Pharmos common stock reduced the monthly redemption amount in
  inverse order of maturity. The $16.0 million earmarked for acquisition
  activity was to be held in escrow until used or repaid. In connection with
  the financing, the Company also issued 1,102,941 three-year warrants
  (including 102,941 placement agent warrants) to purchase 1,102,941 shares of
  common stock at an exercise price of $10.20 per share. The issuance costs
  related to the convertible debentures of approximately $1,229,000 in cash and
  $434,000 for the value of the placement agent warrants were capitalized and
  amortized over the life of the debt. The Company calculated the value of the
  warrants at the date of the transaction, including the placement agent
  warrants, being approximately $4,652,877 under the Black-Scholes
  option-pricing method (assumption: volatility 75%, risk free rate 1.59% and
  zero dividend yield). The Company allocated the $21.0 million in gross
  proceeds between the convertible debentures and the warrants based on their
  relative fair values. The Company has reported the debt discount as a direct
  reduction to the face amount of the debt in accordance with APB 21. The
  discount had accreted over the life of the outstanding debentures. The
  issuance costs allocated to the convertible debentures were deferred and
  amortized to interest expense over the life of the debt. APB 21 also requires
  the Company to allocate the warrant costs between the convertible debentures
  and the transaction warrants. The issuance costs allocated to the warrants
  were recorded as a debit to additional paid in capital. During the first
  quarter of 2004, one of the investors from the September 2003 Convertible
  Debentures private placement converted a total of $2 million plus interest.
  The Company issued 99,532 shares of common stock. As of March 31, 2005, the
  Convertible Debentures have been fully repaid.7.
  Common Stock TransactionsIn the nine months ended September 30, 2005, there
  were no shares of common stock issued pursuant to the Pharmos Corporation
  2001 Employee Stock Purchase Plan or options exercised under the Companys
  Stock Option Plans. In the nine months ended September 30, 2005, the Company
  incurred a non-cash charge of $1,244 for issuing stock options to consultants
  who have since become employees. In addition, the amortization of the
  remaining balance for options which had been issued below fair market value
  in 2004 has been expensed in the amount of $48,000 in the second quarter of
  2005 as a result of the acceleration of vested options above $9.00 which
  included these shares.On May 26, 2005, Pharmos Corporation filed a
  Certificate of Change with the Nevada Secretary of State which served to
  effect, as of May 31, 2005, a 1-for-5 reverse split of Pharmos common stock.
  As a result of the reverse stock split, every five shares of Pharmos common
  stock were combined into one share of common stock; any fractional shares
  created by the reverse stock split were rounded up to whole shares. The
  reverse stock split affected all of Pharmos common stock, stock options,
  restricted shares and warrants outstanding immediately prior to the effective
  date of the reverse stock split. The reverse split reduced the number of
  shares of Pharmos common stock outstanding from 95,137,076 shares to
  19,027,809 shares, and the number of authorized shares of common stock was
  reduced from 150,000,000 shares to 30,000,000 shares. The authorized shares
  of common stock were increased to 60,000,000 shares at the Annual Meeting
  held in September 2005.On September 6, 2004, the Board of Directors
  approved the Retention Award Agreements and Pharmos entered into Retention
  Award Agreements with each of Dr. Haim Aviv, Chairman and Chief Executive
  Officer, and Dr. Gad Riesenfeld, President and Chief Operating Officer. The
  Company granted retention awards of $300,000 cash and 75,950 restricted stock
  units to Dr. Aviv and $200,000 cash and 50,633 shares of restricted stock to
  Dr. Riesenfeld (the Awards). One half of the Awards shall vest or are
  scheduled to vest and become non-forfeitable on December 31, 2005, and the
  balance shall vest and become non-forfeitable on June 30, 2007, subject to
  certain accelerated vesting provisions. The fair value of the restricted
  shares was based on the fair value of the stock on the issuance date. The
  aggregate fair value of the restricted stock awards totaled $2 million. For
  financial reporting purposes, the cash awards and the fair value of the
  restricted stock awards, which totaled $2,500,000, will be expensed pro rata
  over the vesting periods. During the nine month period ended September 30,
  2005, the Company recorded an expense of $827,000 in connection with the
  stock portion of the Awards.12


On March 4, 2003, the Company raised $4.3 million
  from the placement of common stock and warrants. The private placement
  offering was completed by issuing 1,011,765 shares of common stock at a price
  of $4.25 per share and approximately 200 thousand warrants at an exercise
  price of $6.25 per share. Additionally, the remaining balance of the
  September 2000 Convertible Debenture offering was redeemed for cash. The
  original face amount of $3.5 million was redeemed for approximately $4.0
  million, which included accrued and unpaid interest. According to EITF 00-19,
  the issued warrants meet the requirements of and are being accounted for as a
  liability since registered shares must be delivered upon settlement. The
  Company calculated the initial value of the warrants, including the placement
  agent warrants, being approximately $394,000 under the Black-Scholes
  option-pricing method (assumption: volatility 75%, risk free rate 2.88% and
  zero dividend yield). The value of the warrants is being marked to market
  each reporting period as a derivative gain/loss until exercised or expiration
  and amounted to $43,709 at September 30, 2005. Upon exercise of each of the
  warrants, the related liability is reduced by recording an adjustment to
  additional paid-in-capital.8.
  Segment and Geographic InformationThe Company is active in one business segment:
  designing, developing, selling and marketing pharmaceutical products. The
  Company maintains development operations in the United States and Israel. The
  Companys selling operations are maintained in the United States.Geographic information for the three and nine months
  ending September 30, 2005 and 2004 are as follows:Three
  months ended September 30,
  
  Nine
  months ended September 30,2005
  
  2004
  
  2005
  
  2004Net
  (loss) incomeUnited States
  
  $
  (3,224,696
  )
  $
  (5,824,145
  )
  $
  300,778
  
  $
  (16,837,447
  )Israel
  
  
  (67,980
  )
  
