|                                                                                 
|---------------------------------------------------------------------------------
|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, 2007
|                                                  |                                                                                         
|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 registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|Large accelerated filero | Accelerated filero | Non-accelerated filerx
|------------------------ | ------------------ | ----------------------

|                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 October 30, 2007, the Registrant had outstanding 25,603,759 shares of its $.03 par value Common Stock.

|1
|-



|**INDEX**  |                                                                                                                   |   
|---------- | ----------------------------------------------------------------------------------------------------------------- | --
|           |                                                                                                                   |   
|PART I     | FINANCIAL INFORMATION                                                                                             | 3 
|           |                                                                                                                   |   
|Item 1.    | Financial Statements                                                                                              | 3 
|           |                                                                                                                   |   
|           | Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006                            | 3 
|           |                                                                                                                   |   
|           | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2007 and 2006 | 4 
|           |                                                                                                                   |   
|           | Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended September 30, 2007 and 2006 | 5 
|           |                                                                                                                   |   
|           | Notes to Consolidated Financial Statements (unaudited)                                                            | 6 
|           |                                                                                                                   |   
|Item 2.    | Managements Discussion and Analysis of Financial Condition and Results of Operations                             | 12
|           |                                                                                                                   |   
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                                        | 18
|           |                                                                                                                   |   
|Item 4T.   | Controls and Procedures                                                                                           | 19
|           |                                                                                                                   |   
|PART II    | OTHER INFORMATION                                                                                                 | 19
|           |                                                                                                                   |   
|Item 1.    | Legal Proceedings                                                                                                 | 19
|           |                                                                                                                   |   
|Item 6.    | Exhibits                                                                                                          | 20
|           |                                                                                                                   |   
|Signatures | 21                                                                                                               

|2
|-



|Part I. | Financial Information
|------- | ---------------------

|       |                     
|------ | --------------------
|Item 1 | Financial Statements

|                           
|---------------------------
|PHARMOS CORPORATION        
|(Unaudited)                
|Consolidated Balance Sheets
|                           

|                                                                                                                                                                                                                                                                              | **September 30,
      2007** |              | **December 31,
      2006** |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------------ | --------------------------- | -
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Assets**                                                                                                                                                                                                                                                                    |                              |              |                             |  
|Cash and cash equivalents                                                                                                                                                                                                                                                     | $                            | 8,498,711    |                             | $
|Short-term investments                                                                                                                                                                                                                                                        |                              | 5,364,366    |                             |  
|Restricted cash                                                                                                                                                                                                                                                               |                              | 85,780       |                             |  
|Research and development grants receivable                                                                                                                                                                                                                                    |                              |             |                             |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                     |                              | 480,999      |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total current assets**                                                                                                                                                                                                                                                      |                              | 14,429,856   |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|Fixed assets, net                                                                                                                                                                                                                                                             |                              | 481,515      |                             |  
|Restricted cash                                                                                                                                                                                                                                                               |                              | 64,758       |                             |  
|Severance pay funded                                                                                                                                                                                                                                                          |                              | 415,099      |                             |  
|Other assets                                                                                                                                                                                                                                                                  |                              | 18,946       |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total assets**                                                                                                                                                                                                                                                              | $                            | 15,410,174   |                             | $
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Liabilities and Shareholders Equity**                                                                                                                                                                                                                                     
|Accounts payable                                                                                                                                                                                                                                                              | $                            | 611,287      |                             | $
|Accrued expenses                                                                                                                                                                                                                                                              |                              | 702,646      |                             |  
|Warrant liability                                                                                                                                                                                                                                                             |                              |             |                             |  
|Accrued wages and other compensation                                                                                                                                                                                                                                          |                              | 949,681      |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total current liabilities**                                                                                                                                                                                                                                                 |                              | 2,263,614    |                             |  
|                                                                                                                                                                                                                                                                             
|Other liabilities                                                                                                                                                                                                                                                             |                              | 17,066       |                             |  
|Severance pay                                                                                                                                                                                                                                                                 |                              | 555,010      |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total liabilities**                                                                                                                                                                                                                                                         |                              | 2,835,690    |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Shareholders Equity**                                                                                                                                                                                                                                                      |                              |              |                             |  
|Preferred stock, $.03 par value, 1,250,000 shares
authorized, none issued and
   outstanding Common stock, $.03 par value; 60,000,000 shares authorized,
   25,603,759 and 25,565,784  issued and outstanding as of September 30, 2007
   and December 31, 2006, respectively |                              | 768,112      |                             |  
|Paid-in capital in excess of par                                                                                                                                                                                                                                              |                              | 205,774,379  |                             |  
|Accumulated deficit                                                                                                                                                                                                                                                           |                              | (193,967,581 | )                           |  
|Treasury stock, at cost, 2,838 shares                                                                                                                                                                                                                                         |                              | (426         | )                           |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total shareholders equity**                                                                                                                                                                                                                                                |                              | 12,574,484   |                             |  
|                                                                                                                                                                                                                                                                              |                              |              |                             |  
|**Total liabilities and shareholders equity**                                                                                                                                                                                                                                | $                            | 15,410,174   |                             | $
|                                                                                                                                                                                                                                                                              |                              |              |                             |  

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

|3
|-



|PHARMOS CORPORATION(Unaudited)Consolidated Statements of Operations
|-------------------------------------------------------------------
|                                                                   

|                                              |  | **Three months ended
      September 30,** |              | **Nine months ended
      September 30,** |  
|--------------------------------------------- |  | ------------------------------------------ | ------------ | ----------------------------------------- | -
|                                              |  |                                            |              |                                           |  
|                                              |  | **2007**                                   |              | **2006**                                  |  
|                                              |  |                                            |              |                                           |  
|**Expenses**                                  |  |                                            |              |                                           |  
|Research and development, gross               |  | $                                          | 2,711,774    |                                           | $
|Grants                                        |  |                                            | (238,123     | )                                         |  
|                                              |  |                                            |              |                                           |  
|Research and development, net
     of grants  |  |                                            | 2,473,651    |                                           |  
|General and administrative                    |  |                                            | 1,200,594    |                                           |  
|Depreciation and amortization                 |  |                                            | 57,946       |                                           |  
|                                              |  |                                            |              |                                           |  
|**Total operating expenses**                  |  |                                            | 3,732,191    |                                           |  
|                                              |  |                                            |              |                                           |  
|                                             
|**Loss from operations**                      |  |                                            | (3,732,191   | )                                         |  
|                                              |  |                                            |              |                                           |  
|                                             
|**Other income (expense)**                    |  |                                            |              |                                           |  
|Interest income                               |  |                                            | 198,703      |                                           |  
|Change in value of warrants                   |  |                                            |             |                                           |  
|Other (expense) income                        |  |                                            | (5,067       | )                                         |  
|                                              |  |                                            |              |                                           |  
|**Other income, net**                         |  |                                            | 193,636      |                                           |  
|                                              |  |                                            |              |                                           |  
|                                             
|**Net loss**                                  |  |                                            | ($ 3,538,555 | )                                         |  
|                                              |  |                                            |              |                                           |  
|                                             
|**Net loss per share**                        |  |                                            |              |                                           |  
|- basic and diluted                           |  |                                            | ($ 0.14      | )                                         |  
|                                              |  |                                            |              |                                           |  
|                                             
|**Weighted average shares
      outstanding** |  |                                            |              |                                           |  
|- basic and diluted                           |  |                                            | 25,600,920   |                                           |  
|                                              |  |                                            |              |                                           |  

