UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM
10-Q xQUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
quarterly period ended March 31, 2005 or oTRANSITION 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. 
YesxNoo. Indicate by check
mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). 
YesxNoo. As of May 4,
2005 the Registrant had outstanding 95,137,076 shares of its $.03 par value
Common Stock.   Part I.   Financial
Information
Item 1   Financial Statements

Pharmos
Corporation(Unaudited)Consolidated
  Balance SheetsMarch 31,
  2005
  
  December
  31,
  2004AssetsCash and cash equivalents
  
  $
  54,323,340
  
  $
  49,014,530Restricted cash
  
  
  
  
  
  4,846,155Research and development grants receivable
  
  
  565,680
  
  
  1,537,782Debt issuance costs
  
  
  
  
  
  45,648Prepaid expenses and other current assets
  
  
  1,058,269
  
  
  262,810Total
  current assets
  
  
  55,947,289
  
  
  55,706,925Fixed assets, net
  
  
  895,029
  
  
  987,451Restricted cash
  
  
  140,181
  
  
  139,594Severance pay funded
  
  
  833,730
  
  
  811,926Other assets
  
  
  18,946
  
  
  18,946Total
  assets
  
  $
  57,835,175
  
  $
  57,664,842Liabilities
  and Shareholders EquityAccounts payable
  
  $
  961,852
  
  $
  2,462,162Accrued expenses
  
  
  671,637
  
  
  1,155,413Warrant liability
  
  
  67,024
  
  
  297,955Accrued wages and other compensation
  
  
  920,859
  
  
  756,488Convertible debentures, net
  
  
  
  
  
  4,765,540Total
  current liabilities
  
  
  2,621,372
  
  
  9,437,558Other liability
  
  
  61,471
  
  
  39,412Severance pay
  
  
  1,189,037
  
  
  1,197,039Total
  liabilities
  
  
  3,871,880
  
  
  10,674,009Commitments and contingenciesShareholders
  equityPreferred stock, $.03 par value, 1,250,000 shares
  authorized, none issued and outstanding
  
  
  
  
  
  Common stock, $.03 par value; 150,000,000 shares authorized,
  95,137,076 and 95,137,076 issued, in 2005 and 2004, respectively.
  
  
  2,854,112
  
  
  2,854,112Deferred compensation
  
  
  (1,407,431
  )
  
  (1,701,122
  )Paid in capital
  
  
  188,811,199
  
  
  188,809,955Accumulated deficit
  
  
  (136,294,159
  )
  
  (142,971,686
  )Treasury stock, at cost, 14,189 shares in 2005 and
  2004, respectively
  
  
  (426
  )
  
  (426
  )Total
  shareholders equity
  
  
  53,963,295
  
  
  46,990,833Total
  liabilities and shareholders equity
  
  $
  57,835,175
  
  $
  57,664,842The accompanying notes
are an integral part of these consolidated financial statements.
2


Pharmos
  Corporation
  (Unaudited)
  Consolidated Statements of OperationsThree
  Months Ended March 31,2005
  
  2004ExpensesResearch and development, gross
  
  $
  2,504,639
  
  $
  4,117,186Grants
  
  
  (19,576
  )
  
  (816,256
  )Research and development, net of grants
  
  
  2,485,063
  
  
  3,300,930(exclusive of depreciation and amortization shown
  separately below)General and administrative
  
  
  1,794,711
  
  
  1,037,711(exclusive of depreciation and amortization shown
  separately below)Depreciation and amortization
  
  
  114,925
  
  
  149,794Total operating expenses
  
  
  4,394,699
  
  
  4,488,435Loss
  from operations
  
  
  (4,394,699
  )
  
  (4,488,435
  )Other
  income (expense)Bausch & Lomb milestone payment, net
  
  
  10,725,688
  
  
  Interest income
  
  
  269,496
  
  
  163,947Interest expense
  
  
  (160,546
  )
  
  (1,443,939
  )Derivative gain (loss)
  
  
  230,931
  
  
  (167,083
  )Other income (expense), net
  
  
  6,657
  
  
  (5,291
  )Other
  income (expense), net
  
  
  11,072,226
  
  
  (1,452,366
  )Net
  income (loss)
  
