UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-Q x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the
quarterly period ended March 31, 2007 or o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 Commission
file number 0-11550 Pharmos Corporation(Exact
name of registrant as specified in its charter)  Nevada



36-3207413(State or other jurisdiction of incorporation or
  organization)

(IRS Employer Id. No.) 99
Wood Avenue South, Suite 311
Iselin, NJ 08830(Address of principal executive offices) Registrants
telephone number, including area code: (732)
452-9556 Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x
No o. Indicate by check mark whether registrant is a large
accelerated filer, an accelerated filer or a non-accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Large accelerated filer  o
Accelerated filer
  o
Non-accelerated filer
  x Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o
No x . As of May 7, 2007, the Registrant had outstanding
25,603,759 shares of its $.03 par value Common Stock. 1    INDEXPART 1
FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Balance Sheets as of
  March 31, 2007 (unaudited) and December 31, 2006Consolidated Statements of Operations
  (unaudited) for the three months ended March 31, 2007 and 2006Consolidated Statements of Cash Flows
  (unaudited) for the three months ended March 31, 2007 and 2006Notes to Consolidated Financial
  Statements (unaudited)Item 2.
Managements
  Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
Quantitative
  and Qualitative Disclosures About Market RiskItem 4T.
Controls
  and ProceduresPART II
OTHER
  INFORMATIONItem 1.
Legal
  ProceedingsItem 6.
ExhibitsSignatures2

Part I.
Financial Information

Item
1 Financial Statements

PHARMOS
CORPORATION
(Unaudited)
Consolidated Balance Sheets

March 31,
  2007

December 31,
  2006AssetsCash and cash
  equivalents

$
9,319,810

$
12,757,013Short-term
  investments


12,761,286


13,172,673Restricted
cash


83,838


82,926Research and
  development grants receivable


588,380


297,865Prepaid
expenses
  and other current assets


597,069


424,658Total current
assets


23,350,383


26,735,135Fixed assets,
  net


613,922


593,457Restricted
cash


64,209


63,922Severance pay
  funded


853,909


975,810Other
assets


24,264


25,014Total
  assets

$
24,906,687

$
28,393,338Liabilities
  and Shareholders EquityAccounts
payable

$
1,366,657

$
663,192Accrued
expenses


899,366


889,783Warrant
  liability





11,435Accrued wages
  and other compensation


1,028,766


1,002,572Total
  current liabilities


3,294,789


2,566,982Other
  liabilities


30,851


77,682Severance
pay


1,261,977


1,320,624Total
  liabilities


4,587,617


3,965,288Shareholders
EquityPreferred
stock,
  $.03 par value, 1,250,000 shares authorized, none issued and outstandingCommon stock,
$.03 par value; 60,000,000
  shares authorized, 25,603,759 and 25,565,784





issued and
outstanding as of March 31, 2007
  and December 31, 2006, respectively


768,112


766,973Paid-in capital
  in excess of par


205,343,007


204,700,030Accumulated
  deficit


(185,791,623
)

(181,038,527
)Treasury stock,
  at cost, 2,838 shares


(426
)

(426
)Total
  shareholders equity


20,319,070


24,428,050Total
  liabilities and shareholders equity

$
24,906,687

$
28,393,338The accompanying
notes are an integral part of these consolidated financial statements.

3

PHARMOS
CORPORATION
(Unaudited)
Consolidated Statements of Operations

Three months ended
  March 31,2007

2006ExpensesResearch and
  development, gross

$
2,906,739

$
1,867,114Grants


(336,641
)

(300,635
)Research and
  development, net of grants


2,570,098


1,566,479General and
  administrative


2,460,696


1,813,221Depreciation
and
  amortization


69,568


78,484Total
  operating expenses


5,100,362


3,458,184Loss from operations


(5,100,362
)

(3,458,184
)Other income (expense)Interest income


330,158


465,704Change in value of warrants





14,104Other (expense) income


17,109


(24,310
)Other income, net


347,267


455,498Net income (loss)

($
4,753,095
)
($
3,002,686
)Net income (loss) per share- basic and diluted

($
0.19
)
($
0.16
)Weighted average shares outstanding- basic and diluted


25,563,367


19,037,628The accompanying
notes are an integral part of these consolidated financial statements.