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

|4
|-



|Pharmos Corporation(Unaudited)Consolidated Statements of Cash Flows
|-------------------------------------------------------------------
|                                                                   

|                                                                                                    | **Nine months ended September 30,** |            
|--------------------------------------------------------------------------------------------------- | ----------------------------------- | -----------
|                                                                                                    | **2007**                            |            
|                                                                                                    |                                     |            
|Cash flows from operating activities                                                                |                                     |            
|Net income (loss)                                                                                   | $                                   | (12,929,053
|                                                                                                    |                                     |            
|Adjustments to reconcile net income (loss) loss to net 
         cash used in operating activities: |                                     |            
|Depreciation and amortization                                                                       |                                     | 194,581    
|Provision for severance pay                                                                         |                                     | (765,614   
|Change in the value of warrants                                                                     |                                     | (11,435    
|Stock based compensation                                                                            |                                     | 969,644    
|Amortization of restricted shares issuance                                                          |                                     | 105,845    
|Gain of disposition of fixed assets                                                                 |                                     | (15,528    
|Changes in operating assets and liabilities:                                                        |                                     |            
|Research and development grants receivable                                                          |                                     | 297,865    
|Prepaid expenses and other current assets                                                           |                                     | (56,341    
|Other assets                                                                                        |                                     | 6,068      
|Accounts payable                                                                                    |                                     | (51,905    
|Accrued expenses                                                                                    |                                     | (187,137   
|Accrued wages and other compensation                                                                |                                     | (52,891    
|Other liabilities                                                                                   |                                     | (60,616    
|                                                                                                    |                                     |            
|                                                                                                   
|Net cash used in operating activities                                                               |                                     | (12,556,517
|                                                                                                    |                                     |            
|                                                                                                   
|Cash flows from investing activities                                                                |                                     |            
|Purchases of fixed assets                                                                           |                                     | (167,494   
|Proceeds from disposition of fixed assets                                                           |                                     | 100,381    
|Costs associated with acquisition of Vela Pharmaceuticals                                           |                                     |           
|Advance to Vela                                                                                     |                                     |           
|Purchase of short-term investments                                                                  |                                     | (6,911,286 
|Proceeds from sale of short-term investments                                                        |                                     | 14,719,593 
|Severance pay funding                                                                               |                                     | 560,711    
|Increase in restricted cash                                                                         |                                     | (3,690     
|                                                                                                    |                                     |            
|                                                                                                   
|Net cash provided by investing activities                                                           |                                     | 8,298,215  
|                                                                                                    |                                     |            
|                                                                                                   
|Cash flows from financing activities                                                                |                                     |           
|                                                                                                    |                                     |            
|                                                                                                    |                                     |            
|                                                                                                   
|Net decrease in cash and cash equivalents                                                           |                                     | (4,258,302 
|                                                                                                    |                                     |            
|                                                                                                   
|Cash and cash equivalents at beginning of year                                                      |                                     | 12,757,013 
|                                                                                                    |                                    
|                                                                                                   
|Cash and cash equivalents at end of period                                                          | $                                   | 8,498,711  
|                                                                                                    |                                     |            

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

|5
|-



|Notes to Consolidated Financial Statements (unaudited)
    Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The accompanying unaudited interim financial statements have been prepared in accordance with accounting
  principles generally accepted in the United States of America 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 accounting principles generally accepted in the
  United States of America 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 nine month period ended September 30, 2007
  are not necessarily indicative of the results that may be expected for the year ending December 31,
  2007. The year-end consolidated 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 Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Pharmos Corporation (the Company or Pharmos) is a biopharmaceutical company that discovers and develops
  novel therapeutics to treat a range of diseases of the nervous system, including disorders of the
  brain-gut axis (e.g., Irritable Bowel Syndrome (IBS), with a focus on pain/inflammation, and autoimmune
  disorders. The Companys most advanced product, dextofisopam, produced a statistically significant
  greater number of months of adequate relief over placebo in a Phase 2a clinical trial in IBS (n=141,
  p=0.033). On June 20, 2007 the Company announced patient screening had commenced in its Phase 2b
  clinical trial of dextofisopam, which is expected to enroll approximately 480 female patients with
  diarrhea-predominant or alternating irritable bowel syndrome (d- and a-IBS). IBS is a chronic and
  sometimes debilitating condition that affects roughly 10%-15% of U.S. adults and is two to three
  times more prevalent in women than men. With an absence of safe and effective available therapies,
  dextofisopams novel non-serotonergic brain-gut mechanism holds the potential for a unique and
  innovative treatment approach to d- and a-IBS.                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Companys NanoEmulsion (NE) drug delivery system, a proprietary asset derived from our formulation
  expertise, completed a second Phase I trial in 2006 that confirmed the safety, and tolerability as
  well as low systemic exposure of a more optimized NE diclofenac cream formulation. On June 27, 2007
  the Company announced that patient screening had commenced in its Phase 2a clinical trial of its
  topical NanoEmulsion (NE) drug delivery technology formulated with 3% diclofenac. The trial will
  compare the safety and analgesic efficacy of the diclofenac NE cream with placebo in approximately
  126 subjects with knee osteoarthritis (OA). OA affects approximately 12% of U.S. adults, a significant
  portion of who are not treated pharmacologically due to side effects associated with the commonly
  used oral treatments. A site-specific, topical diclofenac product that could deliver a high drug
  concentration to the affected joint with minimal systemic exposure could reduce the risk of treatment-limiting
  side effects while maintaining the analgesic effect.                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Companys core proprietary discovery platform focuses on synthetic cannabinoid compounds.
  Cannabinor, the initial CB2-selective receptor agonist candidate, has completed two Phase 2a clinical
  trials for pain relief with an intravenous (IV) formulation. In January 2007, Pharmos reported that
  in the first of these studies intravenous (i.v.) Cannabinor was generally safe and well tolerated,
  but failed to meet the primary endpoint of reversing capsaicin-induced pain. The Company subsequently
  noted that analysis of additional endpoints of heat-induced and pressure-induced pain indicated that
  i.v. Cannabinor does in fact exhibit a statistically significant systemic analgesic effect compared
  to placebo. In April 2007, Pharmos reported that the lowest dose of Cannabinor (12mg) produced a
  statistical significant decrease in pain versus placebo as in subjects undergoing third molar dental
  extraction model, but that this effect was not seen in the higher dose groups (24mg and 48 mg). This
  is an unexpected pattern of results and as such the Company has determined that it will not continue
  with the development of Cannabinor at this time, but will focus resources on other CB2 compounds
  that have better potential. Cannabinor will be available for outlicensing.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Pharmos cannabinoid research is geared toward development of selective and specific CB2 receptor
  agonists. Because they have little affinity for the CNS-located CB1 receptor, CB2-selective and specific
  agonists lack the unwanted psychotropic side effects of many natural cannabinoids. By activating
  CB2 receptors, CB2 agonists inhibit autoimmune and inflammatory processes, and are likely to be useful
  for treating pain, autoimmune, inflammatory and degenerative disorders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Other compounds in Pharmos pipeline are in pre-clinical studies and are targeted as potential
  treatments for inflammatory bowel disease, pain, multiple sclerosis, rheumatoid arthritis and other
  disorders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|As described in more detail under Item 2, Managements Discussion and Analysis of Financial Condition
  and Results of Operations, on August 6, 2007 the Board of Pharmos approved a detailed restructuring
  and cost reduction plan for the Companys operations in Israel. The plan involved a workforce
  reduction from 41 employees to 23 employees. Certain key functions that were previously conducted
  on site were outsourced and certain equipment was sold or leased to third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|On October 24, 2007 the Board of Pharmos approved a second phase of restructuring involving a workforce
  reduction from 23 to 8 employees in its Israeli subsidiary, Pharmos Ltd. The Company does not expect
  a material charge against operations to result from
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|this undertaking.
|-----------------
|                 

|The Israeli subsidiary will continue efforts to expand and exploit the potential of the Companys
  CB2 receptor-selective library of compounds, including preclinical development of PRS-639,058 for
  neuropathic pain. It will also work to complete the Phase 2a clinical trial of Pharmos proprietary
  NanoEmulsion topical cream for osteoarthritis pain.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                 

|The Company has corporate offices in Iselin, New Jersey and conducts research, discovery and
  development through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                  

