|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549                   
|----------------------------------------------------------------------------------------
|                                                                                        
|FORM 10-Q                                                                               
|                                                                                        
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                        
|For the quarterly period ended June 30, 2005                                            
|                                                                                        
|or                                                                                      
|                                                                                        
|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                                                              
|                                                                    
|(State or other jurisdiction of
      incorporation or organization)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99 Wood Avenue South, Suite 311Iselin, 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. Yesx Noo.
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo.
      As of August 9, 2005 the Registrant had outstanding 19,027,809 shares of its $.03 par value Common Stock.

|1
|-



|Part I.   Financial Information
Item 1   Financial Statements
|-------------------------------------------------------------
|PHARMOS CORPORATION                                          
|(Unaudited)                                                  
|Condensed Consolidated Balance Sheets                        

| |                                                                                             |                         |              |                             |  
| | ------------------------------------------------------------------------------------------- | ----------------------- | ------------ | --------------------------- | -
| | ****                                                                                        | **June 30,
      2005** |              | **December 31,
      2004** |  
| | **Assets**                                                                                  |                         |              |                             |  
| | Cash and cash equivalents                                                                   | $                       | 44,345,792   |                             | $
| | Short-term investments                                                                      |                         | 6,807,932    |                             |  
| | Restricted cash                                                                             |                         |             |                             |  
| | Research and development grants receivable                                                  |                         | 694,659      |                             |  
| | Debt issuance costs                                                                         |                         |             |                             |  
| | Prepaid expenses and other current assets                                                   |                         | 858,319      |                             |  
| |                                                                                             |                         |              |                             |  
| | **Total current assets**                                                                    |                         | 52,706,702   |                             |  
| |                                                                                             |                         |              |                             |  
| | Fixed assets, net                                                                           |                         | 884,434      |                             |  
| | Restricted cash                                                                             |                         | 140,828      |                             |  
| | Severance pay funded                                                                        |                         | 739,461      |                             |  
| | Other assets                                                                                |                         | 18,497       |                             |  
| |                                                                                             |                         |              |                             |  
| |                                                                                             |                         |              |                             |  
| | **Total assets**                                                                            | $                       | 54,489,922   |                             | $
| |                                                                                             |                         |              |                             |  
| |                                                                                             |                         |              |                             |  
| | **Liabilities and Shareholders Equity**                                                    |                         |              |                             |  
| | Accounts payable                                                                            | $                       | 439,403      |                             | $
| | Accrued expenses                                                                            |                         | 861,631      |                             |  
| | Warrant liability                                                                           |                         | 55,271       |                             |  
| | Accrued wages and other compensation                                                        |                         | 1,076,597    |                             |  
| | Convertible debentures, net                                                                 |                         |             |                             |  
| |                                                                                             |                         |              |                             |  
| | **Total current liabilities**                                                               |                         | 2,432,902    |                             |  
| |                                                                                             |                         |              |                             |  
| | Other liability                                                                             |                         | 117,631      |                             |  
| | Severance pay                                                                               |                         | 986,445      |                             |  
| |                                                                                             |                         |              |                             |  
| | **Total liabilities**                                                                       |                         | 3,536,978    |                             |  
| |                                                                                             |                         |              |                             |  
| | Commitments and contingencies                                                               |                         |              |                             |  
| |                                                                                             |                         |              |                             |  
| | **Shareholders Equity**                                                                    |                         |              |                             |  
| | Preferred stock, $.03 par value, 1,250,000 shares authorized, none
  issued and outstanding |                         |             |                             |  
| |                                                                                             |                         |              |                             |  
| | Common stock, $.03 par value; 30,000,000 shares authorized,
  19,027,415 issued             |                         | 570,822      |                             |  
| | Deferred compensation                                                                       |                         | (1,079,332   | )                           |  
| | Paid-in capital in excess of par                                                            |                         | 191,094,489  |                             |  
| | Accumulated deficit                                                                         |                         | (139,632,609 | )                           |  
| |                                                                                             |                         |              |                             |  
| | Treasury stock, at cost, 2,838 shares                                                       |                         | (426         | )                           |  
| |                                                                                             |                         |              |                             |  
| | **Total shareholders equity**                                                              |                         | 50,952,944   |                             |  
| |                                                                                             |                         |              |                             |  
| | **Total liabilities and shareholders equity**                                              | $                       | 54,489,922   |                             | $
| |                                                                                             |                         |              |                             |  

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

|2
|-



|                                                                                       
|---------------------------------------------------------------------------------------
|Pharmos Corporation
    (Unaudited) 
    CondensedConsolidated Statements of Operations

|                                        |                             |            
|--------------------------------------- | --------------------------- | -----------
|                                        | Three months Ended June 30, |            
|                                        | 2005                        |            
|                                        |                             |            
|                                        |                             |            
|Expenses                                |                             |            
|Research and development, gross         | $                           | 2,540,597  
|Grants                                  |                             | (711,879   
|                                        |                             |            
|Research and development, net of grants |                             | 1,828,718  
|                                        |                             |            
|Selling, general and administrative     |                             | 1,736,035  
|Depreciation and amortization           |                             | 98,752     
|                                        |                             |            
|                                        |                             |            
|Total operating expenses                |                             | 3,663,505  
|                                        |                             |            
|                                        |                             |            
|Loss from operations                    |                             | (3,663,505 
|                                        |                             |            
|Other income (expense)                  |                             |            
|                                        |                             |            
|Interest income                         |                             | 357,520    
|Interest expense                        |                             | (2,826     
|Change in value of warrants             |                             | 11,753     
|Other (expense) income                  |                             | (41,380    
|                                        |                             |            
|Other income (expense), net             |                             | 325,067    
|                                        |                             |            
|                                        |                             |            
|Net loss                                |                             | ($3,338,438
|                                        |                             |            
|                                        |                             |            
|Net loss per share                      |                             |            
|- basic                                 |                             | ($0.18     
|                                        |                             |            
|- diluted                               |                             | ($0.18     
|                                        |                             |            
|                                        |                             |            
|Weighted average shares outstanding     |                             |            
|- basic                                 |                             | 18,973,944 
|                                        |                             |            
|- diluted                               |                             | 18,973,944 
|                                        |                             |            

|
|

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

|3
|-



|Pharmos Corporation
        (Unaudited)
        Condensed Consolidated Statements of Operations
|-----------------------------------------------------------------------------------------------

|                                        |                           |           
|--------------------------------------- | ------------------------- | ----------
|                                        | Six months Ended June 30, |           
|                                        | 2005                      |           
|                                        |                           |           
|                                        |                           |           
|Expenses                                |                           |           
|Research and development, gross         | $                         | 5,045,236 
|Grants                                  |                           | (731,455  
|                                        |                           |           
|                                       
|Research and development, net of grants |                           | 4,313,781 
|                                        |                           |           
|Selling, general and administrative     |                           | 3,530,746 
|Depreciation and amortization           |                           | 213,677   
|                                        |                           |           
|                                        |                           |           
|Total operating expenses                |                           | 8,058,204 
|                                        |                           |           
|                                        |                           |           
|Loss from operations                    |                           | (8,058,204
|                                        |                           |           
|Other income (expense)                  |                           |           
|                                        |                           |           
|Bausch & Lomb payment                   |                           | 10,725,688
|Interest income                         |                           | 627,016   
|Interest expense                        |                           | (163,372  
|Change in value of warrants             |                           | 242,684   
|Other income (expense)                  |                           | (34,723   
|                                        |                           |           
|Other income (expense), net             |                           | 11,397,293
|                                        |                           |           
|Net income (loss)                       | $                         | 3,339,089 
|                                        |                           |           
|                                        |                           |           
|Net income (loss) per share             |                           |           
|- basic                                 | $                         | 0.18      
|                                        |                           |           
|- diluted                               | $                         | 0.18      
|                                        |                           |           
|                                        |                           |           
|Weighted average shares outstanding     |                           |           
|- basic                                 |                           | 18,973,944
|                                        |                           |           
|- diluted                               |                           | 18,974,011
|                                        |                           |           