  (118,764
  )
  
  (254,365
  )
  
  (331,564
  )$
  (3,292,676
  )
  $
  (5,942,909
  )
  $
  49,413
  
  $
  (17,169,011
  )Capital
  ExpendituresUnited States
  
  $
  
  
  $
  31,493
  
  $
  3,945
  
  $
  71,057Israel
  
  
  16,091
  
  
  53,489
  
  
  122,816
  
  
  167,614$
  16,091
  
  $
  84,982
  
  $
  126,761
  
  $
  238,671Geographic
  information as of September 30, 2005 and 2004 are as follows:2005
  
  2004Total
  AssetsUnited States
  
  
  
  
  
  
  
  $
  47,709,020
  
  $
  60,494,279Israel
  
  
  
  
  
  
  
  
  3,825,652
  
  
  4,566,729$
  51,534,672
  
  $
  65,061,008Long
  Lived Assets, netUnited States
  
  
  
  
  
  
  
  $
  110,158
  
  $
  130,483Israel
  
  
  
  
  
  
  
  
  1,500,856
  
  
  1,634,909$
  1,611,014
  
  $
  1,765,39213


9.
  Subsequent EventsIn early October, the Company notified its Chief
  Operating Officer that it would not be renewing his employment agreement when
  it expires in April 2006. Under the terms of his employment agreement, this
  non-renewal will require several payments from the Company including salary,
  benefits and the vesting of certain stock options and restricted stock. These
  payments will include his salary through April 2006, one years additional
  salary of $249,063, plus payments for benefits commensurate with his current
  benefits. In addition, his restricted stock and other stock options will
  become vested. The balance for the restricted shares carried in Deferred
  Compensation within Equity is $322,059 as of September 30, 2005. The Company
  also expects to record approximately $300,000 in other severance costs in the
  fourth quarter of 2005.On November 7, 2005, the Company entered into an employment agreement with a new President and Chief Operating Officer, to be
effective as of November 14, 2005.  Under the terms of his employment agreement, he will receive an annual salary of $315,000, a
sign-on bonus of $40,000 plus option to purchase 325,000 shares of common stock.10.
  Commitments and ContingenciesLegalThe Company and certain
  current officers have been named as defendants in several purported
  shareholder class action lawsuits alleging violations of federal securities
  laws. These lawsuits were filed beginning in January 2005 and are pending in
  the U.S. District Court for the District of New Jersey. These lawsuits assert
  claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
  and Rule 10b-5 thereunder. The complaints allege generally that the
  defendants knowingly or recklessly made false or misleading statements
  regarding the effectiveness of dexanabinol in treating TBI which had the
  effect of artificially inflating the price of our shares. The complaints seek
  unspecified damages. These class actions have been consolidated by order of
  the Court and lead plaintiffs and lead plaintiffs counsel have been
  appointed. An amended complaint was filed in September 2005. Management
  intends to defend these lawsuits vigorously. However, we cannot assure you
  that we will prevail in these actions, and, if the outcome is unfavorable to
  Pharmos, our reputation, profitability and share price could be adversely
  affected.In addition, two purported
  shareholders of Pharmos common stock have commenced derivative actions
  against our directors and against certain current and former officers. The
  first derivative lawsuit was commenced in February 2005 in the U.S. District
  Court for the District of New Jersey, and has been consolidated for pretrial
  purposes with the class actions. An amended complaint in the federal
  derivative lawsuit was filed in September 2005. The second was filed in April
  2005 in the Superior Court of New Jersey, County of Middlesex. Both lawsuits
  allege generally, on behalf of Pharmos (which has been named as a nominal
  defendant), breaches of fiduciary duty and other state law violations arising
  from the same set of underlying facts as the class actions. The complaints
  seek unspecified damages. The Company believes the complaints are
  without merit and intends to defend the lawsuits vigorously, and is planning
  on filing motions to dismiss the pending actions.14


Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations

This discussion and analysis of our financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. The Company has based these forward-looking
statements on our current expectations and projections of future events. Such
statements reflect our current views with respect to future events and are
subject to unknown risks, uncertainty and other factors that may cause results
to differ materially from those contemplated in such forward looking
statements. Statements made in this document related to the development,
commercialization and market expectations of the Companys drug candidates, to
the establishment of corporate collaborations, and to the Companys operational
projections are forward-looking and are made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. Among the factors
that could result in a materially different outcome are the inherent
uncertainties accompanying new product development, action of regulatory
authorities and the results of further trials. Additional economic,
competitive, governmental, technological, marketing and other factors
identified in Pharmos filings with the Securities and Exchange Commission
could affect such results. In addition, the following discussion should be read
in conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this report.

Executive Summary

During the third quarter of 2005, the Company
commenced a Phase I trial for its lead candidate for treating pain, a CB-2
selective agonist, cannabinor (formerly known as PRS 211,375). If successful,
the Company will enter Phase II testing in pain indications in early 2006. The
Companys NanoEmulsion drug delivery system is in development for the topical
application of analgesic and anti-inflammatory agents and also has the
potential for the delivery of a wide variety of water-insoluble molecules.
Phase I (safety and tolerability) studies have been completed with a prototype
formulation of an NSAID, and revealed that the it was well-tolerated. The
Company expects to commence a clinical program in the first half of 2006. From
the dextrocannabinoid family, the neuroprotective drug candidate dexanabinol
completed a Phase IIa trial as a preventive agent against post-surgical
cognitive impairment in the fourth quarter of 2004. Results of the exploratory
Phase II trial of dexanabinol as a preventive agent for cognitive impairment
(CI) in coronary artery bypass graft (CABG) patients are being reviewed
internally and with the FDA. The Company expects to complete its evaluation of
the clinical and regulatory aspects of this program and their impact on the
future of the program during the fourth quarter of this year.