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

|The Company was not profitable from 2002 through September 30, 2007. At September 30, 2007, the Company
  had an accumulated deficit of $194.0 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 $13.9 million as of September
  30, 2007, will be sufficient to support the Companys currently planned continuing operations
  through at least September 2008.                                                                                                                                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The Company routinely actively pursues various funding options, including equity offerings, equity-like
  financing, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|On September 26, 2007, we received notice from The Nasdaq Stock Market (Nasdaq) that

the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive business days

and that we were therefore not in compliance with Nasdaq listing rules. We have until March

24, 2008 (180 calendar days from September 26, 2007) to regain compliance. No assurance can

be given that we will regain compliance during that period. If compliance is not achieved by March

24, 2008, we will be eligible for another 180-day compliance period (until September 20, 2008)
  if
  we meet the Nasdaq Capital 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 we will

be eligible for the additional 180-day compliance period or, if applicable, that we will regain
  compliance
  during any additional compliance period. If our common stock were to be delisted from
  Nasdaq, liquidity
  for our common stock could be significantly decreased which could reduce the
  trading price and increase
the transaction costs of trading shares of our common stock.

|                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.  Significant Accounting Policies                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                      
|Basis of consolidation                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                      
|The accompanying consolidated financial statements include the accounts of the Company and its wholly
  owned subsidiaries: Pharmos Ltd and Vela Acquisition Corp. All significant intercompany balances
  and transactions are eliminated in consolidation. The functional currency for Pharmos Ltd. is the
  US dollar.             
|                                                                                                                                                                                                                                                                                                                                      
|Research and development grants receivable                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                      
|As of September 30, 2007 and December 31, 2006, research and development grant receivables consist
  of grants for research and development from the office of the Chief Scientist in Israel (OCS) relating
  to certain projects. Research and development grants are recognized as a reduction of research and
development expenses.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The 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. The Company invests in a variety of instruments
  such as commercial paper, US Government securities and corporate securities with an effective maturity
  of less than one year. Some of the Companys investments are in auction-rate securities (ARS)
  that are held as investments available for sale. Auction rate securities are instruments with long-term
  underlying maturities, but for which an auction is conducted periodically, as specified, to reset
  the interest rate and allow investors to buy or sell the instruments. Because auctions generally
  occur more often than annually, and because the Company holds these instruments in order to meet
short-term liquidity needs, the auction rate securities are classified

|7
|-



|as short-term investments in the Consolidated Balance Sheet. 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. The Consolidated Statement of Cash Flows reflects the gross amount of the
  purchases of short term investments and the proceeds from maturities of short term securities and
  sales of auction rate securities.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|**September 30, 
      2007** | **December 31, 
      2006**   
|----------------------------- | -------------------------------
|                              |                                
|                              | Securities greater than 90 days
|                              | Auction Rate Securities        
|                              |                                
|                              | Total Short Term Investments   
|                              |                                

|                                                                                           
|-------------------------------------------------------------------------------------------
|Restricted cash                                                                            
|                                                                                           
|Both short term and long term restricted cash represents deposits held for or by landlords.

|                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tax Provision                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                         
|No tax provision is required at this time since the Company expects to be in a tax loss position at

year-end December 31, 2007 and has net operating losses from previous years. The Company has established

a 100% valuation allowance against the deferred tax asset.
|                                                                                                                                                                                                                                                                         
|Accounting for Uncertainty in Income Taxes (FIN 48)                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                         

|In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes
  recognized in an entitys financial statements and prescribes a recognition threshold of more-likely-than-not
  to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold
  has been met. This Interpretation also provides guidance on derecognition, classification, interest
  and penalties, accounting in interim periods, disclosure, and transition. Pharmos conducts business
  in the US and Israel and, as a result, files US, New Jersey and Israeli income tax returns. In the
  normal course of business the Company is subject to examination by taxing authorities. At present,
  there are no ongoing audits or unresolved disputes with the various tax authorities that the Company
  files with. Given the Companys substantial net operating loss carryforwards (NOLs,
  which are subject to a full valuation allowance) as well as the historical operating losses, the
  adoption of FIN 48 on January 1, 2007 did not have any effect on our financial position, results
of operations or cash flows as of September 30, 2007.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Foreign exchange                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|The Companys foreign operations are principally conducted in U.S. dollars. Any transactions or
  balances in currencies other than U.S. dollars are remeasured and any resultant gains and losses
  are included in other (expense) income. To date, such gains and losses have been insignificant.                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|Equity based compensation                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|During the nine months ended September 30, 2007 and 2006, the Company recognized equity based compensation
  expense of $969,654 and $695,724, respectively, for stock options which was recognized in the Statement
  of Operations. As of September 30, 2007, the total compensation costs related to non-vested awards
  not yet recognized is $2.0 million which will be recognized over the next three years.
|                                                                                                                                                                                                                                                                                                                                                                                                                  
|During the nine months ended September 30, 2007 and 2006, employees and outside directors of the Company
  were granted stock options under the Pharmos 2000 Stock Option Plan per the table below:                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                  

| | Period Ended       |  | Grants Issued |         | Weighted Average
      Exercise Price |   | Weighted Average
      Fair Value | 
| | ------------------ |  | ------------- | ------- | ------------------------------------- | - | --------------------------------- | 
| |                    |  |               |         |                                       |   |                                   | 
|
| | September 30, 2007 |  |               | 870,000 |                                       | $ | 1.70                              | 
| | September 30, 2006 |  |               | 676,000 |                                       | $ | 2.15                              | 
| |                    |  |               |         |                                      

|8
|-



|The 2007 option grants include 200,000 options granted contingent upon the approval by the Companys
  shareholders of an increased number of authorized shares in the 2000 Amended and Restated Stock Option
  Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).

SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for
  measuring
  fair value, and requires additional disclosures about fair-value measurements. SFAS 157
  applies only
  to fair value measurements that are already required or permitted by other accounting
  standards (except
  for measurements of share-based payments) and is expected to increase the consistency
  of those measurements.
  Accordingly, SFAS 157 does not require any new fair value measurements.
  However, for some entities,
  the application of SFAS 157 will change current practice. SFAS 157
  is effective for fiscal years
  beginning after November 15, 2007, and interim periods within those
  fiscal years. The Company does
  not expect the adoption of SFAS 157 to have a material impact on
  our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In February 2007, the FASB issued Statement of Financial Accounting Standards (FAS) No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment
  of FASB Statement No. 115 (FAS No. 159), which is effective for financial statements
  issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal
  years. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities
  and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not
  permitted to be accounted for at fair value under other generally accepted accounting principles.
  The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded
  in earnings. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|On June 27, 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3, Accounting

for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities

(EITF 07-03). Currently, under FASB Statement No. 2, Accounting for Research
  and
  Development Costs, nonrefundable advance payments for future research and development
  activities
  for materials, equipment, facilities, and purchased intangible assets that have no alternative
  future
  use are expensed as incurred. EITF 07-03 addresses whether such non-refundable advance payments
  for
  goods or services that have no alternative future use and that will be used or rendered for
  research
  and development activities should be expensed when the advance payments are made or when
  the research
  and development activities have been performed. The consensus reached by the FASB
  requires companies
  involved in research and development activities to capitalize such non-refundable
  advance payments
  for goods and services pursuant to an executory contractual arrangement because
  the right to receive
  those services in the future represents a probable future economic benefit.
  Those advance payments
  will be capitalized until the goods have been delivered or the related services
  have been performed.
  Entities will be required to evaluate whether they expect the goods or services
  to be rendered. If
  an entity does not expect the goods to be delivered or services to be rendered,
  the capitalized advance
  payment will be charged to expense. The consensus on EITF 07-03 is effective
  for financial statements
  issued for fiscal years beginning after December 15, 2007, and interim
  periods within those fiscal
  years. Earlier application is not permitted. Entities are required
  to recognize the effects of applying
  the guidance in EITF 07-03 prospectively for new contracts
  entered into after the effective date.
  The Company is in the process of evaluating the expected
  impact of EITF 07-03 on its financial position
  and results of operations following adoption.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.Vela Pharmaceuticals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | 
| | 