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

|4
|-



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

|                                                                                                                 |                                 |            
|---------------------------------------------------------------------------------------------------------------- | ------------------------------- | -----------
|                                                                                                                 | Six
      Months Ended June 30, |            
|                                                                                                                 | 2005                            |            
|Cash flows
      from operating activities                                                                       |                                 |            
|Net income
      (loss)                                                                                          | $                               | 3,339,089  
|Adjustments
      to reconcile net income (loss) loss to net                                                     |                                 |            
|Cash
      used in operating activities:                                                                         |                                 |            
|Depreciation
      and amortization                                                                              |                                 | 213,677    
|Interest
      expense on convertible debentures converted into common stock                                     |                                 |           
|Provision
      for severance pay                                                                                |                                 | (210,594   
|Change
      in the value of warrants                                                                            |                                 | (242,684   
|Amortization
      of debt discount and issuance costs                                                           |                                 | 126,256    
|Amortization
      of stock options issuances below fair market value                                            |                                 | 70,312     
|Option
      expense  consultant compensation                                                                   |                                 | 1,244      
|Amortization
      of restricted shares issuance                                                                 |                                 | 551,478    
|Income
      from Bausch & Lomb milestone payment, net                                                           |                                 | (10,725,688
|Changes in
      operating assets and liabilities:                                                               |                                 |            
|Research
      and development grants receivable                                                                 |                                 | 843,123    
|Prepaid
      expenses and other current assets                                                                  |                                 | (595,509   
|Severance
      pay funding                                                                                      |                                 | 72,465     
|Other
      assets                                                                                               |                                 | 449        
|Accounts
      payable                                                                                           |                                 | (490,231   
|Accrued
      expenses                                                                                           |                                 | (293,782   
|Accrued
      wages and other compensation                                                                       |                                 | 320,109    
|Other
      liabilities                                                                                          |                                 | 78,219     
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Net cash
      used in operating activities                                                                      |                                 | (6,942,067 
|                                                                                                                 |                                 |            
|Cash flows
      from investing activities                                                                       |                                 |            
|Purchases
      of fixed assets                                                                                  |                                 | (110,672   
|Proceeds
      from Bausch & Lomb milestone payment                                                              |                                 | 12,275,000 
|Payment to Bausch & Lomb
      related to sale of opthalmic business                                             |                                 | (1,532,528 
|Royalty
      payment and grant reimbursement related to Bausch & Lomb
        milestone payment                 |                                 | (1,549,312 
|Purchase
      of short-term investments                                                                         |                                 | (6,807,932 
|Decrease
      in restricted cash                                                                                |                                 | 4,844,921  
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Net cash
      provided by investing activities                                                                  |                                 | 7,119,477  
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Cash flows
      from financing activities                                                                       |                                 |            
|Proceeds
      from issuance of common stock and exercise of options and
        warrants, net of issuance costs |                                 |           
|Repayment
      of convertible debentures                                                                        |                                 | (4,846,148 
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Net cash
      used in financing activities                                                                      |                                 | (4,846,148 
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Net increase
      (decrease) in cash and cash equivalents                                                       |                                 | (4,668,738 
|                                                                                                                 |                                 |            
|Cash and
      cash equivalents at beginning of year                                                             |                                 | 49,014,530 
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Cash and
      cash equivalents at end of period                                                                 |                                 | 44,345,792 
|                                                                                                                 |                                 |            
|                                                                                                                 |                                 |            
|Supplemental
      information:                                                                                  |                                 |            
|Interest
      paid                                                                                              | $                               | 36,823     
|Supplemental
      disclosure of non-cash financing activities:                                                  |                                 |            
|Conversion
      of convertible debt                                                                             |                                 |            

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

|5
|-



|Basis of Presentation
|---------------------
|                     

| | The accompanying unaudited interim financial statements have been prepared in accordance with generally
  accepted accounting principles for interim financial information pursuant to the instructions to
  Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
  and footnotes required by generally accepted accounting principles for complete financial statements.
  In the opinion of management, all adjustments, consisting of normal recurring accrual adjustments,
  considered necessary for a fair statement have been included. Operating results and cash flows for
  the three month and six month periods ended June 30, 2005 are not necessarily indicative of the results
  that may be expected for the year ended December 31, 2005. The year-end condensed balance sheet was
  derived from audited financial statements but does not include all disclosures required by accounting
  principles generally accepted in the United States of America and included in Form 10-K filing.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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

| | Pharmos Corporation (the Company or Pharmos) is a bio-pharmaceutical company that discovers and develops
  novel therapeutics to treat a range of indications, in particular neurological and inflammatory disorders.
  The Companys core proprietary technology platform focuses on discovery and development of synthetic
  cannabinoid compounds. Cannabinor, the lead CB2-selective receptor agonist candidate, is scheduled
  to begin Phase I safety studies in the third quarter of 2005 and, if successful, enter Phase II testing
  in pain indications around yearend or early 2006. From the dextrocannabinoid family, the neuroprotective
  drug candidate dexanabinol completed a Phase IIa trial as a preventive agent against post-surgical
  cognitive impairment in the fourth quarter of 2004. Other compounds from Pharmos proprietary
  synthetic cannabinoid library are in pre-clinical studies targeting pain, multiple sclerosis, rheumatoid
  arthritis and other disorders. The Companys NanoEmulsion drug delivery system is in clinical-stage
  development for topical application of analgesic and anti-inflammatory agents. The Company has executive
  offices in Iselin, New Jersey and conducts research and development through its wholly owned subsidiary,
  Pharmos, Ltd., in Rehovot, Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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

| | The Company was not profitable in 2002, 2003, or 2004. During the first six months of 2005, the Company
  showed other income of $10.7 million as a result of the receipt of a non-recurring milestone payment
  in January 2005 from Bausch & Lomb (B&L) related to the FDA approval of Zylet. At June
  30, 2005, the Company has an accumulated deficit of $139.6 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 and cash equivalents of $44.3 plus the short term investments of $6.8
  million or a total of $51.2 million, as of June 30, 2005, will be sufficient to support the Companys
  continuing operations beyond June 30, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company is continuing to actively pursue various funding options, including equity offerings, strategic
  corporate alliances, business combinations and the establishment of product related research and
  development limited partnerships, to obtain additional financing to continue the development of its
  products and bring them to commercial markets. Should the Company be unable to raise adequate financing
  or generate revenue in the future, long-term operations will need to be scaled back or discontinued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|6
|-



| | 3. | Significant Accounting Policies
| | -- | -------------------------------
| |    |                                

| | Reverse
Stock Split
| | -------------------

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

| | Reclassifications
| | -----------------

| | The consolidated statement of cash flows for the six months ended June 30, 2005
includes in cash flows from investing activities a $1.5 million payment made
during the three months ended March 31, 2005 to Bausch & Lomb.  For the
three months ended March 31 2005 such payment was included in cash flow used in
operating activities. The change had no impact on the Consolidated Balance Sheet
or Consolidated Statement of Operations for any period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development grants receivable
| | ------------------------------------------

| | As
        of June 30, 2005 and December 31, 2004, research and development grant
        receivables consist of grants for research and development relating to
        certain projects. Research and development grants are recognized as a
        reduction of research and development expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Interest
income includes interest, amortization of investment         purchases premiums and
discounts, and realized gains and losses on sales         of securities. Realized gains
and losses on sales of investment securities         are determined based on the specific
identification method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                
| | ---------------
| | Restricted cash
| |                

| | In connection with the September 2003 Convertible Debenture offering, the terms of the agreement required
  the Company to establish an escrow account. The escrow account is shown as Restricted Cash on the
  Companys balance sheet and had been released to the Company generally in proportion to the
  amount of Convertible Debentures converted into common shares or in connection with the repayment
  of the debt that began in March 2004. The short-term balance represents debt repayment due within
  12 months. During the first quarter of 2004, one of the investors converted a total of $2 million
  plus interest into shares of common stock. As part of the escrow agreement, $2 million of restricted
  cash was released to the Company during April 2004. The Company repaid in full the debenture holders
  approximately $4.8 million from its escrow account during the six months ended June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The remaining restricted cash represents deposits held for or by landlords.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|7
|-



| | Impairment of Long-Lived Assets
| | -------------------------------
| |                                

| | The Company reviews long-lived assets for impairment whenever events or changes in business circumstances
  indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives
  of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted
  cash flow to the recorded value of the asset. Subsequent impairment assessments could result in future
  impairment charges. Any impairment charge would result in the reduction in the carrying value of
  long-lived assets to its fair market value and would reduce its operating results in the period in
which the charge arose.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |              
| | -------------
| | Tax 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, 2005 and has net operating losses from previous years. The Company has
  created