  $
  6,677,527
  
  $
  (5,940,801
  )Net
  income (loss) per share- basic
  
  $
  .07
  
  $
  (.07
  )- diluted
  
  $
  .07
  
  $
  (.07
  )Weighted
  average shares outstanding- basic
  
  
  94,972,887
  
  
  87,522,955- diluted
  
  
  95,703,064
  
  
  87,522,955The accompanying notes
are an integral part of these consolidated financial statements.
3


Pharmos
  Corporation
  (Unaudited)
  Consolidated Statements of Cash FlowsThree
  Months Ended March 31,2005
  
  2004Cash flows from operating activitiesNet income (loss)
  
  $
  6,677,527
  
  $
  (5,940,801
  )Adjustments to reconcile net income (loss) loss to
  netCash used in operating activities:Depreciation and amortization
  
  
  114,925
  
  
  149,794Interest expense on convertible debentures converted
  into common stock
  
  
  
  
  
  10,555Provision for severance pay
  
  
  (8,002
  )
  
  3,235Change in the value of warrants
  
  
  (230,931
  )
  
  167,083Amortization of debt discount and issuance costs
  
  
  126,256
  
  
  1,239,639Amortization of stock options issuances below fair
  market value
  
  
  17,952
  
  
  18,032Option expense  consultant compensation
  
  
  1,244
  
  
  8,823Amortization of restricted shares issuance
  
  
  275,739
  
  
  Income from Bausch & Lomb milestone payment, net
  
  
  (10,725,688
  )Changes in operating assets and liabilities:Research and development grants receivable
  
  
  972,102
  
  
  (537,279
  )Prepaid expenses and other current assets
  
  
  (795,459
  )
  
  114,208Severance pay funding
  
  
  (21,804
  )
  
  8,503Other assets
  
  
  
  
  
  1,643Accounts payable
  
  
  (1,500,310
  )
  
  (785,816
  )Accrued expenses
  
  
  (483,776
  )
  
  108,634Accrued wages and other compensation
  
  
  164,371
  
  
  (503,027
  )Other liabilities
  
  
  22,059
  
  
  Net cash used in operating activities
  
  
  (5,393,795
  )
  
  (5,936,774
  )Cash flows from investing activitiesPurchases of fixed assets
  
  
  (22,503
  )
  
  (52,953
  )Proceeds from Bausch & Lomb milestone payment
  
  
  12,275,000
  
  
  Royalty payment and grant reimbursement related to
  Bausch & Lomb milestone payment
  
  
  (1,549,312
  )
  
  Decrease in restricted cash
  
  
  4,845,568
  
  
  26,232Net cash provided by (used in) investing activities
  
  
  15,548,753
  
  
  (26,721
  )Cash flows from financing activitiesProceeds from issuance of common stock and exercise
  of options and warrants, net of issuance costs
  
  
  
  
  
  4,566,673Repayment of convertible debentures
  
  
  (4,846,148
  )
  
  (1,384,616
  )Net cash (used in) provided by financing activities
  
  
  (4,846,148
  )
  
  3,182,057Net increase (decrease) in cash and cash equivalents
  
  
  5,308,810
  
  
  (2,781,438
  )Cash and cash equivalents at beginning of year
  
  
  49,014,530
  
  
  49,292,641Cash and cash equivalents at end of period
  
  $
  54,323,340
  
  $
  46,511,203Supplemental information:Interest paid
  
  $
  32,308
  
  $
  192,111Supplemental disclosure of non-cash financing
  activities:Conversion of convertible debt
  
  $
  
  
  $
  2,000,000The accompanying notes
are an integral part of these consolidated financial statements.
4


Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
Basis of
Presentation

The accompanying
  unaudited consolidated 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 presentation have been included. Operating results and cash flows for
  the three month period ended March 31, 2005 are not necessarily indicative of
  the results that may be expected for the year ended December 31, 2005.1.   The
  CompanyPharmos Corporation
  (the Company or Pharmos) is a bio-pharmaceutical company that discovers and
  develops novel therapeutics to treat central nervous system (CNS) and
  systemic disorders including pain, inflammation and auto-immune diseases. The
  Company has a portfolio of drug candidates in clinical trials and under
  development, as well as discovery, preclinical and clinical capabilities. 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 incurred
  operating losses since its inception through the year ended December 31, 2000
  and was not profitable in 2002, 2003, or 2004. During the first quarter of 2005,
  the Company showed other income of $10.7 million as a result of the receipt
  of a non-recurring milestone payment from Bausch & Lomb (B&L) related
  to the FDA approval of Zylet. 
  During 2001, the Company recorded other income due to the
  non-recurring sale of its ophthalmic product line. At March 31, 2005, the
  Company has an accumulated deficit of $136.3 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 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 and cash equivalents, of $54.3 million, as of March 31,
  2005, will be sufficient to support the Companys continuing
  operations beyond March 31, 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.3.   Significant
  Accounting PoliciesReclassificationsCertain amounts in the
  consolidated financial statements of prior periods have been reclassified to
  conform to the current period presentation for comparative purposes.Research and development grants receivableAs of March 31, 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.5

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

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 the debenture holders approximately $4.8 million from its  escrow account during the three months
  ended March 31, 2005.At March 31, 2005, the
  Company had repaid the full amount of the September 2003 Convertible
  Debentures.  The remaining restricted
  cash represents deposits held for or by landlords.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.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
  created a 100% valuation allowance against the deferred tax asset.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 123.6

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

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
  March 31,2005
  
  2004Net income (loss) as reported
  
  $
  6,677,527
  
  $
  (5,940,801
  )Add: Stock-based employee compensation expense included
  in reported net income (loss)
  
  
  293,691
  
  
  18,032Deduct: Total stock-based employee compensation
  expense determined under fair value based method for all awards
  
  
  (626,875
  )
  
  (353,102
  )Pro forma net income (loss)
  
  $
  6,344,343
  )
  $
  (6,275,871
  )Earnings per share:Basic - as reported
  
  $
  .07
  
  $
  (.07
  )Diluted - as reported
  
  $
  .07
  
  $
  (.07
  )Basic - pro forma
  
  $
  .07
  
  $
  (.07
  )Diluted  pro forma
  
  $
  .07
  
  $
  (.07
  )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, March 312005
    
    2004Risk-free
        interest rate
    
    3.71%
    
    3.07 
        3.36%Expected
        lives (in years)
    
    5
    
    5Dividend
        yield
    
    0%
    
    0%Expected
        volatility
    
    99%
    
    88%New Accounting PronouncementAs of April 14, 2005,
  the Securities and Exchange Commission (SEC) approved a new rule that for
  public companies delays the effective date of FASB Statement No. 123 (revised
  2004), Share-Based Payment (FAS
  123(R)), giving companies more time to develop their implementation
  strategies. Except for this deferral of the effective date, the guidance in
  FAS 123(R) is unchanged.  Under the
  SECs rule, FAS 123(R) is now effective for public companies for annual, rather than interim, periods that
  begin after June 15, 2005. The effect of the new rule for the Company is a
  six-month deferral of the new standard.7

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements
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 March
        31, 2004, common stock equivalents have 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 March 31, 2005 were in the money 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 March 31, 2005 is illustrated below.March
        31, 
        2005
    
    March
        31, 
        2004Weighted
        average shares outstanding -basic
    
    
    94,869,722
    
    
    87,522,955Restricted
        stock  non-vested
    
    
    632,912
    
    
    Weighted
      average of options that are in the money
    
    
    97,265
    
    
    Weighted
        average shares outstanding -diluted
    
    
    95,599,899
    
    
    87,522,955The following table summarizes the equivalent number of common shares assuming the related securities that were outstanding as of March 31, 2005 and 2004 had been converted.2005
    
    2004Stock options
    
    
    4,968,479
    
    
    4,801,487Warrants
    
    
    6,889,690
    
    
    7,485,234Shares issuable upon exercise of convertible debt
    
    
    
    
    