|The Companys 2006 statement of operations includes the results of operations from Vela from October
  26, 2006 forward. The following table presents unaudited pro forma consolidated results of operations
  for Pharmos for the nine months ended September 30, 2006, as though the Vela acquisition was completed
  as of the beginning of the period.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                          

| |                                                         | September 30, 
      2006 |             |  
| | ------------------------------------------------------- | ------------------------- | ----------- | -
| |                                                         |                           |             |  
| | Net loss attributable to common shareholders            | $                         | (14,849,108 | )
| |                                                         |                           |             |  
| | Net loss per share attributable to common shareholders: |                           |             |  
| |                                                         |                           |             |  
| | Basic and diluted                                       | $                         | (0.58       | )
| |                                                         |                           |             |  
|
| | Weighted average shares outstanding                     |                           | 25,554,413  |  
| |                                                         |                           |             |  

|9
|-



|In connection with the acquisition of Vela Pharmaceuticals which closed on October 25, 2006 the Company

is obligated to pay certain performance based milestones connected to the development of dextofisopam.                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                              
|The $1.0 million cash milestone payable when the first patient enrolled in the Phase 2b trial was paid

on June 26, 2007 as that milestone was achieved in the second quarter of 2007. Such amount was
  included
  in research and development expense (net).
|                                                                                                                                                                                                                                                              
|The remaining milestones are as follows:                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                              

| |  | $1 million cash + 2 million shares of Pharmos common stock: Final patient enrolled in Phase 2b trial
| | - | ----------------------------------------------------------------------------------------------------
| |   |                                                                                                     
| |  | $2 million cash + 2.25 million shares: Successful completion of Phase 2b                            
| |   |                                                                                                     
| |  | $2 million + 2 million shares: NDA submission                                                       
| |   |                                                                                                     
| |  | $2 million cash +2.25 million shares: FDA approval                                                  
| |   |                                                                                                     
| |  | 1 million shares: Approval to market in Europe or Japan                                             
| |   |                                                                                                     

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

|5.Net Loss Per Common Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Basic and diluted net loss per common share was computed by dividing the net loss for the period by
  the weighted average number of shares of common stock issued and outstanding. For the periods ending
  September 30, 2007 and 2006, 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, it was determined that no
  stock options or warrants as of September 30, 2007 and 2006 were in the money and therefore
  none were considered other potential common stock to be included in the calculation of diluted net
  loss per share.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The following table sets forth the number of potential shares of common stock that have been excluded
  from diluted 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,
      2007 |           | September 30,
      2006 | 
|------------------------------------------------------------------ | ------------------------ | --------- | ------------------------ | 
|                                                                   |                          |           |                          | 
|                                                                  
|Stock options                                                      |                          | 2,534,980 |                          | 
|Warrants                                                           |                          | 297,739   |                          | 
|Restricted stock - non vested                                      |                          |          |                          | 
|                                                                   |                          |           |                          | 
|                                                                  
|Total potential dilutive securities not included in loss per share |                          | 2,832,719 |                          | 
|                                                                   |                          |           |                          | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6.Collaborative Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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 former Chief Executive Officer of Pharmos. In the three and nine months ending
  September 30, 2007, the Company recorded in other income royalties of $1,804 and $3,856 compared
  with $2,190 and $3,838 for the same periods in 2006, respectively, per the licensing agreement with
  Herbamed.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|7.Common Stock Transactions                                                                                                                                                                                                                                                                                                                                                                                                                          
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|In the nine months ended September 30, 2007 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.                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|During the first quarter of 2007, the Company incurred a non-cash charge of $328,057 for the acceleration
  of unvested options for Dr. Haim Aviv, Chairman and former Chief Executive Officer. In the third
  quarter of 2007, the Company incurred a non-cash charge of $69,571 for the vesting acceleration and
  exercise term modification of options for employees subject to the workforce reduction approved by
  the board on August 6,2007.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|On September 6, 2004, the Board of Directors approved, and Pharmos entered into, a Retention Award
  Agreement with Dr. Haim Aviv, Chairman and former Chief Executive Officer. The Company granted
  a retention award of $300,000 cash and 75,950
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
|--



|restricted stock units to Dr. Aviv (the Awards). Under the agreement, one-half of the Awards
  vested on December 31, 2005 and the balance of Dr. Avivs Awards were to vest and become non-forfeitable
  on June 30, 2007, subject to certain accelerated vesting provisions. The Company accelerated the
  vesting of Dr. Avivs remaining unvested Awards to March 31, 2007 in connection with his retirement
  on that date as Chief Executive Officer. 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, were expensed pro rata over the vesting periods. During the
  three month period ended March 31, 2007, the Company recorded an expense of approximately $105,844
  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 1,011,765 shares of common stock at a price
  of $4.25 per share and approximately 200,000 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, as 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 were being marked to market each reporting period as a gain/loss until
  exercised or expiration and amounted to $11,435 of income through March 31, 2007 at which point the
  warrants expired. Upon exercise of each of the warrants, the related liability is reduced by recording
  an adjustment to additional paid-in-capital.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|The fair value of the warrants was being marked to market using the Black-Scholes option-pricing model
  with the same assumptions as used for the stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|8.Segment and Geographic Information                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                            
|The 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, 2007 and 2006 are as follows:
|-------------------------------------------------------------------------------------------------------
|                                                                                                       

| |                          | Three months ended September 30, |            | Nine months ended September 30, |  
| | ------------------------ | -------------------------------- | ---------- | ------------------------------- | -
|
|
| |                          |                                  |            |                                 |  
| | **Net (loss) income**    |                                  |            |                                 |  
| | United States            | $                                | (3,776,788 | )                               | $
| | Israel                   |                                  | 238,233    |                                 |  
| |                          |                                  |            |                                 |  
| |                          | $                                | (3,538,555 | )                               | $
| |                          |                                  |            |                                 |  
| |                          |                                  |            |                                 |  
| | **Capital Expenditures** |                                  |            |                                 |  
| | United States            | $                                |           |                                 | $
| | Israel                   |                                  | 34,365     |                                 |  
| |                          |                                  |            |                                 |  
| |                          | $                                | 34,365     |                                 | $
| |                          |                                  |            |                                 |  

|                                                                                     
|-------------------------------------------------------------------------------------
|Geographic information as of September 30, 2007 and December 31, 2006 are as follows:
|                                                                                     

| | 2007                       |   | 2006       | 
| | -------------------------- | - | ---------- | 
| |                            |   |            | 
| | **Total Assets**           |   |            | 
| | United States              | $ | 13,218,162 | 
| | Israel                     |   | 2,192,012  | 
| |                            |   |            | 
| |                            | $ | 15,410,174 | 
| |                            |   |            | 
|
| | **Long Lived Assets, net** |   |            | 
| | United States              | $ | 22,857     | 
| | Israel                     |   | 458,658    | 
| |                            |   |            | 
| |                            | $ | 481,515    | 
| |                            |   |            | 

|9.Legal Proceedings  
|---------------------
|                     
|Class Action Lawsuits

|11
|--



|The 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 hereunder. The complaints allege generally that the defendants knowingly or recklessly
  made false or misleading statements regarding the effectiveness of dexanabinol in treating TBI (Traumatic
  Brain Injury) which had the effect of artificially inflating the price of the Companys common
  stock. 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|On May 31, 2007, the Company entered into an agreement with plaintiffs to settle the class action lawsuits

that commenced starting in January 2005 and are currently pending in the U.S. District Court for

the District of New Jersey. The lawsuits relate to statements purportedly made by Pharmos and its

officers regarding the effectiveness of dexanabinol in treating traumatic brain injury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|The settlement, which is covered in its entirety by Pharmos insurance, has been reached with