a 100% valuation allowance against the deferred tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Equity based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Company accounts for its employee stock option plans in accordance with the provisions of Accounting
  Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
  interpretations. As such, compensation expense related to employee stock options is recorded if,
  on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company
  adopted the disclosure-only requirements of SFAS No. 123, Accounting for Stock-Based Compensation,
  which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions
  with employees and provide pro forma operating results and pro forma per share disclosures for employee
  stock grants as if the fair-value-based method of accounting in SFAS No. 123 (as amended by SFAS
  148) has been applied to these transactions. Options issued to non-employees are valued using the
  fair value methodology under SFAS 123.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | On June 28, 2005, the Company accelerated the vesting of unvested stock options awarded under its stock
  option plans that had exercise prices greater than $9.00; the closing price was $2.43 on June 28,
  2005. Unvested options to purchase approximately 200 thousand shares became exercisable as a result
  of the vesting acceleration. Typically, the Company grants stock options that vest over a four-year
  period. The purpose of the accelerated vesting was to enable the Company to avoid recognizing, in
  its consolidated statement of operations, compensation expense associated with these options in future
  periods, upon adoption of SFAS 123R (Share-Based Payment) in January 2006. The impact of this acceleration
resulted in a $2.6 million increase in proforma stock-based compensation expense.                                                                                                                                              

|8
|-



| | The following table illustrates the effect on net income (loss) and net income (loss) per share if
  the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
  compensation. The estimated fair value of each option is calculated using the Black-Scholes option-pricing
  model.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                 

| |                                                                                                                                   | Three months ended
      June 30, |   | Six months ended
      June 30, |  
| | --------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | ------------------------------- | -
| |                                                                                                                                   | 2005                              |   | 2004                            |  
| |                                                                                                                                   |                                   |   |                                 |  
| | Net loss (income) as reported                                                                                                     | ($3,338,438                       | ) | ($5,285,301                     | )
| | Add: Stock-based employee
      compensation expense included
      in reported net income (loss)                                 | 328,099                           |   | 17,952                          |  
| | Deduct: Total stock-based
      employee compensation expense
      determined under fair value
      based method for all awards | (3,189,407                        | ) | (353,102                        | )
| |                                                                                                                                   |                                   |   |                                 |  
| | Pro forma net income (loss)                                                                                                       | ($6,199,746                       | ) | ($5,620,451                     | )
| |                                                                                                                                   |                                   |   |                                 |  
| |                                                                                                                                   |                                   |   |                                 |  
| | Earnings per share:                                                                                                               |                                   |   |                                 |  
| |                                                                                                                                   |                                   |   |                                 |  
| | Basic - as reported                                                                                                               | ($.18)                            |   | ($.30)                          |  
| | Diluted - as reported                                                                                                             | ($.18)                            |   | ($.30)                          |  
| | Basic - pro forma                                                                                                                 | ($.33)                            |   | ($.32)                          |  
| | Diluted  pro forma                                                                                                               | ($.33)                            |   | ($.32)                          |  

| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For disclosure purposes under SFAS No. 123, the fair value of each option grant was estimated on the
  date of grant using the Black-Scholes option valuation model with the following weighted-average
  assumption:
| |                                                                                                                                                                                                                      

| |                           | Three months ended, June 30, |  | Six months ended, June 30, | 
| | ------------------------- | ---------------------------- |  | -------------------------- | 
| |                           | 2005                         |  | 2004                       | 
| |                           |                              |  |                            | 
| | Risk-free interest rate   | 3.72%                        |  | 3.073.36%                 | 
| | Expected lives (in years) | 5                            |  | 5                          | 
| | Dividend yield            | 0 %                          |  | 0%                         | 
| | Expected volatility       | 107 %                        |  | 88%                        | 

| |                              
| | -----------------------------
| | New Accounting Pronouncements
| |                              

| | New pronouncements issued by the FASB and not effective until after June 30, 2005 are not expected
  to have a significant effect on the companys financial position or results of operations, with
  the possible exception of the following, which are currently being evaluated by management:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In May 2005, the FASB has issued Statement No. 154, Accounting Changes and Error Corrections, a replacement

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

|9
|-



| | As of April 14, 2005, the Securities and Exchange Commission (SEC) approved a new rule that for public

companies delays the effective date of FASB Statement No. 123 (revised 2004), Share-Based Payment

(FAS 123(R)), giving companies more time to develop their implementation strategies. Except for
  this
  deferral of the effective date, the guidance in FAS 123(R) is unchanged. Under the SECs
  rule,
  FAS 123(R) is now effective for public companies for annual, rather than interim, periods
  that begin
  after June 15, 2005. The effect of the new rule for the Company is a six-month deferral
  of the new
  standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In March 2005, the FASB issued FASB Interpretation No. (FIN) 47  Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143, that clarifies the term conditional asset retirement obligation as used in Statement

of Financial Accounting Standards (SFAS) No. 143  Accounting for Asset Retirement Obligations. Specifically, FIN 47 provides that an asset retirement obligation is conditional when either the

timing and (or) method of settling the obligation is conditioned on a future event. Accordingly,

an entity is required to recognize a liability for the fair value of a conditional asset retirement

obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the

timing and (or) method of settlement of a conditional asset retirement obligation should be factored

into the measurement of the liability when sufficient information exists. This interpretation also

clarifies when an entity would have sufficient information to reasonably estimate the fair value

of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15,

2005. The adoption of FIN 47 is not expected to have a material impact on our consolidated financial

position or results of operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | 4. | Net Income (Loss) Per Common Share
| | -- | ----------------------------------
| |    |                                   

| | Basic and diluted net income (loss) per common share was computed by dividing the net income (loss)
  for the period by the weighted average number of shares of common stock issued and outstanding. For
  the period ending June 30, 2004, common stock equivalents have been excluded from the calculation
  of diluted net loss per common share, as their inclusion would be anti-dilutive. In accordance with
  the requirements of Statement of Financial Accounting Standards No. 128, a limited number of the
  stock options or warrants as of June 30, 2005 were in the money and have been included
  in the calculation of diluted net earnings per share. The basis for the shares used in determining
  the diluted shares include in the calculation of diluted income per share for June 30, 2005 is illustrated
  below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                     | June 30, 
      2005 |  | June 30, 
      2004 | 
| | --------------------------------------------------- | -------------------- |  | -------------------- | 
| |                                                     |                      |  |                      | 
| | Weighted average shares outstanding basic          | 18,973,944           |  | 17,554,041           | 
| |                                                     |                      | 
| | Restricted shares  non-vested                      |                     |  |                     | 
| |                                                     |                      |  |                      | 
| | Weighted average of options that are in the money | 67                   |  |                     | 
| |                                                     |                      |  |                      | 
| |                                                     |                      |  |                      | 
| | Weighted average shares outstanding  diluted       | 18,974,011           |  | 17,544,041           | 
| |                                                     |                      |  |                      | 

|10
|--



| | The following table sets forth the number of potential shares of common stock that have been excluded
  from diluted income (loss) per share because the exercise price was greater than the average market
  price of our common stock, and therefore, the effect on diluted income (loss) per share would have
been anti-dilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                   | June 30,
      2005 |  | June 30,
      2004 | 
| | --------------------------------------------------------------------------------- | ------------------- |  | ------------------- | 
| |                                                                                   |                     |  |                     | 
| |                                                                                   |                     |  |                     | 
| | Stock options                                                                     | 977,056             |  | 939,441             | 
| | Warrants                                                                          | 1,313,017           |  | 1,457,662           | 
| | Shares issuable upon exercise of convertible debt-                                |                     |  | 666,413             | 
| | Restricted stock  non vested                                                     | 126,582             |  |                    | 
| |                                                                                   |                     |  |                     | 
| | Total potential dilutive securities not included
      in income (loss) per share | 2,416,655           |  | 3,063,516           | 
| |                                                                                   |                     |  |                     | 

| |    |                         
| | -- | ------------------------
| | 5. | Collaborative Agreements
| |    |                         

| | In October 2001, the Company sold its ophthalmic product line to Bausch & Lomb. Future payments

were subject to certain milestones related to product approvals by the FDA and the royalties on
  the
  sales of these products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | At the time of the sale in 2001, Pharmos received gross proceeds of approximately $25 million in cash.

In January 2005, Pharmos received additional gross proceeds of approximately $12.275 million from

Bausch & Lomb in connection with their successful commercial launch of the Zylet product.