During the nine months ended September 30, 2005,
Pharmos advanced the lead candidate from its proprietary platform of
CB2-selective synthetic cannabinoid compounds, cannabinor, through the initial
stages of development, including safety and toxicology studies in multiple
species, kinetics, and clinical Phase I. Cannabinor and other platform
compounds were designed to reduce the side effects caused by natural
cannabinoids. In a number of animal models, these compounds have demonstrated
efficacy as analgesics to treat moderate to severe pain, as anti-inflammatory
agents, and immunomodulation agents to treat diseases such as multiple
sclerosis, rheumatoid arthritis and inflammatory bowel disease. The Company
commenced Phase I human testing of cannabinor during the third quarter of 2005,
and dosing in the Phase I study in healthy volunteers has been completed.
Pending full review of the Phase I data, Phase II studies will be conducted to
assess feasibility for treating indications such as post-operative pain and
neuropathic pain with cannabinor.

Pharmos has initiated a clinical program to develop
its proprietary NanoEmulsion drug delivery technology. A Phase I study in
healthy volunteers has been completed, and the formulation was well-tolerated.
The Company plans to initiate a Phase I/II feasibility clinical trial in the
first quarter of 2006. The study will evaluate safety, pharmacokinetics and the
analgesic effect of an approved non-steroidal anti-inflammatory drug (NSAID)
formulated in its NanoEmulsion. Efforts are targeted for the development of a
product for the treatment of osteoarthritic pain.

Pharmos invented and owns a family of patents covering
novel NanoEmulsion formulations as vehicles for lipophilic drugs. A topical
application of the nanotechnology has already demonstrated excellent targeted
delivery of lipophilic drugs to muscle and joints in animal models. Topical
application of drugs directly to pathological sites offers potential advantages
over systemic delivery by producing high drug concentration in the affected
tissue while avoiding unwanted side-effects due to high systemic drug levels.
Topical preparations of NSAIDs are commonly used as analgesics and
anti-inflammatory agents to treat various disorders such as arthropathies and
myalgias. Many topical formulations employ chemical penetration enhancers to
improve dermal penetration of drugs. Chemical enhancers, which are usually
organic solvents, may cause skin irritation and sensitization. An advantage of
Pharmos NanoEmulsion is that it is composed of natural lipids and oils
designed to minimize irritation as well as its high loading capacity for
lipophilic drugs.

15

In December 2004, the Company completed and announced
the results of a Phase 3 trial of dexanabinol to treat severe traumatic brain
injury (TBI) patients. Dexanabinol did not demonstrate efficacy in the trial,
and the program was discontinued. A final report was submitted to the FDA, and
a manuscript was submitted to a peer-reviewed journal for publication. During
2005, the Company responded to the unfavorable TBI results and the termination
of the TBI project by reducing its workforce by 15%, rebalancing its personnel
to focus on advancing its preclinical programs toward a clinical developmental
stage and by reducing costs without jeopardizing its strategic initiatives.

On May 26, 2005, Pharmos Corporation filed a
Certificate of Change with the Nevada Secretary of State which served to
effect, as of May 31, 2005, a 1-for-5 reverse split of Pharmos common stock.
As a result of the reverse stock split, every five shares of Pharmos common
stock were combined into one share of common stock; any fractional shares
created by the reverse stock split were rounded up to whole shares. The reverse
stock split affected all of Pharmos common stock, stock options and warrants
outstanding immediately prior to the effective date of the reverse stock split.
The reverse split reduced the number of shares of Pharmos common stock outstanding
from 95,137,076 shares to 19,027,809 shares, and the number of authorized
shares of common stock was reduced from 150,000,000 shares to 30,000,000
shares. All references to common share and per common share amounts for all
periods presented have been retroactively restated to reflect this reverse
split. At the Annual Meeting in September 2005, the shareholders voted to
increase the number of authorized shares of common stock to 60,000,000 shares.

The Company is currently dependent upon external financing,
interest income, and research and development contracts to pursue its intended
business activities. The Company was not profitable in 2002, 2003, or 2004.
During the nine months ended September 30, 2005, the Company funded all of its
expenses through other income of $10.7 million as a result of the receipt of a
non-recurring milestone payment in January 2005 from Bausch & Lomb
(B&L) related to the FDA approval and subsequent project launch of Zylet
and income from grants received from the Office of the Chief Scientist of
Israel. At September 30, 2005, the Company has an accumulated deficit of $142.9
million and expects to continue to incur losses going forward. Losses have
resulted principally from costs incurred in research activities aimed at identifying
and developing the Companys product candidates, clinical research studies, the
write-off of purchased research and development, and general and administrative
expenses. The Company expects to incur additional losses over the next several
years as the Companys research and development and clinical trial programs
continue. The Companys ability to achieve profitability, if ever, is dependent
on its ability to develop and obtain regulatory approvals for its product
candidates, to enter into agreements for product development and
commercialization with strategic corporate partners and contract to develop or
acquire the capacity to manufacture and sell its products. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Liquidity and Capital Resources.

16

Results
of OperationsQuarters ended September 30, 2005 and 2004

Total operating expenses decreased by $1,943,627 or
34%, from $5,661,913 in 2004 to $3,718,286 in 2005. With the completion of the
pivotal dexanabinol trial in TBI and the decision to discontinue efforts for
this indication, resources have been allocated to pre-clinical activities for
cannabinor in preparation of beginning human clinical trials in the third
quarter of 2005. The Company incurred higher compensation expenses for the
deferred compensation from the September 2004 Retention Award Agreements, and
higher investor relations costs and higher insurance costs as discussed below.

Research efforts in 2005 have been focused on the
completion of cannabinor toxicology, scale-up manufacturing, technology
transfer to the active ingredient supplier, and clinical trial finished
material at Pharmos facility in Rehovot, Israel, as well as continuing to
identify new, potentially more potent, CB2 agonists. During the quarter, the
Company both initiated and completed dosing its dose escalating safety trial.
The major decreases in quarter to quarter operating expenses for 2005 and 2004
reflects the shift from robust clinical trial spending for two trials in 2004 vs.
primarily in-house research & development activities.