4

Pharmos
Corporation
(Unaudited)
Consolidated Statements of Cash Flows

Three months ended March 31,2007

2006Cash flows from
  operating activitiesNet income
  (loss)

$
(4,753,095
)
$
(3,002,686
)Adjustments to
  reconcile net income (loss) loss to net cash used in operating activities:Depreciation
and
  amortization


69,568


78,484Provision for
  severance pay


(58,647
)

90,102Change in the
  value of warrants


(11,435
)

(14,104
)Stock based
  compensation


538,272


219,957Amortization of
  restricted shares issuance


105,845


264,712Changes in
  operating assets and liabilities:Research and
  development grants receivable


(290,515
)

(218,716
)Prepaid
expenses
  and other current assets


(172,411
)

(940,937
)Other
assets


750


Accounts
payable


703,465


41,876Accrued
expenses


9,583


(39,783
)Accrued wages
  and other compensation


26,194


(39,924
)Other
  liabilities


(46,833
)

11,342Net cash used in
  operating activities


(3,879,259
)

(3,549,677
)Cash flows from
  investing activitiesPurchases of
  fixed assets


(90,033
)

(96,097
)Costs
associated
  with acquisition of Vela Pharmaceuticals





(741,468
)Purchase of
  short-term investments


(6,661,286
)

(2,929,485
)Proceeds from
  sale of short-term investments


7,072,673


2,200,000Severance pay
  funding


121,901


(31,555
)Increase in
  restricted cash


(1,199
)

(958
)Net cash
  provided by (used in) investing activities


442,056


(1,599,563
)Cash flows from
  financing activities





Net decrease in
  cash and cash equivalents


(3,437,203
)

(5,149,240
)Cash and cash
  equivalents at beginning of year


12,757,013


10,289,127Cash and cash
  equivalents at end of period

$
9,319,810

$
5,139,887Supplemental
  information:Interest
paid

$


$
The accompanying
notes are an integral part of these consolidated financial statements.

5

Notes to Consolidated Financial Statements (unaudited)

Basis of Presentation

The accompanying unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accrual adjustments, considered necessary for a fair statement have
been included. Operating results and cash flows for the three month period
ended March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. The year-end condensed balance
sheet was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America and included in the Form 10-K filing.

1. The Company

Pharmos Corporation (the Company or Pharmos) is a biopharmaceutical
company that discovers and develops novel therapeutics to treat a range of
diseases of the nervous system, including disorders of the brain-gut axis
(e.g., IBS), with a focus on pain/inflammation, and autoimmune disorders. The
Companys most advanced product, dextofisopam, produced a statistically
significant greater number of months of adequate relief over placebo in a Phase
2a clinical trial in IBS (n=141, p=0.033). The Company plans to initiate a
Phase 2b study in mid-2007.

The Companys core proprietary discovery platform focuses on synthetic
cannabinoid compounds. Cannabinor, the initial CB2-selective receptor agonist
candidate, has completed two Phase 2a clinical trials for pain relief with an
intravenous (IV) formulation. In January 2007, Pharmos reported that in the
first of these studies intravenous (i.v.) Cannabinor was generally safe and
well tolerated, but failed to meet the primary endpoint of reversing
capsaicin-induced pain. The Company subsequently noted that analysis of
additional endpoints of heat-induced and pressure-induced pain indicates that
i.v. Cannabinor does in fact exhibit a statistically significant systemic
analgesic effect compared to placebo. In April 2007, Pharmos reported that the
lowest dose of Cannabinor (12mg) produced a statistical significant decrease in
pain versus placebo as in subjects undergoing third molar dental extraction
model, but that this effect was not seen in the higher dose groups (24mg and 48
mg). This is an unexpected pattern of results and the Company continues to
explore possible explanations. An oral form of Cannabinor has completed
preclinical testing.

The Companys NanoEmulsion (NE) drug delivery system, a proprietary
asset derived from our formulation expertise, completed a second Phase I trial
in 2006 that confirmed the safety, and tolerability as well as low systemic
exposure of a more optimized NE diclofenac cream formulation. In mid 2007, the
Company expects to initiate a Phase IIa trial in Osteoarthritis patients with
this delivery technology for topical application of analgesic and
anti-inflammatory agents. The NanoEmulsion technology has demonstrated
additional potential applications, including vaccine formulation as well as
targeted delivery of local anesthetics and antifungal drugs.