    4,360,243Restricted stock  non vested
    
    
    632,912
    
    
    Total potential dilutive securities not included in income (loss) per share
    
    
    12,491,081
    
    
    16,646,9645.   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.  During the first quarter of
  2005, the Company recorded in other income royalties of $12,202, compared
  with $3,369 in the first quarter of 2004, per the licensing agreement with
  Herbamed.8

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

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 $4.04,
  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 5,514,705 three-year
  warrants (including 514,705 placement agent warrants) to purchase 5,514,705
  shares of common stock at an exercise price of $2.04 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 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 497,662 shares of common stock. 
  As of March 31, 2005, the Convertible Debentures have been fully
  repaid.9

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

7.   Common
  Stock TransactionsIn the first three
  months of 2005, there were no shares of common stock issued pursuant to the
  Pharmos Corporation 2001 Employee Stock Purchase Plan or shares
  exercised.  In the first three months
  of 2005, the Company incurred a non-cash charge of $1,244 for issuing stock
  options to consultants who have since become employees.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
  379,747 restricted stock units to Dr. Aviv and $200,000 cash and 253,165
  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 quarter ended March
  31, 2005, the Company recorded an expense of $276,000 in connection with the
  Awards.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 5,058,827 shares of
  common stock at a price of $0.85 per share and approximately 1.1 million
  warrants at an exercise price of $1.25 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 $67,024 at March 31, 2005. Upon exercise
  of each of the warrants, the related liability is removed by recording an
  adjustment to additional paid-in-capital.10

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

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 months ending March 31, 2005 and 2004 are as follows:Three
  months ended March 31,2005
  
  2004Net income (loss)United States
  
  $
  6,752,687
  
  $
  (5,824,199
  )Israel
  
  
  (75,160
  )
  
  (116,602
  )$
  6,677,527
  
  $
  (5,940,801
  )Total AssetsUnited States
  
  $
  54,222,038
  
  $
  62,660,549Israel
  
  
  3,613,137
  
  
  4,053,162$
  57,835,175
  
  $
  66,713,711Long
  Lived Assets, netUnited States
  
  $
  141,670
  
  $
  156,317Israel
  
  
  1,606,035
  
  
  1,626,792$
  1,747,705
  
  $
  1,783,109Capital ExpendituresUnited States
  
  $
  3,945
  
  $
  31,180Israel
  
  
  18,558
  
  
  21,773$
  22,503
  
  $
  52,95311

Pharmos Corporation
Unaudited Notes to Consolidated Financial Statements

9.   Commitments
  and ContingenciesLegalThe Company and three 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 on
  behalf of a class of purchasers of the Companys common stock
  during the period from February 10, 2000 through and including December 17,
  2004 (the Class Period). The complaints allege
  generally that the defendants knowingly or recklessly made false or
  misleading statements during the Class Period 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. Management,
  based on the advice of counsel, believes the complaints are without merit and
  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 certain officers and directors of Pharmos.  The
first derivative lawsuit was commenced in February 2005 in the U.S. District
Court for the District of New Jersey.  It alleges, on behalf of Pharmos
(which has been named as a nominal defendant), breaches of fiduciary duty and
other state law violations.  The second derivative lawsuit (which has not
yet been served on Pharmos), was filed in April 2005 in the Superior Court,
County of Middlesex, New Jersey. It contains similar claims on behalf of Pharmos
(as a nominal defendant) as the February 2005 derivative lawsuit, but also
includes claims against a former officer of Pharmos and certain other Pharmos
officers and a Pharmos director. The Complaints seek unspecified damages. 
Management, based on the advice of counsel, believes that the derivative actions
are without merit, and intends to take all appropriate action in respect of the
derivative actions.NASDAQ Stock ListingOn 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 has until September 14, 2005 (180 calendar
  days from March 18, 2005) to regain compliance. No assurance can be given
  that the Company will regain compliance during that period.The Company can regain compliance with the minimum
  bid price rule if the bid price of its common stock closes at $1.00 or higher
  for a minimum of 10 consecutive business days during the initial 180-day
  period, although NASDAQ may, in its discretion, require the Company to
  maintain a bid price of at least $1.00 per share for a period in excess of
  ten consecutive business days (but generally no more than 20 consecutive
  business days) before determining that the Company has demonstrated the
  ability to maintain long-term compliance. If compliance is not achieved by
  September 14, 2005, the Company will be eligible for another 180-day
  compliance period (until March 13, 2006) if it meets the NASDAQ SmallCap
  Market initial listing criteria as set forth in NASDAQ Marketplace Rule
  4310(c) other than the minimum bid price requirement. No assurance can be
  given that the Company will be eligible for the additional 180-day compliance
  period or, if applicable, that it will regain compliance during any
  additional compliance period. If the Company is not eligible for an
  additional compliance period, or does not regain compliance during any
  additional compliance period, NASDAQ will provide written notice to the Company
  that its securities will be delisted. At such time, the Company would be able
  to appeal the delisting determination to a NASDAQ Listing Qualifications
  Panel.12