no admission of liability by any party and has been entered into to avoid costly and time consuming

litigation by all parties. The parties agreed to seek the required court approvals of the settlement

and filed the settlement documents with the Court on June 4, 2007. On July 18, 2007, the Court
  granted
  preliminary approval of the settlement. The settlement is subject to final court approval.
  There
  is no assurance that the settlement will be approved by the Court.                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Both of the previously disclosed derivative lawsuits (which alleged, generally, breaches of fiduciary
  duty and other state law violations arising from the same set of underlying facts as the class actions)
  have been settled, court approval has been obtained, the settlements are final and the cases
  have been dismissed with prejudice.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|10.Related Party Transaction                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                            
|Pursuant to the retirement agreement with the Company, the Chairman and former CEO acquired his corporate
  automobile on June 30, 2007 for $31,008. The automobiles fair market value as of June
  2007 was $64,599 and its depreciated cost as of the June 30, 2007 was $68,278. The discounted
  benefit of $33,591 was included in general and administrative expenses.
|                                                                                                                                                                                                                                                                                                                                                                            

|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|This report on Form 10-Q contains information that may constitute forward-looking statements. The
  use of words such as believe, expect, intend, estimate,
anticipate, project, will and similar expressions identify forward-looking
  statements, which generally are not historical in nature. All statements that address operating performance,
  events or developments that we expect or anticipate will occur in the future are forward-looking
  statements. As and when made, we believe that these forward-looking statements are reasonable. However,
  caution should be taken not to place undue reliance on any such forward-looking statements because
  such statements speak only as of the date when made. We undertake no obligation to publicly update
  or revise any forward-looking statements, whether as a result of new information, future events or
  otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties
  that could cause actual results to differ materially from our companys historical experience
  and our present expectations or projections. These risks and uncertainties include, but are not limited
  to, those described in Part I, Item 1A. Risk Factors of our Form 10-K for the year
  ended December 31, 2006 and elsewhere in this report and those described from time to time in our
  future reports filed with the Securities and Exchange Commission.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|We do not undertake to discuss matters relating to our ongoing clinical trials or our regulatory strategies
  beyond those which have already been made public or discussed herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Executive Summary of 2007 Strategy and Operating Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Pharmos business is the discovery and development of novel therapeutics to treat a range of indications
  including specific diseases of the nervous system such as disorders of the brain-gut
  axis, pain/inflammation and autoimmune disorders. The Companys core proprietary technology
  platform focuses on discovery and development of synthetic cannabinoid compounds with a focus on
  cannabinoids (CB2) receptor-selective agonists. The Company has a portfolio of drug candidates and
  compounds in various development stages, preclinical and discovery. Pharmos is also working to commercialize
  its proprietary NanoEmulsion (NE) drug delivery system, which is in clinical-stage development for
  topical application of analgesic and anti-inflammatory agents. To complement our own drug development
  platforms, the Company periodically evaluates expanding its portfolio of internally developed products
  with either in-licensed products or acquisitions in selected related therapeutic areas. Also, we
  seek to enter into targeted strategic alliances/scientific collaborations with established pharmaceutical
companies to complete development and                                                                                                                                                                                                                                                                             

|12
|--



|commercialization of selected products. The Company also maintains a commitment to out-license proprietary
  technologies and products not consistent with our primary corporate focus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Pharmos lead product, dextofisopam (previously known as R-tofisopam) is in Phase IIb clinical
  development as a treatment for irritable bowel syndrome (IBS). Dextofisopam is the R-enantiomer of
  racemic tofisopam, a nonsedating agent that has been marketed and used safely outside the U.S. for
  over three decades for multiple indications including IBS. Dextofisopam binds to specific receptors
  in areas of the brain affecting autonomic function, including gastrointestinal function. Unlike 5-HT3
  or 5-HT4 IBS therapies currently available, both of which have significant safety concerns, dextofisopams
  novel non-serotonergic, brain-gut mechanism offers a unique and innovative approach to IBS treatment.
  On June 20, 2007 the Company announced it had commenced a Phase IIb clinical trial of dextofisopam,
  which is expected to enroll approximately 480 female patients with diarrhea-predominant or alternating
  IBS (d- and a-IBS) in up to 70 U.S. centers. The double-blind, randomized, placebo-controlled study
  will evaluate the clinical safety, tolerability and efficacy of multiple doses of dextofisopam. The
  estimated duration of the enrollment period for the study is 18 months. The Phase IIb IBS study follows
  a successful Phase IIa study in 141 IBS patients in which dextofisopam demonstrated a statistically
  significant improvement over placebo on the primary endpoint of adequate overall relief (p = 0.033).
  In the Phase IIa trial, dextofisopam was well tolerated and did not cause significant constipation.
  Dextofisopam also provided benefit on a variety of secondary endpoints. Importantly, the beneficial
  effects on stool frequency were observable after two days and maintained for the 12 weeks of treatment.
  Overall, similar rates of adverse events were seen with dextofisopam and placebo. Importantly, diarrhea
  and constipation occurred at a very low rate. Dextofisopam has also been evaluated in three randomized,
  double-blind, placebo-controlled Phase 1 trials comprising healthy volunteers in which dextofisopam
  appeared to be safe and well tolerated at doses up to 600 mg BID. IBS is a chronic and sometimes
  debilitating condition that affects roughly 10%-15% of U.S. adults and is two to three times more
  prevalent in women than men. With an absence of safe and effective available therapies, dextofisopams
  novel non-serotonergic brain-gut mechanism holds the potential for a unique and innovative treatment approach to d- and a-IBS.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Pharmos proprietary NE drug delivery technology is in Phase IIa clinical development as a local
  anti-inflammatory drug delivery agent, and is potentially applicable to Pharmos CB2 receptor-selective
  molecules. The NE drug delivery system consists of an efficient solvent-free topical vehicle based
  on drug entrapment in stable, submicron particles of oil-in-water emulsions with a mean droplet size
  between 100 and 200 nm that are uniformly dispersed in an aqueous phase. One of the unique characteristics
  of the NE technology is the relatively high percentage of total particle volume occupied by the internal
  hydrophobic oil core of the droplets, which provides high solubilization capacity for lipophilic
  compounds compared to other lipoidal vehicles such as liposomes. Another unique characteristic of
  Pharmos NE technology is that it does not employ the chemical penetration enhancers commonly
  used in other topical drug delivery vehicles, which may cause skin irritation and sensitization.
  On June 27, 2007 the Company announced that it had commenced a Phase IIa clinical trial of the NE
  drug delivery technology formulated with 3% diclofenac, an approved and widely-used non-steroidal
  anti-inflammatory drug (NSAID). Up to eight sites in Israel will participate in the double-blind,
  randomized, placebo-controlled, parallel group study. The trial will compare the safety and analgesic
  efficacy of the diclofenac NE cream with placebo in approximately 126 subjects with osteoarthritis
  (OA) of the knee. OA affects approximately 12% of U.S. adults, a significant portion of whom are
  not treated pharmacologically due to side effects associated with the commonly used oral treatments.
  A site-specific, topical diclofenac product that could deliver a high drug concentration to the affected
  joint with minimal systemic exposure could reduce the risk of treatment-limiting side effects while
  maintaining the analgesic effect. Two Phase I studies in healthy volunteers have been completed and
  confirmed the safety and tolerability as well as the low systemic exposure of diclofenac NE topical cream.                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Our discovery program is focused on capitalizing on our expertise in the biology, chemistry and manufacturing
  of synthetic cannabinoid therapeutics, an area in which Pharmos has generated significant know-how
  and amassed a rich intellectual property estate covering multiple areas of cannabinoid biology. Modulation
  of the CB2 receptors in preclinical models of disease suggests that potential areas for therapeutic
  intervention include the treatment of pain, autoimmune disease, OA, asthma, allergy, atherosclerosis
  and obesity. Pharmos research efforts are currently focused on the use of cannabinoid compounds
  that selectively bind to the CB2 receptors (CB2-selective) for the treatment of pain and autoimmune
  diseases. These efforts have produced increasingly more potent, drugable and selective CB2 receptor
  agonists and antagonists for these indications as well as others. Cannabinor, the most advanced CB2-selective
  compound from Pharmos library, has completed two Phase IIa clinical studies in an intravenous
  formulation. In January 2007, Pharmos reported that in the first of the Phase IIa studies to be completed,
  an experimentally induced pain model, cannabinor failed to meet the primary endpoint of reducing
  capsaicin-induced pain. The Company subsequently noted that analysis of additional endpoints of pressure-induced
  and heat-induced pain indicates that cannabinor does exhibit a statistically significant systemic
  analgesic effect compared to placebo. In April 2007, Pharmos reported that in the separate Phase
  IIa trial of i.v. cannabinor in acute nociceptive pain in patients undergoing 3rd molar extraction,
  an analgesic effect was observed at the 12mg dose; however, there was no effect at the higher doses
  (24mg and 48mg). In both Phase 2a trials, cannabinor was generally well tolerated with no serious
  adverse events. This is an unexpected pattern of results and as such the Company has determined that
  it will not continue with the development of cannabinor at this time, but will focus resources on
other CB2 compounds that have greater potential from multiple aspects. Cannabinor will be available for outlicensing.                                                                                                                                                                                                                                                                                                                       