Pharmos cannabinoid research is geared toward development of selective
and specific CB2 receptor agonists. Because they have little affinity for the
CNS-located CB1 receptor, CB2-selective and -specific agonists lack the
unwanted psychotropic side effects of many natural cannabinoids. By activating
CB2 receptors, CB2 agonists inhibit autoimmune and inflammatory processes, and
are likely to be useful for treating pain, autoimmune, inflammatory and
degenerative disorders.

Other compounds in Pharmos pipeline are in pre-clinical studies and
are targeted as potential treatments for inflammatory bowel disease, pain,
multiple sclerosis, rheumatoid arthritis and other disorders.

6

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

2. Liquidity and Business Risks

The Company was not profitable in 2002 through 2006 and through the
first quarter of 2007. At March 31, 2007, the Company had an accumulated
deficit of $186 million and expects to continue to incur losses going forward.
Such losses have resulted principally from costs incurred in research and
development and from general and administrative expenses. The Company has
financed its operations with public and private offerings of securities,
advances and other funding pursuant to a marketing agreement with Bausch &
Lomb, grants from the Office of the Chief Scientist of Israel, research
contracts, the sale of a portion of its New Jersey net operating loss
carryforwards, and interest income. Management believes that the current cash,
cash equivalents and short term investments, totaling $22 million as of March
31, 2007, will be sufficient to support the Companys continuing operations
beyond March 31, 2008.

The Company routinely actively pursues various funding options,
including equity offerings, equity-like financing, strategic corporate
alliances, business combinations and the establishment of product related
research and development limited partnerships, to obtain additional financing
to continue the development of its products and bring them to commercial
markets. Should the Company be unable to raise adequate financing or generate
revenue in the future, long-term operations will need to be scaled back or
discontinued.

3. Significant Accounting Policies

Basis of
consolidation

The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries: Pharmos Ltd and Vela
Acquisition Corp. All significant intercompany balances and transactions are
eliminated in consolidation. The functional currency for Pharmos Ltd is the US
dollar.

Reclassifications

The consolidated statement of cash flows for the three months ended
March 31, 2006 includes in cash flows from investing activities $(31,555), for
the funding of severance payments. In prior filings such payments were included
in cash flow used in operating activities. This reclass was recorded in the
nine month period ended September 30, 2006 and had no impact on the
Consolidated Balance Sheet or Consolidated Statement of Operations for any period.

Research and
development grants receivable

As of March 31, 2007 and December 31, 2006, research and development
grant receivables consist of grants for research and development from the
office of the Chief Scientist in Israel (OCS) relating to certain projects.
Research and development grants are recognized as a reduction of research and
development expenses.

7

Investments

The Company considers all investments that are not considered cash
equivalents and with a maturity of less than one year from the balance sheet
date to be short-term investments. The Company considers all investments with a
maturity of greater than one year to be long-term investments. All investments
are considered as held-to-maturity and are carried at amortized cost, as the
Company has both the positive intent and ability to hold them to maturity. The
Company invests in a variety of instruments such as commercial paper, US
Government securities and corporate securities with an effective maturity of
less than one year. Some of the Companys investments are in auction-rate
securities (ARS) that are held as investments available for sale. Auction rate
securities are instruments with long-term underlying maturities, but for which
an auction is conducted periodically, as specified, to reset the interest rate
and allow investors to buy or sell the instruments. Because auctions generally
occur more often than annually, and because the Company holds these instruments
in order to meet short-term liquidity needs, the auction rate securities are classified
as short-term investments in the Consolidated Balance Sheet. Interest income
includes interest, amortization of investment purchases premiums and discounts,
and realized gains and losses on sales of securities. Realized gains and losses
on sales of investment securities are determined based on the specific
identification method. The Consolidated Statement of Cash Flows reflects the
gross amount of the purchases of short term investments and the proceeds from
maturities of short term securities and sales of auction rate securities.

March 31,
  2007

December 31,
  2006Securities greater than 90 days

$
6,661,286

$
5,172,673Auction Rate
  Securities


6,100,000


8,000,000Total Short
  Term Investments

$
12,761,286

$
13,172,673Restricted cash

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

Tax Provision

No tax
provision is required at this time since the company expects to be in a tax
loss position at year-end December 31, 2007 and has net operating losses from
previous years. The Company has established a 100% valuation allowance against
the deferred tax asset.