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. 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
In the first quarter of
2005, the Company received a $10.7 million non-recurring milestone net payment
from Bausch & Lomb relating to the product launch of Zylet in
January.  During the quarter, the
Company adjusted from the unfavorable TBI trial results by rebalancing its
personnel to focus on advancing its preclinical programs toward clinical
developmental stage and by reducing costs associated with TBI activities.  Results of the exploratory Phase II trial of
dexanabinol as a preventative agent for cognitive impairment (CI) in coronary artery bypass graft (CABG) patients are being
reviewed.  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 around midyear. The lead
candidate for treating pain, cannabinor (formerly known as PRS 211,375), is
undergoing safety and toxicology studies in monkeys along with GMP pilot plant
manufacturing.  The Company expects to
initiate Phase I trials in the second half of 2005.
Through the end of the
third quarter of 2001, the Company generated revenues from product sales but is
currently dependent upon external financing, interest income, and research and
development contracts to pursue its intended business activities. The Company
incurred operating losses since its inception through the year ended December
31, 2000 and was not profitable in 2002, 2003 or 2004. During the first quarter
of 2005, the Company showed other income of $10.7 million as a result of the
receipt of a non-recurring milestone payment from Bausch & Lomb related to
the FDA approval of Zylet. 
The Company has incurred a cumulative net loss of $136.3 million through
March 31, 2005 and expects to continue to incur losses going forward. In 2001,
the Company recorded a profit due to the sale of its ophthalmic product line to
Bausch & Lomb. 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.
In November 2004, the
Company announced the results of the Phase IIa feasibility and safety study to
determine the effectiveness of dexanabinol in reducing post-surgical cognitive
impairment (CI). Analysis of the study data indicates that the drug was safe
and well tolerated in CABG patients with no serious adverse events attributable
to the drug. The primary efficacy analysis was designed to measure cognitive
function. It included the Stroop Color Word (Stroop) test that measures
executive function, and a battery of five computerized neuropsychological tests
that measures other domains of cognition. The Stroop test indicated that the
dexanabinol-treated patients had a clinically and statistically significant
(p=0.01) improvement over placebo at three months post-surgery. The five
computerized tests did not show a significant difference between the
drug-treated and placebo-treated groups. Pharmos continues to analyze and
evaluate the results of this trial.

In December 2004, Pharmos
announced the results of the Phase III trial of dexanabinol for TBI. The
analysis of the primary endpoints indicates that dexanabinol did not
demonstrate efficacy. Pharmos continued to analyze the results of this trial
during the first quarter of 2005 and completed the closure of the clinical
sites.  The TBI program has been
discontinued.
13

Pharmos is advancing the
lead candidate from its proprietary platform of CB2-selective synthetic
cannabinoid compounds, cannabinor, through advanced stages of preclinical
development. The 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 and as
anti-inflammatory agents to treat diseases such as multiple sclerosis,
rheumatoid arthritis and inflammatory bowel disease. Using both rodents and
large animals, pharmacological efficacy of cannabinor has been demonstrated in
models of various types of pain, including nociceptive, inflammatory,
neuropathic, visceral, and post-operative. Safety and toxicology studies in
multiple species are ongoing. Pending successful completion of preclinical
studies, the Company plans to initiate Phase I human testing of cannabinor
during the second half of 2005.  Pending
successful completion of Phase I, Phase II studies will be conducted to assess
feasibility for treating indications such as post-operative pain and
neuropathic pain.
Results
of OperationsQuarters ended March 31, 2005 and 2004