|13
|--



|The results for the three and nine months ended September 30, 2007 and 2006 were a net loss of $3.5
  and $4.2 million and a net loss of $12.9 million and $11.3 million, respectively. On a loss per share
  basis, this equates to $(0.14) and $(0.22) for the quarter and $(0.51) and $(0.60) for the nine months,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Except for 2001, the Company has experienced operating losses every year since inception in funding
  the research, development and clinical testing of our drug candidates. As of September 30, 2007,
  the Companys accumulated deficit was approximately $194.0 million. 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|On August 6, 2007 the board of Pharmos approved a detailed restructuring and cost reduction plan for
  the Companys operations in Israel. The plan involved a workforce reduction from 41 employees
  to 23 employees. Certain key functions that were previously conducted on site will be outsourced
  and certain equipment will be sold or leased to third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The restructuring plan will enable the Company to continue its scientific research and development
  programs and better manage existing cash resources.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The focus of the Companys operations in Israel will now be:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |  | Development of PRS-639,058 for neuropathic pain, a follow on compound to cannabinor, which will not be further developed by the Company at this time.                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                              
| |  | Maintain a core group of scientific expertise to maintain the research and development capability and to exploit the potential
          of the Companys CB2-selective library of compounds.
| |   |                                                                                                                                                                                              
| |  | Completion of the NE drug delivery Phase IIa clinical trial.                                                                                                                                 
| |   |                                                                                                                                                                                              
| |  | Continue to explore licensing and/or collaborations around different CB2-selective target indications.                                                                                       
| |   |                                                                                                                                                                                              

|The Company did not incur a material charge to operations as a result of these actions. Severance arrangements
  in Israel are largely covered by deposited funds with insurance policies and by an accrual.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                            

|On October 24, 2007 the Board of Pharmos, as it continues to optimize the balance between cash resources
  and its most promising scientific research and development programs, approved a second phase of restructuring
  involving a workforce reduction from 23 to 8 employees in its Israeli subsidiary, Pharmos Ltd. The
  Company does not expect a material charge against operations to result from this undertaking.                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Israeli subsidiary will continue efforts to expand and exploit the potential of the Companys
  CB2 receptor-selective library of compounds, including preclinical development of PRS-639,058 for
  neuropathic pain. It will also work to complete the Phase 2a clinical trial of Pharmos proprietary
  NanoEmulsion topical cream for osteoarthritis pain, currently underway at several Israeli hospitals,
  with data anticipated in mid-2008.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|This restructuring phase also calls for the Company to assess other means of financing these programs,
  such as the possibility of finding new investors to finance Pharmos Ltd. as an independent entity.                                                                                                                                                                                                                                            

|14
|--



|Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Three Months ended September 30, 2007 and 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Total operating expenses for the third quarter of 2007 decreased by $998,096 or 21%, from $4,730,287
  in 2006 to $3,732,191 in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Research & development gross expenses increased by $373,382 or 16% from $2,338,392 to $2,711,774
  in 2007, related to increased clinical study activities over 2006. The Company recorded research
  and development grant receivables from the Office of the Chief Scientist of Israels Ministry
  of Industry and Trade of $238,123 and $415,203 during the third quarter of 2007 and 2006, respectively,
  which reduced research and development expenses. Total research and development expenses, net of
  grants, increased by $550,462 or 29%, from $1,923,189 in 2006 to $2,473,651 in 2007. The Company
  considers major research & development projects to be those projects that have reached at least
  Phase II level of clinical development.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|During the third quarter, the Company advanced a Phase IIb trial of its lead compound, dextofisopam,
  in female IBS patients, which is expected to enroll approximately 480 patients in about 70 sites
  over an 18 month period. Costs of $1.1 million were incurred during the quarter in connection with
  the trial, comprising approximately $1.0 million for CRO-related activities and site selection and
  evaluation. Dextofisopam was one of the compounds the Company obtained through the acquisition of
  Vela Pharmaceuticals Inc which closed in October 2006. The continued development of this compound
  through late-stage clinical testing will significantly increase the research and development expenses
  going forward.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|Additional research and development expenses were incurred during the quarter in preparing for a Phase

2a clinical trial with NanoEmulsion-diclofenac for Osteoarthritic pain. On June 27, 2007 the Company

announced that patient screening has commenced in this Phase 2a trial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|In the second quarter of 2007, the Company completed a Phase IIa study of an intravenous formulation
  of cannabinor in a nociceptive pain model. The results of an earlier, separate Phase IIa study of
  intravenous cannabinor in an experimentally induced pain model were announced in the first quarter
  2007. During the third quarter of 2007, the gross cost of development and review of cannabinor was
  approximately $0.2 million. Total costs since the cannabinor project entered Phase II development
  in 2006 through September 30, 2007 were $3.6 million.                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Gross expenses for other research and development projects in early stages of development for the third
  quarter of 2007 and 2006 were $857,000 and $861,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|General and administrative expenses for the third quarter of 2007 decreased by $1,529,470, or 56%,
  from $2,730,064 in 2006 to $1,200,594. The decrease primarily reflects 2006 non recurring professional
  fees and investor relations costs of $1,102,000 that relate to legal matters associated with
  the Vela acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Depreciation and amortization expenses decreased by $19,088, or 25%, from $77,034 in 2006 to $57,946
  in 2007. The decrease is due to fixed assets which have become fully depreciated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Other income (expense) net, decreased by $295,098 from $488,734 in 2006 to $193,636 in 2007. The majority
  of the decrease is from decreased interest income from a decline in cash, cash equivalents and short
  term investments. During the quarter, the Company recorded, in other income, royalties of $1,804
  compared with $2,190 in 2006 per the licensing agreement with Herbamed Ltd, a company controlled
  by Dr. Haim Aviv, the Companys Chairman and former 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, 2007 and has net operating losses from previous years. The Company has established

a 100% valuation allowance against the deferred tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Nine Months ended September 30, 2007 and 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Total operating expenses for the nine months ended September 30, 2007 increased by $925,242 or 7% from
  $12,784,535 in 2006 to $13,709,777 in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Research & development gross expenses increased by $2,698,063 or 41% from $6,587,480 in 2006 to
  $9,285,543 in 2007, related to an increase in clinical activities. The Company recorded research
  and development grant receivables from the Office of the Chief Scientist of Israels Ministry
  of Industry and Trade of $769,072 and $1,083,464 during the first half of 2007 and 2006, respectively,
  which reduced research and development expenses. Total research and development expenses, net of
  grants, increased by $3,012,455 or 55% from $5,504,016 in 2006 to $8,516,471 in 2007. The Company
  considers major research & development projects to be those projects that have reached at least
Phase II level of clinical development.