The Company considers major research & development
projects to be those projects that have reached at least Phase II level of
clinical development. The Companys Phase II project is the development of
dexanabinol as a preventive agent against the cognitive impairment that can
follow CABG surgery. During the third quarter of 2005, the gross cost of
development and review was approximately $0.2 million. Total costs since the
CI-CABG project entered Phase II development in 2003 through September 30, 2005
were $3.2 million. The Company is evaluating various strategies regarding
development of this product and will make its determination of direction in the
fourth quarter. To bring this product to the FDA for approval would require
extensive additional testing in both Phase II and Phase III trials and there is
no assurance the product could achieve regulatory approval and
commercialization.

Gross expenses for other research and development
projects in early stages of development for the third quarters of 2005 and 2004
were $1,453,807 and $1,741,596, respectively. Over 80% of the spending in both
2005 and 2004 was related to cannabinor and other CB2 compounds. Research &
development (R&D) gross expenses decreased by $2,631,610 or 55% from
$4,811,747 in 2004 to $2,180,137 in 2005, primarily related to the TBI clinical activity in 2004. The
Company recorded research and development grant receivables from the Office of
the Chief Scientist of Israels Ministry of Industry and Trade of $284,185 and
$1,032,813 during the third quarter of 2005 and 2004, respectively, which
reduced the research and development expenses. Total research and development
expenses, net of grants, decreased by $1,882,982 or 50% from $3,778,934 in 2004
to $1,895,952 in 2005.

General and administrative expenses remained at the
same level at $1,734,493 in 2005 from $1,739,679 in 2004 in total; however,
there were offsetting variances within the major expense categories. The
increase in general and administrative expenses is due to higher compensation,
insurance and investor relations by $202,851, $124,636 and $66,503,
respectively, in the third quarter 2005 compared to the third quarter 2004. The
decrease in general and administrative expenses is due to lower professional
fees and consultant expenses by $157,656 and $214,109, respectively, coupled
with savings from the Companys cost containment efforts in the third quarter
2005 compared to the third quarter 2004. The increase in compensation is attributed
to the amortization of deferred compensation related to General &
Administration from the Retention Award Agreements in the amount of $183,826
which commenced in the third quarter of 2004. The increase in insurance is
attributable to higher insurance rates. The increase in investor relation costs
is solely a result of the change in the timing of the annual meeting from its
normal June schedule to September 2005 and the shift in the timing of the
expenses from the 2nd quarter of 2005 to the 3rd quarter
of 2005. The decrease in professional fees in 2005 over 2004 is from the higher
expenses recognized in the third quarter of 2004 for accounting fees for the
cost of implementation and compliance for SOX 404 offset by higher legal fees
in 2005 related to the class action suits. The decrease in consulting expenses
is attributed to a non-cash charge for stock options provided to a key
consultant in 2004 and no costs incurred in 2005, coupled with reduced
pre-marketing consulting in 2005 vs. 2004.

Depreciation and amortization expenses decreased by
$55,459, or 39%, from $143,300 in 2004 to $87,841 in 2005. The decrease is due
to fixed assets which have become fully depreciated.

17

Other income (expense), net, increased by $706,606
from an expense of $280,996 in 2004 to income of $425,610 in 2005. Interest
expense decreased by $754,585 to $2,219 in 2005 from $756,804 in 2004. The
decrease in 2005 interest expense is a result of the retirement of the
September 2003 Convertible Debentures during the first quarter of 2005.
Interest income increased by $268,973, or 183%, to $416,267 in 2005 from
$147,294 in 2004 as a result of higher average cash and short term investment
balances. During the quarter, the Company recorded in other income royalties of
$2,219 compared with $59 in the third quarter of 2004 per the licensing
agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the
Companys CEO.

No tax provision is required at this time since
the company expects to be in a tax loss position at year-end December 31, 2005
and has net operating losses from previous years. The Company has established a
100% valuation allowance against the deferred tax asset.

18

Nine months ended September 30, 2005 and 2004

Total operating expenses decreased by $2,733,776 or
19%, from $14,510,266 in 2004 to $11,766,490 in 2005. With the completion of
the pivotal dexanabinol trial in TBI and the decision to discontinue efforts
for this indication, resources have been allocated to pre-clinical activities
and clinical for cannabinor in preparation of human clinical trials which began
in the third quarter of 2005. The Company incurred higher compensation expenses
for the deferred compensation from the September 2004 Retention Award
Agreements and higher professional fees consisting of accounting and legal fees
and higher insurance cost as discussed below.

Research efforts in 2005 have been focused on the
completion of cannabinor toxicology, scale-up manufacturing, technology
transfer to the active ingredient supplier, and clinical trial finished
material at Pharmos facility in Rehovot, Israel. During the quarter, the
Company commenced its dose escalating safety trial. The major decreases in
year-to-date operating expenses yearover-year reflects the shift from robust
clinical trial spending for two trials in 2004 vs. primarily in-house research
& development activities.

The Company considers major research & development
projects to be those projects that have reached at least Phase II level of
clinical development. The Companys Phase II project is the development of
dexanabinol as a preventive agent against the cognitive impairment that can
follow CABG surgery. During the first nine months 2005, the gross cost of
development and review was approximately $0.9 million. Total costs since the
CI-CABG project entered Phase II development in 2003 through September 30, 2005
were $3.2 million. The Company is evaluating various strategies regarding
development of this product and will make its determination of direction in the
fourth quarter of 2005. To bring this product to the FDA for approval would
require extensive additional testing in both Phase II and Phase III trials and
there is no assurance the product could achieve regulatory approval and
commercialization.