Total operating expenses
decreased by $93,736 or 2%, from $4,488,435 in 2004 to $4,394,699 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 second half
of 2005.  The Company incurred higher
compensation expenses for the deferred compensation from the Retention Award
Agreements and higher professional fees consisting of accounting and legal
fees.

Major differences in
quarterly operating expenses yearover-year include decreased costs for both
the Phase II clinical trials of dexanabinol as a preventative agent against
cognitive impairment in CABG operations and the Phase III for TBI which completed
enrollment by mid-year 2004.  Cannabinor
toxicology and other preclinical work is continuing in the first quarter of
2005 along with scale up manufacturing and technology transfer to the active
pharmaceutical ingredient supplier.
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 preventative agent against the cognitive
impairment that can follow CABG
surgery.  During the first quarter of
2005, the gross cost of development and review was approximately $0.3
million.  Total costs since the CI-CABG
project entered Phase II development in 2003 through March 31, 2005 were $2.7
million.  The Company is evaluating
various strategies regarding development of this product and will make its
determination of direction by mid-year. 
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 first
quarters of 2005 and 2004 were $1,914,876 and $981,966, respectively. Total
research and development expenses, net of grants, for the first quarters of
2005 and 2004 were $2,485,063 and $3,300,930, respectively. The Company
recorded research and development grant receivables from the Office of the
Chief Scientist of Israels Ministry of Industry and Trade of
$19,576 and $816,256 during the first quarters of 2005 and 2004, respectively,
which reduced the research and development expenses.
Research &
development (R&D) gross expenses decreased by $1,612,547 or 39% from
$4,117,186 in 2004 to $2,504,639 in 2005 due to a reduction in clinical activity.  Grants decreased from $816,256 for Q1 2004 to
$19,576 for Q1 2005 due to a delay in the 2005 grants approval as a result of a
delay in the approval of the Israeli governments annual budget
which was approved on March 30, 2005. 
In mid-April, approval letters from the OCS were received.

General and
administrative expenses increased by $757,000, or 73%, to $1,794,711 in 2005
from $1,037,711 in 2004. The majority of the increase in general and
administrative expenses is due to higher professional fees, compensation,
consultants, and insurance by $276,032, $272,130, $105,619 and $86,089,
respectively, in the first quarter 2005 compared to the first quarter 2004. The
increase in compensation is attributed to the amortization of deferred
compensation from the Retention Award Agreements. The higher professional fees
in 2005 are attributed to increased accounting fees related to Sarbanes-Oxley
compliance and legal fees related to the class action suits. The increase in
consulting is attributed to business development consulting.  The increase in insurance is attributable to
higher insurance rates.
14

Depreciation and
amortization expenses decreased by $34,839, or 23%, from $149,764 in 2004 to
$114,925 in 2005. The decrease is due to fixed assets which have become fully
depreciated.
Other income (expense),
net, increased by $12,524,592 from an expense of $1,452,366 in 2004 to income
of $11,072,226 in 2005.  Income of
$10,725,688 was recognized for the net payment received from  B&L. 
Interest expense decreased by $1,283,393 to $160,546 in 2005 from
$1,443,939 in 2004. The decrease in 2005 interest expense is a result of the
substantially reduced average outstanding balance during the first quarter of
2005 of the September 2003 Convertible Debentures.  This debt was fully repaid as of March 31, 2005.  During the quarter, the Company recorded in
other income royalties of $12,202 compared with $3,369 in the first quarter of
2004 per the licensing agreement with Herbamed, Ltd, a company controlled by
Dr. Haim Aviv, the Companys CEO. Interest income increased by
$105,549, or 64%, to $269,496 in 2005 from $163,947 in 2004 as a result of a
higher average cash balance.
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 created
a 100% valuation allowance against the deferred tax asset.