The net proceeds to Pharmos from this payment were approximately $9.2 million, after making the
  payments
  to Bausch & Lomb, Dr. Nicholas Bodor and the Israel-U.S. Binational Industrial Research
  and Development
  Foundation as described below. In addition, Pharmos may receive a royalty payment
  of up to $10 million
  if actual Zylet sales during the first two years after commercialization
  exceed agreed-upon amounts.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | As part of the original agreement with Bausch & Lomb, Pharmos agreed to pay up to $3.75 million

of the costs of developing Zylet. In January 2005, Pharmos paid approximately $1.56 million

(included in accounts payable on December 31, 2004) which was the remaining balance owed to Bausch

& Lomb for the Zylet project development under the terms of the agreement.                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Dr. Nicholas Bodor, a former director of and consultant to Pharmos, is the patent owner and licensor

of the technology underlying the ophthalmic product line sold to Bausch & Lomb. In January
  2005,
  Pharmos paid Dr. Bodor approximately $1.338 million in connection with the commercialization
  of Zylet,
  per the license agreement with Dr. Bodor. Pharmos owes Dr. Bodor an additional
  14.3% of any payments
  the Company may receive from Bausch & Lomb in the event that certain
  sales levels are exceeded
  in the first two years following commencement of Zylet sales in
  the U.S.                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In February 2005, the Company paid the Israel-U.S. Binational Industrial Research and Development Foundation

(BIRDF) $.212 million, which represented the maximum amount the Company owed the foundation for
  Zylet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Pharmos subsidiary, Pharmos Ltd., licensed its patents related to the oral delivery of lipophilic
  substances in the limited field of use of nutraceuticals to Herbamed, Ltd., a company in Israel controlled
  by the Chairman and Chief Executive Officer of Pharmos. In the three and six months ending June 30,
  2005, the Company recorded in other income royalties of $8,289 and $20,491, compared with $1,285
and $4,754 in the same periods in 2004, per the licensing agreement with Herbamed.                                                                                                                                                                                                                                       

|11
|--



| | 6. | Private Placement of Convertible Debt
| | -- | -------------------------------------
| |    |                                      

| | On September 26, 2003, the Company completed a private placement of convertible debentures and warrants
  to six institutional investors, generating total gross proceeds of $21.0 million. Five million dollars
  of the proceeds was to be used for working capital purposes, and $16.0 million was to be available
  to fund acquisitions upon the approval of the investors. The convertible debentures were convertible
  into common stock of the Company at a fixed price of $20.20, 205% above the closing bid price of
  the stock for the five days preceding the closing date. The debentures, which bore an interest rate
  of 4%, were redeemed in 13 substantially equal monthly increments which began March 31, 2004. Amounts
  converted into shares of Pharmos common stock reduced the monthly redemption amount in inverse order
  of maturity. The $16.0 million earmarked for acquisition activity was to be held in escrow until
  used or repaid. In connection with the financing, the Company also issued 1,102,941 three-year warrants
  (including 102,941 placement agent warrants) to purchase 1,102,941 shares of common stock at an exercise
  price of $10.20 per share. The issuance costs related to the convertible debentures of approximately
  $1,229,000 in cash and $434,000 for the value of the placement agent warrants were capitalized and
  amortized over the life of the debt. The Company calculated the value of the warrants at the date
  of the transaction, including the placement agent warrants, being approximately $4,652,877 under
  the Black-Scholes option-pricing method (assumption: volatility 75%, risk free rate 1.59% and zero
  dividend yield). The Company allocated the $21.0 million in gross proceeds between the convertible
  debentures and the warrants based on their fair values. The Company has reported the debt discount
  as a direct reduction to the face amount of the debt in accordance with APB 21. The discount had
  accreted over the life of the outstanding debentures. The issuance costs allocated to the convertible
  debentures were deferred and amortized to interest expense over the life of the debt. APB 21 also
  requires the Company to allocate the warrant costs between the convertible debentures and the transaction
  warrants. The issuance costs allocated to the warrants were recorded as a debit to additional paid
  in capital. During the first quarter of 2004, one of the investors from the September 2003 Convertible
  Debentures private placement converted a total of $2 million plus interest. The Company issued 99,532
  shares of common stock. As of March 31, 2005, the Convertible Debentures have been fully repaid.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                          
| | -- | -------------------------
| | 7. | Common Stock Transactions
| |    |                          

| | In the first six months of 2005, there were no shares of common stock issued pursuant to the Pharmos
  Corporation 2001 Employee Stock Purchase Plan or options exercised under the Companys Stock
  Option Plans. In the first six months of 2005, the Company incurred a non-cash charge of $1,244 for
  issuing stock options to consultants who have since become employees. In addition, the amortization
  of the remaining balance for options which had been issued below fair market value in 2004 has been
  expensed in the amount of $48,000 in the second quarter of 2005 as a result of the acceleration of
  vested options above $9.00 which included these shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On May 26, 2005, Pharmos Corporation filed a Certificate of Change with the Nevada Secretary of State
  which served to effect, as of May 31, 2005, a 1-for-5 reverse split of Pharmos common stock.
  As a result of the reverse stock split, every five shares of Pharmos common stock were combined into
  one share of common stock; any fractional shares created by the reverse stock split were rounded
  up to whole shares. The reverse stock split affected all of Pharmos common stock, stock options,
  restricted shares and warrants outstanding immediately prior to the effective date of the reverse
  stock split. The reverse split reduced the number of shares of Pharmos common stock outstanding
  from 95,137,076 shares to approximately 19,027,000 shares, and the number of authorized shares of
  common stock was reduced from 150,000,000 shares to 30,000,000 shares.                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On September 6, 2004, the Board of Directors approved the Retention Award Agreements and Pharmos entered
  into Retention Award Agreements with each of Dr. Haim Aviv, Chairman and Chief Executive Officer,
  and Dr. Gad Riesenfeld, President and Chief Operating Officer. The Company granted retention awards
  of $300,000 cash and 75,950 restricted stock units to Dr. Aviv and $200,000 cash and 50,633 shares
  of restricted stock to Dr. Riesenfeld (the Awards). One half of the Awards shall vest or are scheduled
  to vest and become non-forfeitable on December 31, 2005, and the balance shall vest and become non-forfeitable
  on June 30, 2007, subject to certain accelerated vesting provisions. The fair value of the restricted
  shares was based on the fair value of the stock on the issuance date. The aggregate fair value of
  the restricted stock awards totaled $2 million. For financial reporting purposes, the cash awards
  and the fair value of the restricted stock awards, which totaled $2,500,000, will be expensed pro
  rata over the vesting periods. During the six month period ended June 30, 2005, the Company recorded
an expense of $551,000 in connection with the stock portion of the Awards.

|12
|--



| | On March 4, 2003, the Company raised $4.3 million from the placement of common stock and warrants.
  The private placement offering was completed by issuing 1,011,765 shares of common stock at a price
  of $4.25 per share and approximately 200 thousand warrants at an exercise price of $6.25 per share.
  Additionally, the remaining balance of the September 2000 Convertible Debenture offering was redeemed
  for cash. The original face amount of $3.5 million was redeemed for approximately $4.0 million, which
  included accrued and unpaid interest. According to EITF 00-19, the issued warrants meet the requirements
  of and are being accounted for as a liability since registered shares must be delivered upon settlement.
  The Company calculated the initial value of the warrants, including the placement agent warrants,
  being approximately $394,000 under the Black-Scholes option-pricing method (assumption: volatility
  75%, risk free rate 2.88% and zero dividend yield). The value of the warrants is being marked to
  market each reporting period as a derivative gain/loss until exercised or expiration and amounted
  to $55,271 at June 30, 2005. Upon exercise of each of the warrants, the related liability is removed
  by recording an adjustment to additional paid-in-capital.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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 six months ending June 30, 2005 and 2004 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                      | Three months ended June 30, |            | Six months ended June 30, |  
| | -------------------- | --------------------------- | ---------- | ------------------------- | -
| |                      |                             |            |                           |  
| |                      | 2005                        |            | 2004                      |  
| |                      |                             |            |                           |  
| | Net (loss) income    |                             |            |                           |  
| | United States        | $                           | (3,227,213 | )                         | $
| | Israel               |                             | (111,225   | )                         |  
| |                      |                             |            |                           |  
| |                      | $                           | (3,338,438 | )                         | $
| |                      |                             |            |                           |  
| |                      |                             |            |                           |  
| |                      |                             |            |                           |  
| | Capital Expenditures |                             |            |                           |  
| | United States        | $                           | 3,945      |                           | $
| | Israel               |                             | 84,222     |                           |  
| |                      |                             |            |                           |  
| |                      | $                           | 88,167     |                           | $
| |                      |                             |            |                           |  
| |                      |                             |            |                           |  

|                                                                                       
|---------------------------------------------------------------------------------------
|Geographic information for the six months ending June 30, 2005 and 2004 are as follows:
|                                                                                       