Gross expenses for other research and development
projects in early stages of development for the nine months ended September 30,
2005 and 2004 were $4,521,387 and $ 2,666,660, respectively. Over 85% of the
spending in both 2005 and 2004 was related to cannabinor and other CB2 compounds.
Research & development (R&D) gross expenses decreased by $5,091,457 or
41% from $12,316,830 in 2004 to $7,225,373 in 2005 due to a reduction in clinical activity. The Company recorded
research and development grant receivables from the Office of the Chief
Scientist of Israels Ministry of Industry and Trade of $1,015,640 and
$2,739,958 during the nine months ended September 30, 2005 and 2004,
respectively, which reduced research and development expenses. Total research
and development expenses, net of grants, decreased by 3,367,139 or 35% from
$9,576,872 in 2004 to $6,209,733 in 2005.

General and administrative expenses increased by
$775,215 or 17%, from $4,490,024 in 2004 to $5,265,239 in 2005. The increase in
general and administrative expenses is due to higher compensation, professional
fees, and insurance by $759,800, $385,257, and $335,858 respectively, in the
nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004. The decrease in general and administrative expenses is due
to lower consultant expenses by $594,066 and savings from the Companys cost
containment efforts in the nine months ended September 30, 2005 compared to the
nine months ended September 30, 2004. The increase in compensation is attributed
to the amortization of deferred compensation related to General &
Administration from the Retention Award Agreements in the amount of $735,295
which commenced in the third quarter of 2004. The higher professional fees in
2005 are attributed to legal fees related to the class action suits and
accounting fees related to Sarbanes-Oxley compliance. The decrease in
consulting is attributed to a non-cash charge of approximately $490,000 for
extending the stock option exercise period to the Companys former chief
financial officer and stock options granted to a key consultant which were
incurred in 2004 but did not occur in 2005, coupled with reduced pre-marketing
consulting in 2005 vs. 2004. The increase in insurance is attributable to
higher insurance rates.

Depreciation and amortization expenses decreased by
$141,852, or 32%, from $443,370 in 2004 to $301,518 in 2005. The decrease is
due to fixed assets which have become fully depreciated.

19

Other income (expense), net, increased by $14,481,648
from an expense of $2,658,745 in 2004 to income of $11,822,903 in 2005. Income
of $10,725,688 was recognized for the net payment received from B&L in the
first quarter of 2005. Interest expense decreased by $3,078,788 from $3,244,379
in 2004 to $165,591 in 2005. The decrease in 2005 interest expense is a result
of the substantially reduced average outstanding balance and maturity at March
31,2005 of the September 2003 Convertible Debentures. This debt was fully
repaid as of March 31, 2005. Interest income increased by $593,140, or 132%,
from $450,143 in 2004 to $1,043,283 in 2005 as a result of a higher average
cash balances. During the nine months ended September 30, 2005, the Company
recorded in other income royalties of $22,710 compared with $4,813 in the nine
months ended September 30, 2004 per the licensing agreement with Herbamed Ltd, a
company controlled by Dr. Haim Aviv, the Companys CEO.

No tax provision is required at
this time since the company expects to be in a tax loss position at year-end
December 31, 2005 and has net operating losses from previous years. The Company
has established a 100% valuation allowance against the deferred tax asset.

Liquidity and Capital Resources

The Company incurred cumulative operating losses since
2002 and had an accumulated deficit of $142.9 million at September 30, 2005.
The Company has financed its operations with public and private offerings of
securities, advances and other funding pursuant to a marketing and asset
agreement with Bausch & Lomb, grants from the Office of the Chief Scientist
of Israel, research contracts, the sale of a portion of its New Jersey State
Net Operating Loss carryforwards, and interest income. Should the Company be
unable to raise adequate financing or generate revenue in the future,
operations will need to be scaled back or discontinued.

The following table describes the Companys liquidity
and financial position on September 30, 2005, and on December 31, 2004:

September
  30, 2005
  
  December
  31, 2004Working capital
  
  $
  47,367,772
  
  $
  46,269,367Cash and cash equivalents
  
  $
  34,678,382
  
  $
  49,014,530Short term investments
  
  $
  13,551,278
  
  $
  Total cash, cash equivalents and short term
  investments
  
  $
  48,229,660
  
  $
  49,014,530Short-term convertible debentures, net
  
  $
  
  
  $
  4,765,540Current
working capital position

As of September 30, 2005, the Company had working
capital of $47.4 million consisting of current assets of $49.8 million and
current liabilities of $2.4 million. This represents an increase of $1.1
million from its working capital of $46.3 million on current assets of $55.7
million and current liabilities of $9.4 million as of December 31, 2004. This
increase in working capital of $1.0 million was principally due to the net cash
received from the B&L payment of $9.2 million ($10.7 million as reported in
other income reduced by an outstanding payable to B&L of $1.5 million) and
$1.9 million received from the Office of the Chief Scientist of Israel offset
by the funding of R&D and G&A activities.

Current
and future liquidity position

Management believes that the current cash, cash
equivalents and short term investments, totaling $48.2 million as of September
30, 2005, will be sufficient to support the Companys continuing operations
beyond September 30, 2006. The Company is continuing to actively pursue various
funding options, including additional equity offerings, strategic corporate
alliances, business combinations and the establishment of product related
research and development limited partnerships, to obtain additional financing
to continue the development of its products and bring them to commercial
markets. Should the Company be unable to raise adequate financing or generate
revenue in the future, long-term operations will need to be scaled back or
discontinued.

20

Cash

At September 30, 2005, cash and cash equivalents
totaled $34.7 million. At December 31, 2004 cash and cash equivalents totaled
$49.0 million. This net decrease in cash of $14.3 million was due to the
investment of cash in short term investments in the amount of $13.6 million and
$11.8 for normal operating requirements offset by the net cash received from
the B&L payment of $9.2 million and $1.9 million received from the Office
of the Chief Scientist of Israel.. The cash, cash equivalents short term
investments will be used to finance future growth.

Operating
activities

Net cash used in operating activities through the
third quarter of 2005 was $9.8 million compared to net cash used of $15.7
million through the third quarter of 2004. The decrease in cash used of $5.9
million is primarily due to lower R&D spending related to the clinical
trials in 2004, the timing of the of grants offset by the payment of annual
insurance premiums and other operating activities.