Liquidity and Capital Resources
While the Company
recorded revenues from 1998 until the third quarter of 2001 from the sale of
its approved products, it has incurred cumulative operating losses since its
inception and had an accumulated deficit of $136.3 million at March 31, 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 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 March
31, 2005, and on December 31, 2004:

March 31, 2005
  
  December 31, 2004Working capital
  
  
  $
  53,325,917
  
  
  
  $
  46,269,367Cash and cash equivalents
  
  
  $
  54,323,340
  
  
  
  $
  49,014,530Short-term convertible debentures, net
  
  
  $
  
  
  
  
  $
  4,765,540Current working capital
position
As of March 31, 2005, the
Company had working capital of $53.3 million consisting of current assets of
$55.9 million and current liabilities of $2.6 million. This represents an
increase of $7.1 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 $7.1 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) offset by the funding of R&D and G&A
activities.

Current and future
liquidity position
Management believes that
cash and cash equivalents of $54.3 million as of March 31, 2005, will be
sufficient to support the Companys continuing operations beyond
March 31, 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.
15

Cash
At March 31, 2005, cash
and cash equivalents totaled $54.3 million. At December 31, 2004 cash and cash
equivalents totaled $49.0 million. This net increase in cash of $5.3 million
was principally due to the net cash received from the B&L payment of $9.2
million offset by normal operating requirements.  The cash and cash equivalents will be used to finance future
growth and capital expenditures.
Operating activities
Net cash used in
operating activities for the first quarter of 2005 was $5.4 million compared to
net cash used of $5.9 million for the first quarter of 2004. The decrease in
cash used of $.5 million is primarily due to receipt of grant monies offset by
the payment of insurance premiums and other operating activities.
Investing activities

Restricted cash during
the first quarter 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 $10.7 million related to investing activities for
a non-recurring milestone payment from Bausch & Lomb related to the FDA
approval of Zylet.
Capital expenditures for
property, plant and equipment for the first three months of 2005 and 2004
totaled approximately $23,000 and $53,000, respectively for normal replacements
and improvements.
Financing activities
During the first quarter
of 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 497,662
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
March 31, 2005, the Company repaid all of the outstanding  September 2003 Convertible Debentures
amounting to a total of $19.0 million.
Executive stock trading
program
As previously disclosed,
one of Pharmos directors, Dr. Elkan Gamzu, adopted a pre-arranged
stock trading plan in 2004 in accordance with guidelines specified by Rule
10b5-1 under the Securities Exchange Act of 1934.
Rule 10b5-1 permits
officers and directors of public companies to adopt pre-determined plans for selling
specified amounts of stock.  The plans
may be entered into only when the director or officer is not in possession of
material, non-public information and may be used to gradually diversify
investment portfolios over a period of time.
Pursuant to his 10b5-1
Plan, Dr. Gamzu sold an aggregate of 22,500 shares, which he acquired upon the
exercise of options and warrants covered by the plan.  Dr. Gamzus plan terminated in accordance with its
terms on April 15, 2005.
16


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 has until
September 14, 2005 (180 calendar days from March 18, 2005) to regain
compliance. No assurance can be given that the Company will regain compliance
during that period.
The Company can regain
compliance with the minimum bid price rule if the bid price of its common stock
closes at $1.00 or higher for a minimum of 10 consecutive business days during
the initial 180-day period, although NASDAQ may, in its discretion, require the
Company to maintain a bid price of at least $1.00 per share for a period in
excess of ten consecutive business days (but generally no more than 20
consecutive business days) before determining that the Company has demonstrated
the ability to maintain long-term compliance. If compliance is not achieved by
September 14, 2005, the Company will be eligible for another 180-day compliance
period (until March 13, 2006) if it meets the NASDAQ SmallCap Market initial
listing criteria as set forth in NASDAQ Marketplace Rule 4310(c) other than the
minimum bid price requirement. No assurance can be given that the Company will
be eligible for the additional 180-day compliance period or, if applicable,
that it will regain compliance during any additional compliance period. If the
Company is not eligible for an additional compliance period, or does not regain
compliance during any additional compliance period, NASDAQ will provide written
notice to the Company that its securities will be delisted. At such time, the
Company would be able to appeal the delisting determination to a NASDAQ Listing
Qualifications Panel.
17