| | Total Assets           | 2005 |            | 2004 |  
| | ---------------------- | ---- | ---------- | ---- | -
| |                        |      |            |      |  
| | United States          | $    | 50,435,313 |      | $
| | Israel                 |      | 4,054,609  |      |  
| |                        |      |            |      |  
| |                        | $    | 54,489,922 |      | $
| |                        |      |           
| |                        |      |            |      |  
| | Long Lived Assets, net |      |            |      |  
| | United States          | $    | 125,420    |      | $
| | Israel                 |      | 1,516,972  |      |  
| |                        |      |            |      |  
| |                        | $    | 1,642,392  |      | $
| |                        |      |            |      |  
| |                        |      |           

|13
|--



| | 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Commitments and Contingencies
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Legal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company and three current officers have been named as defendants in several purported shareholder

class action lawsuits alleging violations of federal securities laws. These lawsuits were filed
  beginning
  in January 2005 and are pending in the U.S. District Court for the District of New Jersey.
  These
  lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
  and
  Rule 10b-5 thereunder. The complaints allege generally that the defendants knowingly or recklessly

made false or misleading statements regarding the effectiveness of dexanabinol in treating TBI
  which
  had the effect of artificially inflating the price of our shares. The complaints seek unspecified

damages. These class actions have been consolidated by order of the Court and lead plaintiffs and

lead plaintiffs counsel have been appointed. Management intends to defend these lawsuits
  vigorously.
  However, we cannot assure you that we will prevail in these actions, and, if the outcome
  is unfavorable
  to Pharmos, our reputation, profitability and share price could be adversely affected.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In addition, two purported shareholders of Pharmos common stock have commenced derivative actions against

our directors and against certain current and former officers. The first derivative lawsuit was
  commenced
  in February 2005 in the U.S. District Court for the District of New Jersey, and has been
  consolidated
  for pretrial purposes with the class actions. The second was filed in April 2005 in
  the Superior
  Court of New Jersey, County of Middlesex. Both lawsuits allege generally, on behalf
  of Pharmos (which
  has been named as a nominal defendant), breaches of fiduciary duty and other
  state law violations
  arising from the same set of underlying facts as the class actions. The complaints
  seek unspecified
  damages. Management intends to take all appropriate action in respect of the derivative
  actions.                                                                                                                                                                                                                                                                                            

|14
|--



|Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis of our financial condition and results of operations contains forward-looking
statements that involve risks and uncertainties. The Company has based these forward-looking statements
on our current expectations and projections of future events. Such statements reflect our current
views with respect to future events and are subject to unknown risks, uncertainty and other factors
that may cause results to differ materially from those contemplated in such forward looking statements.
Statements made in this document related to the development, commercialization and market expectations
of the Companys drug candidates, to the establishment of corporate collaborations, and to the
Companys operational projections are forward-looking and are made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. Among the factors that could result in
a materially different outcome are the inherent uncertainties accompanying new product development,
action of regulatory authorities and the results of further trials. Additional economic, competitive,
governmental, technological, marketing and other factors identified in Pharmos filings with
the Securities and Exchange Commission could affect such results. In addition, the following discussion
should be read in conjunction with the consolidated financial statements and the related notes thereto
included elsewhere in this report.
Executive Summary
In the first half of 2005, the Company received a $10.7 million non-recurring milestone net payment
from Bausch & Lomb relating to the product launch of Zylet in January. During the first
half of 2005, the Company adjusted from the unfavorable TBI trial results by rebalancing its personnel
to focus on advancing its preclinical programs toward clinical developmental stage and by reducing
costs associated with TBI activities. From the dextrocannabinoid family, the neuroprotective drug
candidate dexanabinol completed a Phase IIa trial as a preventive agent against post-surgical cognitive
impairment in the fourth quarter of 2004. Results of the exploratory Phase II trial of dexanabinol
as a preventative agent for cognitive impairment (CI) in coronary artery bypass graft (CABG) patients
are being reviewed. The Company expects to complete its evaluation of the clinical and regulatory
aspects of this program and their impact on the future of the program during the second half of the
year. The lead candidate for treating pain, cannabinor (formerly known as PRS 211,375), is scheduled
to begin Phase I safety studies in the third quarter of 2005 and, if successful, enter Phase II testing
in pain indications around yearend or early 2006. The Companys NanoEmulsion drug delivery system
is in clinical-stage development for topical application of analgesic and anti-inflammatory agents.
The Company is currently dependent upon external financing, interest income, and research and development
contracts to pursue its intended business activities. The Company incurred operating losses in 2002,
2003 and 2004. During the first six months of 2005, the Company recorded other income of $10.7 million
as a result of the receipt of a non-recurring milestone payment in January 2005 from Bausch &
Lomb related to the FDA approval of Zylet. The Company has incurred a cumulative net loss of
$139.6 million through June 30, 2005 and expects to continue to incur losses going forward. Losses
have resulted principally from costs incurred in research activities aimed at identifying and developing
the Companys product candidates, clinical research studies, the write-off of purchased research
and development, and general and administrative expenses. The Company expects to incur additional
losses over the next several years as the Companys research and development and clinical trial
programs continue. The Companys ability to achieve profitability, if ever, is dependent on
its ability to develop and obtain regulatory approvals for its product candidates, to enter into
agreements for product development and commercialization with strategic corporate partners and contract
to develop or acquire the capacity to manufacture and sell its products. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.
In November 2004, the Company announced the results of the Phase IIa feasibility and safety study to
determine the effectiveness of dexanabinol in reducing post-surgical cognitive impairment (CI). Analysis
of the study data indicates that the drug was safe and well tolerated in CABG patients with no serious
adverse events attributable to the drug. The primary efficacy analysis was designed to measure cognitive
function. It included the Stroop Color Word (Stroop) test that measures executive function, and a
battery of five computerized neuropsychological tests that measures other domains of cognition. The
Stroop test indicated that the dexanabinol-treated patients had a clinically and statistically significant
(p=0.01) improvement over placebo at three months post-surgery. The five computerized tests did not
show a significant difference between the drug-treated and placebo-treated groups. Pharmos continues
to analyze and evaluate the results of this trial.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



|In December 2004, Pharmos announced the results of the Phase III trial of dexanabinol for TBI. The
analysis of the primary endpoints indicates that dexanabinol did not demonstrate efficacy. Pharmos
continued to analyze the results of this trial during the first half of 2005 and completed the closure
of the clinical sites. The TBI program has been discontinued.
Pharmos is advancing the lead candidate from its proprietary platform of CB2-selective synthetic cannabinoid
compounds, cannabinor, through advanced stages of preclinical development. The compounds were designed
to reduce the side effects caused by natural cannabinoids. In a number of animal models these compounds
have demonstrated efficacy as analgesics to treat moderate to severe pain, as anti-inflammatory agents,
and immunomodulation agents to treat diseases such as multiple sclerosis, rheumatoid arthritis and
inflammatory bowel disease. Using both rodents and large animals, pharmacological efficacy of cannabinor
has been demonstrated in models of various types of pain, including nociceptive, inflammatory, neuropathic,
visceral, and post-operative. Safety and toxicology studies in multiple species were completed. The
Company plans to initiate Phase I human testing of cannabinor during the third quarter of 2005. Pending
successful completion of Phase I, Phase II studies will be conducted to assess feasibility for treating
indications such as post-operative pain and neuropathic pain.
Pharmos has initiated a clinical program to commercialize its proprietary NanoEmulsion drug delivery
technology. The Company plans to initiate a Phase I/II feasibility clinical trial around yearend.
The study will evaluate safety, pharmacokinetics and the analgesic effect of an approved non-steroidal
anti-inflammatory drug (NSAID) formulated in its NanoEmulsion in patients with osteoarthritic pain
in the knee.
Pharmos previously invented and owns a family of patents covering novel NanoEmulsion formulations as
vehicles for lipophilic drugs. A topical application of the nanotechnology has already demonstrated
excellent targeted delivery of lipophilic drugs to muscle and joints in animal models. Topical application
of drugs directly to pathological sites offers potential advantages over systemic delivery by producing
high drug concentration in the affected tissue while avoiding unwanted side-effects due to high systemic
drug levels. Topical preparations of NSAIDs are commonly used as analgesics and anti-inflammatory
agents to treat various disorders such as arthropathies and myalgias. Many topical formulations employ
chemical penetration enhancers to improve dermal penetration of drugs. Chemical enhancers, which
are usually organic solvents, may cause skin irritation and sensitization. An advantage of Pharmos
NanoEmulsion is that it is composed of natural lipids and oils designed to minimize irritation.
On May 26, 2005, Pharmos Corporation filed a Certificate of Change with the Nevada Secretary of State

which served to effect, as of May 31, 2005, a 1-for-5 reverse split of Pharmos common stock.