|15
|--



|In 2007, the Company commenced a Phase IIb trial of its lead compound, dextofisopam, in female IBS
  patients, which is expected to enroll approximately 480 patients in about 70 sites over an 18 month
  period. Costs of $4.2 million were incurred in 2007 in connection with the trial, comprising approximately
  $3.1 million for CRO-related activities, site selection and evaluation, investigator meetings and
  CMC packaging, and a $1.0 million milestone payment made by Pharmos upon the studys commencement.
  Dextofisopam was one of the compounds the Company obtained through the acquisition of Vela Pharmaceuticals
  Inc which closed in October 2006. The continued development of this compound through late-stage clinical
  testing will significantly increase the research and development expenses going forward.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|Additional research and development expenses were incurred during the quarter in preparing for a Phase

2a clinical trial with NanoEmulsion-diclofenac for Osteoarthritic pain. On June 27, 2007 the Company

announced that patient screening has commenced in this Phase 2a trial.                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Also during the first half of 2007 the Company completed a Phase IIa study of an intravenous formulation
  of cannabinor in a nociceptive pain model and a separate Phase IIa study of intravenous cannabinor
  in an experimentally induced pain model. Total costs since the cannabinor project entered Phase II
  development in 2006 through September 30, 2007 were $3.6 million.                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Gross expenses for other research and development projects in early stages of development for the nine
  months ended September 30, 2007 and 2006 were $2,315,000 and $2,392,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|General and administrative expenses for the nine months ended September 30, 2007 decreased by $2,039,882,
  or 29% from $7,038,607 in 2006 to $4,998,725. The decrease primarily reflects 2006 non recurring
  professional fees and investor relations costs of $2,113,000 that relate to legal matters associated
  with the Vela acquisition and a reduction in insurance costs of $286,000 in the first half 2007 reflecting
  favorable renewal rates and reduced policy coverage limits. These reductions are offset in part by
  a $250,000 consulting fee paid in 2007 to a former officer in accordance with his employment agreement.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Depreciation and amortization expenses decreased by $47,331, or 20%, from $241,912 in 2006 to $194,581
  in 2007. The decrease is due to fixed assets which have become fully depreciated and the disposition
  of certain fixed assets.                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Other income (expense), net, decreased by $661,196 from income of $1,441,920 in 2006 to income of $780,724
  in 2007. The majority of the decreases is from decreased interest income from a decline in cash,
  cash equivalents and short term investments. In the nine months ended September 30, 2007, the Company
  recorded in other income royalties of $3,856 compared with $3,838 in the first half of 2006 per the
  licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the Companys
Chairman and former CEO.                                                                                             

|                               
|-------------------------------
|Liquidity and Capital Resources
|                               

|The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $194.0
  million at September 30, 2007. 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,
  2007, and on December 31, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                         | September 30, 2007 |            | December 31, 2006 |  
| | ------------------------------------------------------- | ------------------ | ---------- | ----------------- | -
| |                                                         |                    |            |                   |  
|
| | Working capital                                         | $                  | 12,166,242 |                   | $
|
| | Cash and cash equivalents                               | $                  | 8,498,711  |                   | $
|
| | Short term investments                                  | $                  | 5,364,366  |                   | $
|
| | Total cash, cash equivalents and short term investments | $                  | 13,863,077 |                   | $
| |                                                         |                    |           

|                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Current working capital position                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                      
|As of September 30, 2007, the Company had working capital of $12.2 million consisting of current assets
  of $14.4 million and current liabilities of $2.2 million. This represents a decrease of $12.0 million
  from its working capital of $24.2 million on current

|16
|--



|assets of $26.7 million and current liabilities of $2.5 million as of December 31, 2006. This decrease
  in working capital of $12.0 million was principally associated with the funding of research and development
  and general and administrative activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Current and future liquidity position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Management believes that the current cash, cash equivalents and short term investments, totaling $13.9
  million as of September 30, 2007, will be sufficient to support the Companys currently planned
  continuing operations through at least September 2008. The Company routinely pursues various funding
  options, including additional equity offerings, equity-like financing, 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.                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|On September 26, 2007, we received notice from The Nasdaq Stock Market (Nasdaq) that

the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive business days

and that we were therefore not in compliance with Nasdaq listing rules. We have until March

24, 2008 (180 calendar days from September 26, 2007) to regain compliance. No assurance can

be given that we will regain compliance during that period. If compliance is not achieved by March

24, 2008, we will be eligible for another 180-day compliance period (until September 20, 2008)
  if
  we meet the Nasdaq Capital 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 we will

be eligible for the additional 180-day compliance period or, if applicable, that we will regain
  compliance
  during any additional compliance period. If our common stock were to be delisted from
  Nasdaq, liquidity
  for our common stock could be significantly decreased which could reduce the
  trading price and increase
  the transaction costs of trading shares of our common stock.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|At September 30, 2007, cash and cash equivalents totaled $8.5 million. At December 31, 2006 cash and
  cash equivalents totaled $12.8 million. This net decrease in cash of $4.3 million was due primarily
  to the net conversion of $7.8 million of short term investments into cash and $12.6 million for normal
  operating requirements. The cash, cash equivalents and short term investments will be used to fund
Research & Development activities and general and administrative costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                                                                                                                                                                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Operating activities                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                   
|Net cash used in operating activities for the first nine months of 2007 was $12.6 million compared
  to net cash used of $9.0 million for the first nine months of 2006. The increase in cash used of
  $3.6 million is primarily due to higher R&D spending related to the initiation of the Dextofisopam
  Phase IIb trial in 2007 including a milestone payment of $1.0 million.
|                                                                                                                                                                                                                                                                                                                                                                                   
|Investing activities                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                   
|During the
first nine months of 2007, the Company had net investment proceeds from the sale of short
term investments of $7.8 million, fixed asset purchases of $0.2 million,
proceeds from the disposition of assets of $0.1 million and a severance pay
funding benefit of $0.6 million.                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                   
|Capital expenditures for property, plant and equipment for the nine months ended September 30, 2007
  and 2006 totaled approximately $195,000 and $146,000, respectively for normal replacements and improvements.                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                   
|The proceeds from the disposition of fixed assets include $65,000 for the discounted sale of a vehicle
  to a former officer in accordance with the terms of his employment agreement.                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                   
|Financing activities                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                   
|There were no financing activities in the first nine months of 2007 or 2006.                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                   

|Commitment and Contingencies
|----------------------------
|                            

|As of September 30, 2007, the Company had the following contractual commitments and long-term obligations:
|----------------------------------------------------------------------------------------------------------
|                                                                                                          

|                                                                   | Total |           | Less than
      1 Year |   | 1 - 3
      Years |  | 3 - 5
      Years |         | More than
      5 Years |   | Undetermined | 
|------------------------------------------------------------------ | ----- | --------- | ---------------------- | - | ----------------- |  | ----------------- | ------- | ----------------------- | - | ------------ | 
|                                                                   |       |           |                        |   |                   |  |                   |         |                         |   |              | 
|Operating Leases                                                   | $     | 704,181   |                        | $ | 370,443           |  | $                 | 333,738 |                         | $ | 0            | 
|Other long-term liabilities reflected 
      on our balance sheet* |       | 555,010   |                        |   |                  |  |                   |        |                         |   | -            | 
|                                                                   |       |           |                        |   |                   |  |                   |         |                         |   |              | 
|Total                                                              | $     | 1,259,191 |                        | $ | 370,443           |  | $                 | 333,738 |                         | $ | 0            | 
|                                                                   |       |           |                        |   |                   |  |                   |         |                         |   |              | 

|17
|--



|* | 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 $415,099.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In connection with the acquisition of Vela Pharmaceuticals which closed on October 25, 2006 the Company