Commitment and
Contingencies
As of March 31, 2005, the
Company had the following contractual commitments and long-term obligations:
Total
  
  Less than
  1 Year
  
  1  3
  Years
  
  3  5
  Years
  
  After 5
  Years
  
  UndeterminedOperating Leases
  
  $
  1,629,506
  
  $
  547,311
  
  $
  680,503
  
  $
  398,947
  
  $
  2,745
  
  $
  Other long-term liabilities reflected on our balance
  sheet*
  
  
  1,189,037
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,189,037Other Commitment**
  
  
  500,000
  
  
  250,000
  
  
  250,000
  
  
  
  
  
  
  
  
  Total
  
  $
  3,318,543
  
  $
  797,311
  
  $
  930,503
  
  $
  398,947
  
  $
  2,745
  
  $
  1,189,037*
  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 $833,730.**
  Represents cash retention bonus given to the CEO and
  President. $160,846 has been accrued through March 31, 2005.The
Company has assessed its vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
cash equivalents 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 based upon the Companys stock
price.
New accounting
pronouncements
As of April 14,2005, the
Securities and Exchange Commission (SEC) approved a new rule that for public
companies delays the effective date of FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)),
giving companies more time to develop their implementation strategies. Except
for this deferral of the effective date, the guidance in FAS 123(R) is unchanged.  Under the SECs rule, FAS 123(R)
is now effective for public companies for annual,
rather than interim, periods that begin after June 15, 2005. The effect of the
new rule for the Company is a six-month deferral of the new standard.
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. Such statements
involve risks and uncertainties, which may cause results to differ materially
from those set forth in these statements. 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.
18


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 and cash equivalents and restricted
cash. Due to the short-term nature of the cash and cash equivalent investments
and restricted cash, we have determined that the risks associated with interest
rate fluctuations related to these financial instruments do not pose a material
risk to us.
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 March 31, 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 March 31, 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 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 this Form 10Q. The Company is in the process of remediating
      this weakness by strengthening 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.19

Part II

Other Information

Item 1   Legal Proceedings

The Company and three 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 on
  behalf of a class of purchasers of the Companys common stock
  during the period from February 10, 2000 through and including December 17,
  2004 (the Class Period). The complaints allege
  generally that the defendants knowingly or recklessly made false or
  misleading statements during the Class Period 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. Management,
  based on the advice of counsel, believes the complaints are without merit and
  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 certain officers and directors of Pharmos.  The
first derivative lawsuit was commenced in February 2005 in the U.S. District
Court for the District of New Jersey.  It alleges, on behalf of Pharmos
(which has been named as a nominal defendant), breaches of fiduciary duty and
other state law violations.  The second derivative lawsuit (which has not
yet been served on Pharmos), was filed in April 2005 in the Superior Court,
County of Middlesex, New Jersey. It contains similar claims on behalf of Pharmos
(as a nominal defendant) as the February 2005 derivative lawsuit, but also
includes claims against a former officer of Pharmos and certain other Pharmos
officers and a Pharmos director. The Complaints seek unspecified damages. 
Management, based on the advice of counsel, believes that the derivative actions
are without merit, and intends to take all appropriate action in respect of the
derivative actions.Item 2
  Unregistered
  Sales of Equity Securities and Use of Proceeds
  NONEItem 3
  Defaults
  upon Senior Securities
  NONEItem 4
  Submissions
  of Matters to Vote of Security Holders
  NONEItem 5
  Other
  Information
  NONEItem 6   Exhibits

Number
  
  Exhibit10.1
  
  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 registrants
  Annual Report on Form 10-K for the year ended December 31, 2004).**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.** This document is a management contract or
  compensatory plan or arrangement.20

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:
  May 4, 2005by: /s/ James A. MeerJames A. MeerSenior Vice President andChief Financial Officer(Principal Accounting andFinancial Officer)21