As a result of the reverse stock split, every five shares of Pharmos common stock were combined
into
one share of common stock; any fractional shares created by the reverse stock split were rounded

up to whole shares. The reverse stock split affected all of Pharmos common stock, stock options

and warrants outstanding immediately prior to the effective date of the reverse stock split. The

reverse split reduced the number of shares of Pharmos common stock outstanding from 95,137,076

shares to approximately 19,027,000 shares, and the number of authorized shares of common stock
was
reduced from 150,000,000 shares to 30,000,000 shares. All references to common share and per
common
share amounts for all periods presented have been retroactively restated to reflect this reverse split.
Results of Operations
Quarters ended June 30, 2005 and 2004
Total operating expenses decreased by $696,413 or 16%, from $4,359,918 in 2004 to $3,663,505 in 2005.
With the completion of the pivotal dexanabinol trial in TBI and the decision to discontinue efforts
for this indication, resources have been allocated to pre-clinical activities for cannabinor in preparation
of beginning human clinical trials in the third quarter of 2005. The Company incurred higher compensation
expenses for the deferred compensation from the September 2004 Retention Award Agreements and higher
professional fees consisting of accounting and legal fees and higher insurance costs as discussed below.
Major differences in quarterly operating expenses yearover-year include decreased costs for both
the Phase II clinical trials of dexanabinol as a preventative agent against cognitive impairment
in CABG operations and the Phase III for TBI which completed enrollment by mid-year 2004. Cannabinor
toxicology and other preclinical work has continued in the second quarter of 2005 along with scale
up manufacturing and technology transfer to the active pharmaceutical ingredient supplier.
The Company considers major research & development projects to be those projects that have reached
at least Phase II level
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--



|of clinical development. The Companys Phase II project is the development of dexanabinol
as a preventative agent against the cognitive impairment that can follow CABG surgery. During the
second quarter of 2005, the gross cost of development and review was approximately $0.3 million.
Total costs since the CI-CABG project entered Phase II development in 2003 through June 30, 2005
were $3.0 million. The Company is evaluating various strategies regarding development of this product
and will make its determination of direction in the second half of 2005. To bring this product to
the FDA for approval would require extensive additional testing in both Phase II and Phase III trials
and there is no assurance the product could achieve regulatory approval and commercialization.
Gross expenses for other research and development projects in early stages of development for the second
quarters of 2005 and 2004 were $1,778,124 and $481,292, respectively. Over 75% of the spending in
both 2005 and 2004 was related to cannabinor and other CB2 compounds. Research & development
(R&D) gross expenses decreased by $847,300 or 25% from $3,387,897 in 2004 to $2,540,597 in 2005
due to a reduction in clinical activity. The Company recorded research and development grant receivables
from the Office of the Chief Scientist of Israels Ministry of Industry and Trade of $711,879
and $890,889 during the second quarter of 2005 and 2004, respectively, which reduced the research
and development expenses. Total research and development expenses, net of grants, decreased by $668,290
or 27% from $2,497,008 in 2004 to $1,828,718 in 2005.
General and administrative expenses remained practically the same at $1,736,035 in 2005 from $1,712,634
in 2004 in total; however there were offsetting variances within the major expense categories. The
increase in general and administrative expenses is due to higher compensation, professional fees,
and insurance by $283,378, $276,511, and $125,133 respectively, in the second quarter 2005 compared
to the second quarter 2004. The decrease in general and administrative expenses is due to lower consultant
expenses by $493,765 and savings from the Companys cost containment efforts in the second quarter
2005 compared to the second quarter 2004. The increase in compensation is attributed to the amortization
of deferred compensation related to General & Administration from the Retention Award Agreements
in the amount of $275,740 which commenced in the third quarter of 2004. The higher professional fees
in 2005 are attributed to increased accounting fees related to Sarbanes-Oxley compliance and legal
fees related to the class action suits. The decrease in consulting is attributed to a non-cash charge
of approximately $403,000 for extending the stock option exercise period to the Companys former
chief financial officer which was incurred in 2004 and no costs incurred in 2005 coupled with reduced
pre-marketing consulting in 2005 vs. 2004. The increase in insurance is attributable to higher insurance rates.
Depreciation and amortization expenses decreased by $51,524, or 34%, from $150,276 in 2004 to $98,752
in 2005. The decrease is due to fixed assets which have become fully depreciated.
Other income (expense), net, increased by $1,250,450 from an expense of $925,383 in 2004 to income
of $325,067 in 2005. Interest expense decreased by $1,040,810 to $2,826 in 2005 from $1,043,636 in
2004. The decrease in 2005 interest expense is a result of the retirement of the September 2003 Convertible
Debentures during the first quarter of 2005. Interest income increased by $218,618, or 157%, to $357,520
in 2005 from $138,902 in 2004 as a result of higher average cash and short term investment balances.
During the quarter, the Company recorded in other income royalties of $8,289 compared with $1,285
in the second quarter of 2004 per the licensing agreement with Herbamed Ltd, a company controlled
by Dr. Haim Aviv, the Companys CEO.
No tax provision is required at this time since the company expects to be in a tax loss position at


year-end December 31, 2005 and has net operating losses from previous years. The Company has
created

a 100% valuation allowance against the deferred tax asset.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



|Six Months ended June 30, 2005 and 2004
  Total operating expenses decreased by $790,149 or 9%, from $8,848,353 in 2004 to $8,058,204 in 2005.
With the completion of the pivotal dexanabinol trial in TBI and the decision to discontinue efforts
for this indication, resources have been allocated to pre-clinical activities for cannabinor in preparation
of beginning human clinical trials in the third quarter of 2005. The Company incurred higher compensation
expenses for the deferred compensation from the September 2004 Retention Award Agreements and higher
professional fees consisting of accounting and legal fees and higher insurance cost as discussed below.
Major differences in year-to-date operating expenses yearover-year include decreased costs for
both the Phase II clinical trials of dexanabinol as a preventative agent against cognitive impairment
in CABG operations and the Phase III for TBI which completed enrollment by mid-year 2004. Cannabinor
toxicology and other preclinical work has continued in the second quarter of 2005 along with scale
up manufacturing and technology transfer to the active pharmaceutical ingredient supplier.
The Company considers major research & development projects to be those projects that have reached
at least Phase II level of clinical development. The Companys Phase II project is the development
of dexanabinol as a preventative agent against the cognitive impairment that can follow CABG surgery.
During the first half of 2005, the gross cost of development and review was approximately $0.6 million.
Total costs since the CI-CABG project entered Phase II development in 2003 through June 30, 2005
were $3.0 million. The Company is evaluating various strategies regarding development of this product
and will make its determination of direction in the second half of 2005. To bring this product to
the FDA for approval would require extensive additional testing in both Phase II and Phase III trials
and there is no assurance the product could achieve regulatory approval and commercialization.
Gross expenses for other research and development projects in early stages of development for the first
two quarters of 2005 and 2004 were $3,509,373 and $925,064, respectively. Over 75% of the spending
in both 2005 and 2004 was related to cannabinor and other CB2 compounds. Research & development
(R&D) gross expenses decreased by $2,459,487 or 33% from $7,505,083 in 2004 to $5,045,236 in
2005 due to a reduction in clinical activity. The Company recorded research and development grant
receivables from the Office of the Chief Scientist of Israels Ministry of Industry and Trade
of $731,455 and $1,707,145 during the first two quarters of 2005 and 2004, respectively, which reduced
the research and development expenses. Total research and development expenses, net of grants, decreased
by 1,484,157 or 26% from $5,797,938 in 2004 to $4,313,781 in 2005.
General and administrative expenses increased by $780,401 or 28%, from $2,750,345 in 2004 to $3,530,746
in 2005. The increase in general and administrative expenses is due to higher compensation, professional
fees, and insurance by $555,508, $542,911, and $211,222 respectively, in the first two quarters of
2005 compared to the first two quarters of 2004. The decrease in general and administrative expenses
is due to lower consultant expenses by $493,765 and savings from the Companys cost containment
efforts in the first half of 2005 compared to the first half of 2004. The increase in compensation
is attributed to the amortization of deferred compensation related to General & Administration
from the Retention Award Agreements in the amount of $551,471 which commenced in the third quarter
of 2004. The higher professional fees in 2005 are attributed to increased accounting fees related
to Sarbanes-Oxley compliance and legal fees related to the class action suits. The decrease in consulting
is attributed to a non-cash charge of approximately $403,000 for extending the stock option exercise
period to the Companys former chief financial officer which was incurred in 2004 and no costs
incurred in 2005 coupled with reduced pre-marketing consulting in 2005 vs. 2004. The increase in
insurance is attributable to higher insurance rates.
Depreciation and amortization expenses decreased by $86,393, or 29%, from $300,070 in 2004 to $213,677
in 2005. The decrease is due to fixed assets which have become fully depreciated.
Other income (expense), net, increased by $13,775,042 from an expense of $2,377,749 in 2004 to income
of $11,397,293 in 2005. Income of $10,725,688 was recognized for the net payment received from B&L
in the first quarter of 2005. Interest expense decreased by $2,324,203 to $163,372 in 2005 from $2,487,575
in 2004. The decrease in 2005 interest expense is a result of the substantially reduced average outstanding
balance during the first half of 2005 of the September 2003 Convertible Debentures. This debt was
fully repaid as of March 31, 2005. Interest income increased by $324,167, or 107%, to $627,016 in
2005 from $302,849 in 2004 as a result of a higher average cash balance. During the first half of
2005, the Company recorded in other income royalties of $20,491 compared with $4,754 in the first
half of 2004 per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv,
the Companys CEO.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