is obligated to pay certain performance based milestones connected to the development of dextofisopam.                                               
|                                                                                                                                                                                                                                                              
|The $1.0 million cash milestone payable when the first patient enrolled in the Phase 2b trial was paid

on June 26, 2007 as that milestone was achieved in the second quarter of 2007. Such amount was
  included
  in research and development expense (net).
|                                                                                                                                                                                                                                                              
|The remaining milestones are as follows:                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                              

| |  | $1 million cash + 2 million shares of Pharmos common stock: Final patient enrolled in Phase 2b trial
| | - | ----------------------------------------------------------------------------------------------------
| |   |                                                                                                     
| |  | $2 million cash + 2.25 million shares: Successful completion of Phase 2b                            
| |   |                                                                                                     
| |  | $2 million + 2 million shares: NDA submission                                                       
| |   |                                                                                                     
| |  | $2 million cash +2.25 million shares: FDA approval                                                  
| |   |                                                                                                     
| |  | 1 million shares: Approval to market in Europe or Japan                                             
| |   |                                                                                                     
| |  | 4 million shares: $100 million sales of dextofisopam, when and if approved, in any 12-month period  

| | 
| | 

|New accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).

SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for
  measuring
  fair value, and requires additional disclosures about fair-value measurements. SFAS 157
  applies only
  to fair value measurements that are already required or permitted by other accounting
  standards (except
  for measurements of share-based payments) and is expected to increase the consistency
  of those measurements.
  Accordingly, SFAS 157 does not require any new fair value measurements.
  However, for some entities,
  the application of SFAS 157 will change current practice. SFAS 157
  is effective for fiscal years
  beginning after November 15, 2007, and interim periods within those
  fiscal years. The Company does
  not expect the adoption of SFAS 157 to have a material impact on
  our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, The
  Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB
  Statement No. 115 (SFAS No. 159), which is effective for financial statements issued for fiscal
  years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 159
  permits entities to measure eligible financial assets, financial liabilities and firm commitments
  at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted
  for at fair value under other generally accepted accounting principles. The fair value measurement
  election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Company
  is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|On June 27, 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3, Accounting

for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities

(EITF 07-03). Currently, under FASB Statement No. 2, Accounting for Research
  and
  Development Costs, nonrefundable advance payments for future research and development
  activities
  for materials, equipment, facilities, and purchased intangible assets that have no alternative
  future
  use are expensed as incurred. EITF 07-03 addresses whether such non-refundable advance payments
  for
  goods or services that have no alternative future use and that will be used or rendered for
  research
  and development activities should be expensed when the advance payments are made or when
  the research
  and development activities have been performed. The consensus reached by the FASB
  requires companies
  involved in research and development activities to capitalize such non-refundable
  advance payments
  for goods and services pursuant to an executory contractual arrangement because
  the right to receive
  those services in the future represents a probable future economic benefit.
  Those advance payments
  will be capitalized until the goods have been delivered or the related services
  have been performed.
  Entities will be required to evaluate whether they expect the goods or services
  to be rendered. If
  an entity does not expect the goods to be delivered or services to be rendered,
  the capitalized advance
  payment will be charged to expense. The consensus on EITF 07-03 is effective
  for financial statements
  issued for fiscal years beginning after December 15, 2007, and interim
  periods within those fiscal
  years. Earlier application is not permitted. Entities are required
  to recognize the effects of applying
  the guidance in EITF 07-03 prospectively for new contracts
  entered into after the effective date.
  The Company is in the process of evaluating the expected
  impact of EITF 07-03 on its financial position
  and results of operations following adoption.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Item 3.Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|18
|--



|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 4T. Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|(a) Evaluation of Disclosure Controls and Procedures: An evaluation of Pharmos disclosure
  controls and procedures (as defined in Section13a-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 June 30, 2007. Based on this evaluation, Pharmos Chief Executive Officer and
  Chief Financial Officer concluded that as of June 30, 2007, Pharmos disclosure controls and
  procedures were effective, at a reasonable level of assurance, in ensuring 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) Changes in Internal Control over Financial Reporting: There were no changes 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                      
|------------------------------------------------------
|Part II   Other Information
Item 1   Legal Proceedings
|                                                      

|Class Action Suits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The 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 (Traumatic
  Brain Injury) which had the effect of artificially inflating the price of the Companys common
  stock. 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|On May 31, 2007, the Company entered into an agreement with plaintiffs to settle the class action lawsuits

that commenced starting in January 2005 and are currently pending in the U.S. District Court for

the District of New Jersey. The lawsuits relate to statements purportedly made by Pharmos and its

officers regarding the effectiveness of dexanabinol in treating traumatic brain injury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The settlement, which is covered in its entirety by Pharmos insurance, has been reached with

no admission of liability by any party and has been entered into to avoid costly and time consuming

litigation by all parties. The parties agreed to seek the required court approvals of the settlement

and filed the settlement documents with the Court on June 4, 2007. On July 18, 2007, the Court
  granted
  preliminary approval of the settlement. The settlement is subject to final court approval.
  There
  is no assurance that the settlement will be approved by the Court.                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Both of the previously disclosed derivative lawsuits (which alleged, generally, breaches of fiduciary
  duty and other state law violations arising from the same set of underlying facts as the class actions)
  have been settled, court approval has been obtained, the settlements are final and the cases have
  been dismissed with prejudice.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|Item 1A  Risk Factors                                                                                                                                                                                                                                                           
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                
|Nasdaq Listing                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                
|On September 26, 2007, we received notice from The Nasdaq Stock Market (Nasdaq) that
  the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive business days
and that we were therefore not in compliance with Nasdaq Marketplace Rule 4310(c)(4).

|19
|--



|In accordance with section 4310(c)(8)(D) of the Nasdaq Marketplace Rules, we have until March
  24, 2008 (180 calendar days from September 26, 2007) to regain compliance. No assurance can
  be given that we will regain compliance during that period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|We can regain compliance with the minimum bid price rule if the bid price of our 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 us 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 we have demonstrated the ability to maintain
  long-term compliance. If compliance is not achieved by March 24, 2008, we will be eligible for another
  180-day compliance period (until September 20, 2008) if we meet the Nasdaq Capital 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 we will be eligible for the additional 180-day
  compliance period or, if applicable, that we will regain compliance during any additional compliance
  period. If we are not eligible for an additional compliance period, or do not regain compliance during
  any additional compliance period, Nasdaq will provide written notice to us that our securities will
  be delisted. At such time, we would be able to appeal the delisting determination to a Nasdaq Listing
  Qualifications Panel.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|If our common stock were to be delisted from Nasdaq, liquidity for our common stock could be significantly
  decreased which could reduce the trading price and increase the transaction costs of trading shares
  of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | NONE
|------ | ----------------------------------------------------------- | ----
|       |                                                             |     
|Item 3 | Defaults upon Senior Securities                             | NONE
|       |                                                             |     
|Item 4 | Submission of Matters to Vote of Security Holders           | NONE
|       |                                                             |     
|Item 5 | Other Information                                           | NONE
|       |                                                             |     
|Item 6 | Exhibits                                                    |     
|       |                                                             |     

|**Number** |  | **Exhibit**                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  |                                                                                                                                                                      
|           |  |                                                                                                                                                                      
|3.1        |  | Amended and Restated By-Laws of Pharmos Corporation.                                                                                                                 
|           |  |                                                                                                                                                                      
|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.                      

|20
|--



|SIGNATURE
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 CORPORATION                              
|----------------------- |  | -------------------------------------------------
|                        |  |                                                  
|                        |  |                                                  
|Dated: October 30, 2007 |  |                                                  
|                        |  | by:                                              
|                        |  |                                                  
|                        |  | S. Colin Neill                                   
|                        |  | Senior Vice President and Chief Financial Officer
|                        |  | (Principal Accounting and Financial Officer)     

|21
|--