Investing
activities

Restricted cash during the first three quarters of
2005 was reduced by approximately $4.8 million as a result of the final
repayment of the September 2003 Convertible Debentures.

During the first quarter of 2005, the Company received
$9.2 million related to investing activities for a non-recurring milestone
payment from Bausch & Lomb related to the FDA approval of Zylet.

The Company invested cash of approximately $13.6
million in short term securities during the nine months ended September 30,
2005.

Capital expenditures for property, plant and equipment
for the nine months ended September 30, 2005 and 2004 totaled approximately
$127,000 and $239,000, respectively for normal replacements and improvements.

Financing
activities

During the nine months ended September 30, 2005, the
financing activities were the repayment of the remainder of the September 2003
Convertible Debentures.

During the first quarter of 2004, one of the investors
from the September 2003 Convertible Debentures private placement converted a total
of $2 million plus interest into 99,532 shares of common stock of the Company.
As part of the escrow agreement, $2 million of restricted cash was released to
the Company during April 2004. As of September 30, 2005, the Company repaid all
of the outstanding September 2003 Convertible Debentures amounting to a total
of $19.0 million.

21

Other
Proceeds

In October 2001, the Company sold its ophthalmic
product line to Bausch & Lomb. Future payments were subject to certain
milestones related to product approvals by the FDA and the royalties on the
sales of these products.

At the time of the sale in 2001, Pharmos received
gross proceeds of approximately $25 million in cash. In January 2005, Pharmos
received additional gross proceeds of approximately $12.275 million from Bausch
& Lomb in connection with their successful commercial launch of the Zylet
product. The net proceeds to Pharmos from this payment were approximately $9.2
million, after making the payments to Bausch & Lomb, Dr. Nicholas Bodor and
the Israel-U.S. Binational Industrial Research and Development Foundation as
described below. In addition, Pharmos may receive a royalty payment of up to
$10 million if actual Zylet sales during the first two years after
commercialization exceed agreed-upon amounts.

As part of the original agreement with Bausch &
Lomb, Pharmos agreed to pay up to $3.75 million of the costs of developing
Zylet. In January 2005, Pharmos paid approximately $1.56 million (included in
accounts payable on December 31, 2004) which was the remaining balance owed to
Bausch & Lomb for the Zylet project development under the terms of the
agreement.

Dr. Nicholas Bodor, a former director of and
consultant to Pharmos, is the patent owner and licensor of the technology
underlying the ophthalmic product line sold to Bausch & Lomb. In January 2005,
Pharmos paid Dr. Bodor approximately $1.338 million in connection with the
commercialization of Zylet, per the license agreement with Dr. Bodor. Pharmos
owes Dr. Bodor an additional 14.3% of any payments the Company may receive from
Bausch & Lomb in the event that certain sales levels are exceeded in the
first two years following commencement of Zylet sales in the U.S.

In February 2005, the Company paid the Israel-U.S.
Binational Industrial Research and Development Foundation (BIRDF) $.212
million, which represented the maximum amount the Company owed the foundation
for Zylet.

Stock Listing

On March 18, 2005, the Company received notice from
The NASDAQ Stock Market, Inc. (NASDAQ) that the minimum bid price of the
Companys common stock had fallen below $1.00 for 30 consecutive business days
and that the Company was therefore not in compliance with NASDAQ Marketplace
Rule 4310(c)(4).

In accordance with section 4310(c)(8) of the NASDAQ
Marketplace Rules, the Company had until September 14, 2005 (180 calendar days
from March 18, 2005) to regain compliance

On June 21, 2005, the Company received notice from
NASDAQ that the Company had regained compliance with NASDAQ Marketplace Rule
4310(c)(4). Such Rule, in general, requires that a listed company maintain a
closing bid price of $1.00 for continued listing on the NASDAQ SmallCap Market.
The notice stated that for 10 consecutive business days, the Companys stock
had closed above $1.00, and therefore, the Company regained compliance with
this Rule. No further actions in this regard were required of the Company.

22

Commitment
and Contingencies

As of September 30, 2005, the Company had the
following contractual commitments and long-term obligations:



Total
  
  Less than
  1 Year
  
  1  3
  Years
  
  3  5
  Years
  
  More than
  Years
  
  UndeterminedOperating Leases
  
  $
  1,361,869
  
  $
  536,250
  
  $
  765,097
  
  $
  60,522
  
  $
  
  
  $
  Other long-term liabilities reflected on our balance
  sheet*
  
  
  1,048,069
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,048,069Other Commitment**
  
  
  500,000
  
  
  250,000
  
  
  250,000
  
  
  
  
  
  
  
  
  Total
  
  $
  2,909,938
  
  $
  786,250
  
  $
  1,015,097
  
  $
  60,522
  
  $
  
  
  $
  1,048,069*
  Consists of severance benefits payable under Israeli
  law. Because these benefits are paid only upon termination of employment, it
  is not possible to allocate the liability across future years. The Company
  has funded $779,820.**
  Represents cash portion of the September 2004
  Retention Award Agreement given to the CEO and President. The Company has
  accrued $298,713 through September 30, 2005.Subsequent
Events

In early October, the Company notified its Chief
Operating Officer that it would not be renewing his employment agreement when
it expires in April 2006. Under the terms of his employment agreement, this
non-renewal will require several payments from the Company including salary,
benefits and the vesting of certain stock options and restricted stock. These
payments will include his salary through April 2006, one years additional
salary of $249,063, plus payments for benefits commensurate with his current
benefits. In addition, his restricted stock and other stock options will become
vested. The balance for the restricted shares carried in Deferred Compensation
within Equity is $322,059 as of September 30, 2005. The Company also expects to
record approximately $200,000 in other severance costs in the fourth quarter of
2005.