|No tax provision is required at this time since the company expects to be in a tax loss position at


year-end December 31, 2005 and has net operating losses from previous years. The Company has
created

a 100% valuation allowance against the deferred tax asset.
Liquidity and Capital Resources
The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $139.6
million at June 30, 2005. The Company has financed its operations with public and private offerings
of securities, advances and other funding pursuant to a marketing and asset agreement with Bausch
& Lomb, grants from the Office of the Chief Scientist of Israel, research contracts, the sale
of a portion of its New Jersey State Net Operating Loss carryforwards, and interest income. Should
the Company be unable to raise adequate financing or generate revenue in the future, operations will
need to be scaled back or discontinued.
The following table describes the Companys liquidity and financial position on June 30, 2005,
and on December 31, 2004:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                       | June 30, 2005 |            | December 31, 2004 |  
|-------------------------------------- | ------------- | ---------- | ----------------- | -
|
|Working capital                        | $             | 50,273,800 |                   | $
|
|Cash and cash equivalents              | $             | 44,345,792 |                   | $
|
|Short term investments                 | $             | 6,807,932  |                   | $
|
|Short-term convertible debentures, net | $             |           |                   | $

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Current working capital position
As of June 30, 2005, the Company had working capital of $50.3 million consisting of current assets
of $52.7 million and current liabilities of $2.4 million. This represents an increase of $4.0 million
from its working capital of $46.3 million on current assets of $55.7 million and current liabilities
of $9.4 million as of December 31, 2004. This increase in working capital of $4.0 million was principally
due to the net cash received from the B&L payment of $9.2 million ($10.7 million as reported
in other income reduced by an outstanding payable to B&L of $1.5 million) and $1.5 million received
from the Office of the Chief Scientist of Israel offset by the funding of R&D and G&A activities.
Current and future liquidity position
Management believes that cash and cash equivalents of $44.3 million plus the short term investments
of $6.8 million or a total of $51.2 million, as of June 30, 2005, will be sufficient to support the
Companys continuing operations beyond June 30, 2006. The Company is continuing to actively
pursue various funding options, including additional equity offerings, strategic corporate alliances,
business combinations and the establishment of product related research and development limited partnerships,
to obtain additional financing to continue the development of its products and bring them to commercial
markets. Should the Company be unable to raise adequate financing or generate revenue in the future,
long-term operations will need to be scaled back or discontinued.
Cash
At June 30, 2005, cash and cash equivalents totaled $44.3 million. At December 31, 2004 cash and cash
equivalents totaled $49.0 million. This net decrease in cash of $4.7 million was due to the net cash
received from the B&L payment of $9.2 million and $1.5 million received from the Office of the
Chief Scientist of Israel, offset by the investment in cash in short term investments in the amount
of $6.8 million and $8.6 for normal operating requirements. The cash and cash equivalents short term
investments will be used to finance future growth.

|19
|--



|Operating activities
Net cash used in operating activities for the first half of 2005 was $6.9 million compared to net cash
used of $10.2 million for the first half of 2004. The decrease in cash used of $3.3 million is primarily
due to lower R&D spending related to the clinical trials in 2004, the timing of the of grants
offset by the payment of annual insurance premiums and other operating activities.
Investing activities
Restricted cash during the first quarters of 2005 was reduced by approximately $4.8 million as a result
of the final repayment of the September 2003 Convertible Debentures.
During the first quarter of 2005, the Company received $10.7 million related to investing activities
for a non-recurring milestone payment from Bausch & Lomb related to the FDA approval of Zylet.
The Company invested cash of approximately $6.8 million in short term securities during the first two
quarters of 2005.
Capital expenditures for property, plant and equipment for the first six months of 2005 and 2004 totaled
approximately $111,000 and $154,000, respectively for normal replacements and improvements.
Financing activities
During the first quarter of 2005, the financing activities were the repayment of the remainder of the
September 2003 Convertible Debentures.
During the first quarter of 2004, one of the investors from the September 2003 Convertible Debentures
private placement converted a total of $2 million plus interest into 99,532 shares of common stock
of the Company. As part of the escrow agreement, $2 million of restricted cash was released to the
Company during April 2004. As of June 30, 2005, the Company repaid all of the outstanding September
2003 Convertible Debentures amounting to a total of $19.0 million.
Executive stock trading program
As previously disclosed, one of Pharmos directors, Dr. Elkan Gamzu, adopted a pre-arranged stock
trading plan in 2004 in accordance with guidelines specified by Rule 10b5-1 under the Securities
Exchange Act of 1934.
Rule 10b5-1 permits officers and directors of public companies to adopt pre-determined plans for selling
specified amounts of stock. The plans may be entered into only when the director or officer is not
in possession of material, non-public information and may be used to gradually diversify investment
portfolios over a period of time.
Pursuant to his 10b5-1 Plan, Dr. Gamzu sold an aggregate of 22,500 shares, which he acquired upon the
exercise of options and warrants covered by the plan. Dr. Gamzus plan terminated in accordance
with its terms on April 15, 2005.
Other Proceeds
In October 2001, the Company sold its ophthalmic product line to Bausch & Lomb. Future payments

were subject to certain milestones related to product approvals by the FDA and the royalties on
the
sales of these products.
At the time of the sale in 2001, Pharmos received gross proceeds of approximately $25 million in cash.

In January 2005, Pharmos received additional gross proceeds of approximately $12.275 million from

Bausch & Lomb in connection with their successful commercial launch of the Zylet product.

The net proceeds to Pharmos from this payment were approximately $9.2 million, after making the
payments
to Bausch & Lomb, Dr. Nicholas Bodor and the Israel-U.S. Binational Industrial Research
and Development
Foundation as described below. In addition, Pharmos may receive a royalty payment
of up to $10 million
if actual Zylet sales during the first two years after commercialization
exceed agreed-upon amounts.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
|--



|As part of the original agreement with Bausch & Lomb, Pharmos agreed to pay up to $3.75 million

of the costs of developing Zylet. In January 2005, Pharmos paid approximately $1.56 million

(included in accounts payable on December 31, 2004) which was the remaining balance owed to Bausch

& Lomb for the Zylet project development under the terms of the agreement.
Dr. Nicholas Bodor, a former director of and consultant to Pharmos, is the patent owner and licensor

of the technology underlying the ophthalmic product line sold to Bausch & Lomb. In January
2005,
Pharmos paid Dr. Bodor approximately $1.338 million in connection with the commercialization
of Zylet,
per the license agreement with Dr. Bodor. Pharmos owes Dr. Bodor an additional
14.3% of any payments
the Company may receive from Bausch & Lomb in the event that certain
sales levels are exceeded
in the first two years following commencement of Zylet sales in
the U.S.
In February 2005, the Company paid the Israel-U.S. Binational Industrial Research and Development Foundation

(BIRDF) $.212 million, which represented the maximum amount the Company owed the foundation for
Zylet.
Stock Listing
On March 18, 2005, the Company received notice from The NASDAQ Stock Market, Inc. (NASDAQ)
that the minimum bid price of the Companys common stock had fallen below $1.00 for 30 consecutive
business days and that the Company was therefore not in compliance with NASDAQ Marketplace Rule 4310(c)(4).
In accordance with section 4310(c)(8) of the NASDAQ Marketplace Rules, the Company had until September
14, 2005 (180 calendar days from March 18, 2005) to regain compliance
On June 21, 2005, the Company received notice from NASDAQ that the Company had regained compliance
with NASDAQ Marketplace Rule 4310(c)(4). Such Rule, in general, requires that a listed company maintain
a closing bid price of $1.00 for continued listing on the NASDAQ SmallCap Market. The notice stated
that for 10 consecutive business days, the Companys stock had closed above $1.00, and therefore,
the Company regained compliance with this Rule. No further actions in this regard were required of
the Company.
Commitment and Contingencies
As of June 30, 2005, the Company had the following contractual commitments and long-term obligations:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                        | Total |   | Less than
      1 Year |  | 1  3
      Years |         | 3  5
      Years |   | After 5
      Years |  | Undetermined |        
|----------------------------------------------------------------------- | ----- | - | ---------------------- |  | ----------------- | ------- | ----------------- | - | ------------------- |  | ------------ | -------
|                                                                        |       |   |                        |  |                   |         |                   |   |                     |  |              |        
|Operating Leases                                                        |       | $ | 1,489,995              |  | $                 | 540,237 |                   | $ | 833,289             |  | $            | 116,469
|Other long-term liabilities
      reflected on our balance
      sheet* |       |   | 986,445                |  |                   |        |                   |   |                    |  |              |       
|Other Commitment**                                                      |       |   | 500,000                |  |                   | 250,000 |                   |   | 250,000             |  |              |       
|
|Total                                                                   |       | $ | 2,976,440              |  | $                 | 790,237 |                   | $ | 1,083,289           |  | $            | 116,469
|

|   |                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | 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 $739,461.
|   |                                                                                                                                                                                                                                      
|** | Represents cash portion of the September 2004 Retention Award Agreement given to the CEO and President.
  The Company has accrued $229,779 through June 30, 2005.                                                                    

|21
|--



|New accounting pronouncements
In May 2005, the FASB has issued Statement No. 154, Accounting Changes and Error Corrections, a replacement

of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes
in
accounting principle, and changes the requirements for accounting for and reporting of a change
in
accounting principle. Statement 154 requires retrospective application to prior periods
financial
statements of a voluntary change in accounting principle unless it is impracticable.
Opinion 20 previously
required that most voluntary changes in accounting principle be recognized
by including in net income
of the period of the change the cumulative effect of changing to the
new accounting principle. Statement
154 improves financial reporting because its requirements enhance
the consistency of financial information
between periods. Statement 154 is effective for accounting
changes and corrections of errors made
in fiscal years beginning after December 15, 2005.
As of April 14, 2005, the Securities and Exchange Commission (SEC) approved a new rule that for public

companies delays the effective date of FASB Statement No. 123 (revised 2004), Share-Based Payment

(FAS 123(R)), giving companies more time to develop their implementation strategies. Except for
this
deferral of the effective date, the guidance in FAS 123(R) is unchanged. Under the SECs
rule,
FAS 123(R) is now effective for public companies for annual, rather than interim, periods
that begin
after June 15, 2005. The effect of the new rule for the Company is a six-month deferral
of the new
standard.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47  Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143, that clarifies the term conditional asset retirement obligation as used in Statement

of Financial Accounting Standards (SFAS) No. 143  Accounting for Asset Retirement Obligations. Specifically, FIN 47 provides that an asset retirement obligation is conditional when either the

timing and (or) method of settling the obligation is conditioned on a future event. Accordingly,

an entity is required to recognize a liability for the fair value of a conditional asset retirement

obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the

timing and (or) method of settlement of a conditional asset retirement obligation should be factored

into the measurement of the liability when sufficient information exists. This interpretation also

clarifies when an entity would have sufficient information to reasonably estimate the fair value

of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15,

2005. The adoption of FIN 47 is not expected to have a material impact on our consolidated financial

position or results of operations.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
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|Item 3.  Quantitative and Qualitative Disclosures About Market Risk
  We assessed our vulnerability to certain market risks, including interest rate risk associated with
financial instruments included in cash, cash equivalents, short term investments and the currency
impact in Israel. Due to the relatively short-term nature of these investments the Company has determined
that the risks associated with interest rate fluctuations related to these financial instruments
do not pose a material risk to us. The value of the warrant liability is based upon the Companys
stock price.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 4. | Controls And Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | (a)   
Evaluation of Disclosure Controls and Procedures: An evaluation of
                    Pharmos disclosure controls and procedures (as defined in Section
                    13a-15(e) of the Securities Exchange Act of 1934 (the Act) was
                    carried out under the supervision and with the participation of Pharmos
                    Chief Executive Officer and Chief Financial Officer and several other members of
                    Pharmos senior management at June 30, 2005. Based on this evaluation,
                    Pharmos Chief Executive Officer and Chief Financial Officer concluded that
                    Pharmos disclosure controls and procedures were not effective at the
                    reasonable assurance level at June 30, 2005 to ensure that the information
                    required to be disclosed by Pharmos in the reports it files or submits under the
                    Act is (i) accumulated and communicated to Pharmos management (including
                    the Chief Executive Officer and Chief Financial Officer) in a timely manner, and
                    (ii) recorded, processed, summarized and reported within the time periods
                    specified in the SECs rules and forms because of the material weakness
                    identified in the first quarter of 2005 as described below.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | During
the first quarter of 2005, management identified a material weakness regarding the
companys preparation and review of its Consolidated Statement of Cash Flows for the
three months ended March 31, 2005. Specifically, the Company did not have effective
controls in place to ensure the net payments of $10.7 million related to the Bausch &
Lomb milestone payment were properly classified as cash flows from investing activities
versus cash flows from operating activities. This control deficiency resulted in an
adjustment to the Companys Consolidated Statement of Cash Flows for the three months
ended March 31, 2005 which was recorded prior to the filing of the Companys
Quarterly Report on Form 10Q for the quarter ended March 31, 2005. The Company is in the
process of remediating this weakness by strengthening the control procedures surrounding
the review and classification of cash flows from nonrecurring transactions during the
quarterly closing process.                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | (b)    Changes in Internal Control Over Financial Reporting: Except as noted above,
    there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f)
    under the Securities Exchange Act of 1934, as amended) during our last fiscal quarter that has materially
    affected, or is reasonably likely to materially affect, our internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|23
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|Part II
  Other Information
Item 1                    
Legal Proceedings
|------------------------------------------------------------------------
|                                                                        

| | The Company and three current officers have been named as defendants in several purported shareholder

class action lawsuits alleging violations of federal securities laws. These lawsuits were filed
  beginning
  in January 2005 and are pending in the U.S. District Court for the District of New Jersey.
  These
  lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
  and
  Rule 10b-5 thereunder. The complaints allege generally that the defendants knowingly or recklessly

made false or misleading statements regarding the effectiveness of dexanabinol in treating TBI
  which
  had the effect of artificially inflating the price of our shares. The complaints seek unspecified

damages. These class actions have been consolidated by order of the Court and lead plaintiffs and

lead plaintiffs counsel have been appointed. Management intends to defend these lawsuits
  vigorously.
  However, we cannot assure you that we will prevail in these actions, and, if the outcome
  is unfavorable
  to Pharmos, our reputation, profitability and share price could be adversely affected.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In addition, two purported shareholders of Pharmos common stock have commenced derivative actions against

our directors and against certain current and former officers. The first derivative lawsuit was
  commenced
  in February 2005 in the U.S. District Court for the District of New Jersey, and has been
  consolidated
  for pretrial purposes with the class actions. The second was filed in April 2005 in
  the Superior
  Court of New Jersey, County of Middlesex. Both lawsuits allege generally, on behalf
  of Pharmos (which
  has been named as a nominal defendant), breaches of fiduciary duty and other
  state law violations
  arising from the same set of underlying facts as the class actions. The complaints
  seek unspecified
  damages. Management intends to take all appropriate action in respect of the derivative
  actions.                                                                                                                                                                                                                                                                                            

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|Item 2
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|Item 3
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|Item 4
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|Item 5
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|Item 6
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| | Number | Exhibit                                                                                                                                                                
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                        
| |        |                                                                                                                                                                        
| | 31.1   | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a),
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| |        |                                                                                                                                                                        
| | 31.2   | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a),
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| |        |                                                                                                                                                                        
| | 32.1   | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002.                      
| |        |                                                                                                                                                                        
| | 32.2   | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002.                      
| |        |                                                                                                                                                                        
| | 99.1   | Amendment No. 1, dated as of June 30, 2005, to the License Agreement by and between Pharmos Ltd. and
  Herbamed Ltd., dated as of December 18, 2001.                   

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

|                      | PHARMOS CORPORATION                              
|--------------------- | -------------------------------------------------
|                      |                                                  
|Dated: August 9, 2005 |                                                  
|                      | by:                                              
|                      |                                                  
|                      | James A. Meer                                    
|                      | Senior Vice President and Chief Financial Officer
|                      | (Principal Accounting andFinancial Officer)      

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