On November 7, 2005, the Company entered into an
Employment Agreement with Alan L. Rubino, 51, to serve as the Companys new
President and Chief Operating Officer, commencing November 14, 2005. Mr.
Rubinos Employment Agreement is attached as exhibit 10.1 to this Quarterly
Report on Form 10-Q. Under the terms of his employment agreement, Mr. Rubino
will be based in the Companys Iselin, New Jersey corporate headquarters and
will receive an annual salary of $315,000, a sign-on bonus of $40,000 plus
options to purchase 325,000 shares of common stock. Prior to joining Pharmos,
Mr. Rubino had been Executive Vice President and General Manager of PDI, Inc., a
publicly traded outsourcing company focused on the pharmaceutical and biotech
industries, since January 2004. From 2001 through December 2003, he served as
Senior Vice President/Officer - PTS Marketing and Business Unit Strategy in the
Pharmaceutical and Technology Services Division of Cardinal Health, Inc. Between
1977 and 2001, Mr. Rubino was with Hoffmann-LaRoche where he rose to Senior Vice
President and a member of the U.S. Executive and Operating Committees.
Currently, he is a member of the Board of Directors of Rutgers Business School
and Aastrom Biosciences, Inc. and serves on the Advisory Board of SK Corp. Mr.
Rubino holds a B.A. in Economics from Rutgers University.

Mr. Rubino will be replacing Dr. Gad Riesenfeld,
the Companys current President and Chief Operating Officer, who will continue
working as an employee of the Company through the expiration of his current
employment agreement in April 2006.

23

New
accounting pronouncements

In May 2005, the FASB has issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3. The Statement applies to all voluntary changes in
accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. Statement 154 requires
retrospective application to prior periods financial statements of a voluntary
change in accounting principle unless it is impracticable. Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. Statement 154
improves financial reporting because its requirements enhance the consistency
of financial information between periods. Statement 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which replaces SFAS 123 and supersedes APB No. 25. Under the new
standard, companies will no longer be allowed to account for stock-based
compensation transactions using the intrinsic value method in accordance with
APB 25. Instead, companies will be required to account for such transactions
using a fair value method and to recognize the expense in the statements of
operations. The adoption of SFAS 123R will require additional accounting
related to the income tax effects of share-based payment arrangements and
additional disclosure of their cash flow impacts. SFAS 123R also allows, but
does not require, companies to restate prior periods. As originally issued,
SFAS 123R would have been effective for periods beginning after June 15, 2005,
but this requirement was amended on April 14, 2005 by a new rule from the SEC
that requires adoption of SFAS 123R by the first fiscal year beginning after
June 15, 2005. The effect of the new rule for the Company is a six-month
deferral of the new standard. Accordingly, the Company expects to adopt the
provisions of SFAS 123R beginning January 1, 2005.

In March 2005, the FASB issued FASB Interpretation No.
(FIN) 47  Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143,
that clarifies the term conditional asset retirement obligation as used in
Statement of Financial Accounting Standards (SFAS) No. 143  Accounting for Asset Retirement Obligations.
Specifically, FIN 47 provides that an asset retirement obligation is
conditional when either the timing and (or) method of settling the obligation
is conditioned on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective
for fiscal years ending after December 15, 2005. The adoption of FIN 47 is not
expected to have a material impact on our consolidated financial position or
results of operations.

24

Item 3. Quantitative and Qualitative Disclosures About Market
Risk

We assessed our vulnerability to certain market risks,
including interest rate risk
associated with financial instruments included in cash, cash equivalents, short
term investments and the currency impact in Israel. Due to the relatively
short-term nature of these investments the Company has determined that the
risks associated with interest rate fluctuations related to these financial
instruments do not pose a material risk to us. The value of the warrant
liability is generally based upon the Companys stock price.

Item 4. Controls And Procedures

a)     
  Evaluation of Disclosure Controls and Procedures: An evaluation of Pharmos
  disclosure controls and procedures (as defined in Section 13a-15(e) of the
  Securities Exchange Act of 1934 (the Act) was carried out under the
  supervision and with the participation of Pharmos Chief Executive Officer
  and Chief Financial Officer and several other members of Pharmos senior
  management at September 30, 2005. Based on this evaluation, Pharmos Chief
  Executive Officer and Chief Financial Officer concluded that Pharmos
  disclosure controls and procedures were not effective at the reasonable
  assurance level at September 30, 2005 to ensure that the information required
  to be disclosed by Pharmos in the reports it files or submits under the Act
  is (i) accumulated and communicated to Pharmos management (including the
  Chief Executive Officer and Chief Financial Officer) in a timely manner, and
  (ii) recorded, processed, summarized and reported within the time periods
  specified in the SECs rules and forms because of the material weakness
  identified in the first quarter of 2005 as described below.During the first quarter of
  2005, management identified a material weakness regarding the companys
  preparation and review of its Consolidated Statement of Cash Flows for the
  three months ended March 31, 2005. Specifically, the Company did not have
  effective controls in place to ensure the net payments of $10.7 million
  related to the Bausch & Lomb milestone payment were properly classified
  as cash flows from investing activities versus cash flows from operating
  activities. This control deficiency resulted in an adjustment to the
  Companys Consolidated Statement of Cash Flows for the three months ended
  March 31, 2005 which was recorded prior to the filing of the Companys
  Quarterly Report on Form 10Q for the quarter ended March 31, 2005. The Company
  has put new procedures in place in order to remediate this weakness and
  strengthen the control procedures surrounding the review and classification
  of cash flows from nonrecurring transactions during the quarterly closing
  process.(b)     
  Changes in Internal Control Over Financial Reporting: Except as noted above,
  there was no change in our internal control over financial reporting (as
  defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
  amended) during our last fiscal quarter that has materially affected, or is
  reasonably likely to materially affect, our internal control over financial
  reporting.25

Part II

Other Information

Item 1
  Legal
  ProceedingsThe Company and certain
  current officers have been named as defendants in several purported
  shareholder class action lawsuits alleging violations of federal securities
  laws. These lawsuits were filed beginning in January 2005 and are pending in
  the U.S. District Court for the District of New Jersey. These lawsuits assert
  claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
  and Rule 10b-5 thereunder. The complaints allege generally that the
  defendants knowingly or recklessly made false or misleading statements
  regarding the effectiveness of dexanabinol in treating TBI which had the
  effect of artificially inflating the price of our shares. The complaints seek
  unspecified damages. These class actions have been consolidated by order of
  the Court and lead plaintiffs and lead plaintiffs counsel have been appointed.
  An amended complaint was filed in September 2005. Management intends to
  defend these lawsuits vigorously. However, we cannot assure you that we will
  prevail in these actions, and, if the outcome is unfavorable to Pharmos, our
  reputation, profitability and share price could be adversely affected.In addition, two purported
  shareholders of Pharmos common stock have commenced derivative actions
  against our directors and against certain current and former officers. The
  first derivative lawsuit was commenced in February 2005 in the U.S. District
  Court for the District of New Jersey, and has been consolidated for pretrial
  purposes with the class actions. An amended complaint in the federal
  derivative lawsuit was filed in September 2005. The second was filed in April
  2005 in the Superior Court of New Jersey, County of Middlesex. Both lawsuits
  allege generally, on behalf of Pharmos (which has been named as a nominal
  defendant), breaches of fiduciary duty and other state law violations arising
  from the same set of underlying facts as the class actions. The complaints seek unspecified damages. The
  Company believes the complaints are without merit and intends to defend the
  lawsuits vigorously, and is planning on filing motions to dismiss the pending
  actions.Item 2
  Unregistered
  Sales of Equity Securities and Use of Proceeds
  NONEItem 3
  Defaults
  upon Senior Securities
  NONEItem 4
  Submission
  of Matters to Vote of Security HoldersAt the Corporations Annual
  Meeting of Stockholders held on September 20, 2005, the stockholders of the
  Corporation elected the following persons as Class II Directors of the
  Corporation to serve until the 2008 annual meeting of stockholders and until
  their successors are duly elected and qualified: Elkan Gamzu and Lawrence F.
  Marshall. The results of the voting were as follows:VOTES FOR
  
  VOTES WITHHELDElkan Gamzu
  
  
  14,329,969
  
  
  
  665,796Lawrence F. Marshall
  
  
  13,930,403
  
  
  
  1,065,363Also at the Annual Meeting,
  the stockholders approved the increase in the number of authorized shares of
  the Companys Common Stock from 30,000,000 to 60,000,000 with 14,109,372
  votes for approval, 853,589 votes against approval, 32,804 abstentions, and
  zero broker non-votes.Also at the Annual Meeting,
  the stockholders approved amending of the Companys 2000 Stock Option Plan,
  with 2,543,389 votes cast for approval, 759,596 votes cast against, 66,147
  abstentions, and 11,626,634 broker non-votes.Further, the stockholders
  ratified the Boards selection of PricewaterhouseCoopers LLP as the
  Corporations independent auditors for the fiscal year ending December 31,
  2005, with 14,644,560 votes for ratification, 299,007 votes against
  ratification, 52,199 abstentions, and zero broker non-votes.26

Item 5
  Other
  Information1.  On November 3, 2005, Pharmos Corporation issued a press release reporting financial results for the third quarter of 2005.
The press release is attached as exhibit 99.1 to this Quarterly Report on Form 10-Q.

2.  On November 7, 2005, the Company entered into an Employment Agreement with Alan L. Rubino, 51, to serve as the Companys new
President and Chief Operating Officer, commencing November 14, 2005.  Mr. Rubinos Employment Agreement is attached as exhibit
10.1 to this Quarterly Report on Form 10-Q.  Under the terms of his employment agreement, Mr. Rubino will be based in the
Companys Iselin, New Jersey corporate headquarters and will receive an annual salary of $315,000, a sign-on bonus of $40,000 plus
options to purchase 325,000 shares of common stock.  Prior to joining Pharmos, Mr. Rubino had been Executive Vice President and
General Manager of PDI, Inc., a publicly traded outsourcing company focused on the pharmaceutical and biotech industries, since
January 2004.  From 2001 through December 2003, he served as Senior Vice President/Officer  PTS Marketing and Business Unit
Strategy in the Pharmaceutical and Technology Services Division of Cardinal Health, Inc.  Between 1977 and 2001, Mr. Rubino was
with Hoffmann-LaRoche where he rose to Senior Vice President and a member of the U.S. Executive and Operating Committees.
Currently, he is a member of the Board of Directors of Rutgers Business School and Aastrom Biosciences, Inc. and serves on the
Advisory Board of SK Corp.  Mr. Rubino holds a B.A. in Economics from Rutgers University. A press release announcing Mr. Rubinos
appointment is attached as exhibit 99.2 to this Quarterly Report on Form 10-Q.

Mr. Rubino will be replacing Dr. Gad Riesenfeld, the Companys current President and Chief Operating Officer, who will continue
working as an employee of the Company through the expiration of his current employment agreement in April 2006.Item 6
  ExhibitsNumber
  
  Exhibit3.1
  Certificate of Amendment to Articles of Incorporation.4.1
  Amendment to the 2000 Stock Option Plan (incorporated by reference to Appendix D to the registrants Definitive Proxy Statement on
Schedule 14A filed on August 8, 2005).10.1
  Employment Agreement dated as of November 7, 2005, between Pharmos Corporation and Alan L. Rubino.31.1
  Certification
  of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
  15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
  Certification
  of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
  15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
  Certification
  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
  Certification
  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
  Press release of Pharmos Corporation dated November 3, 2005.99.2
  Press release of Pharmos Corporation dated November 7, 2005.27

SIGNATURE PAGE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

PHARMOS
  CORPORATIONDated:
  November 7, 2005by: /s/ James A. MeerJames A. Meer
  Senior Vice President and Chief Financial Officer
  (Principal Accounting and Financial Officer)28