Accounting for
Uncertainty in Income Taxes (FIN 48)

In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an entitys financial statements and prescribes a
recognition threshold of more-likely-than-not to be sustained upon examination.
Measurement of the tax uncertainty occurs if the recognition threshold has been
met. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Pharmos conducts business in the US and Israel and,
as a result, files US, New Jersey and Israeli income tax returns. In the normal
course of business the Company is subject to examination by taxing authorities.
At present, there are no ongoing audits or unresolved disputes with the various
tax authorities that the Company files with. Given the Companys substantial
net operating loss carryforwards (NOLs, which are subject to a full valuation
allowance) as well as the historical operating losses, the adoption of FIN 48
on January 1, 2007 did not have any effect on our financial position, results
of operations or cash flows as of March 31, 2007.

8

Foreign exchange

The Companys foreign operations are principally conducted in U.S.
dollars. Any transactions or balances in currencies other than U.S. dollars are
remeasured and any resultant gains and losses are included in other (expense)
income. To date, such gains and losses have been insignificant.

Equity based
compensation

During the three months ended March 31, 2007 and 2006, the Company
recognized equity based compensation expense of $538,272 and $219,957,
respectively, for stock options which was recognized in the Statement of
Operations. As of March 31, 2007, the total compensation costs related to
non-vested awards not yet recognized is $2.6 million which will be recognized
over the next three and one-half years.

During the first quarter of fiscal 2007 and 2006, employees and outside
directors of the Company were granted stock options under the Pharmos 2000
Stock Option Plan per the table below:

Period Ended

Grants
  Issued

Weighted
  Average
  Exercise Price

Weighted
  Average
  Fair ValueMarch 31,
  2007


870,000

$
1.70

$
1.23March 31,
  2006


676,000

$
2.15

$
1.67The 2007 option grants include 200,000 options granted contingent upon
the approval by the Companys shareholders of an increased number of authorized
shares in the 2000 Amended and Restated Stock Option Plan.

Recent Accounting
Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value measurements. SFAS 157 applies
only to fair value measurements that are already required or permitted by other
accounting standards (except for measurements of share-based payments) and is
expected to increase the consistency of those measurements. Accordingly, SFAS
157 does not require any new fair value measurements. However, for some
entities, the application of SFAS 157 will change current practice. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company does not expect the adoption of
SFAS 157 to have a material impact on our consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115 (SFAS
No. 159), which is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. SFAS No. 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. The Company is currently evaluating the
impact that SFAS No. 159 will have on its consolidated financial statements.

4. Vela Pharmaceuticals, Inc.  Pro Forma
Disclosure

The Companys 2006 statement of operations includes the results of
operations from Vela from October 26, 2006 forward. The following table
presents unaudited pro forma consolidated results of operations for Pharmos for
the three months ended March 31, 2006, as though the Vela acquisition was
completed as of the beginning of the period.

9

March 31, 2006Net loss
  attributable to common shareholders

$
4,487,089Net loss per
  share attributable to common shareholders:Basic and
  diluted

$
(0.18
)Weighted
  average shares outstanding


25,537,62810

5. 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 periods ending March 31, 2007 and 2006,
other potential common stock has been excluded from the calculation of diluted
net loss per common share, as their inclusion would be anti-dilutive. In
accordance with the requirements of Statement of Financial Accounting Standards
No. 128, it was determined that no stock options or warrants as of March 31,
2007 and 2006 were in the money and therefore none were considered other
potential common stock to be included in the calculation of diluted net
earnings per share.

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.

March 31,
  2007

March 31,
  2006Stock
  options


2,695,705


1,832,809Warrants


297,739


1,176,310Restricted
  stock - non vested





63,292Total potential
  dilutive securities not included in loss (income) per share


2,993,444


3,072,4116. Collaborative Agreements

Pharmos
subsidiary, Pharmos Ltd., licensed its patents related to the oral delivery of
lipophilic substances in the limited field of use of nutraceuticals to
Herbamed, Ltd., a company in Israel controlled by the Chairman and former Chief
Executive Officer of Pharmos. In the three months ending March 31, 2007, the
Company recorded in other income royalties of $897 and $991 respectively, per
the licensing agreement with Herbamed.

7. Common Stock Transactions

In the three
months ended March 31, 2007 there were no shares of common stock issued
pursuant to the Pharmos Corporation 2001 Employee Stock Purchase Plan or
options exercised under the Companys Stock Option Plans.

During the
first quarter of 2007, the Company incurred a non-cash charge of $328,057 for
the acceleration of unvested options for Dr. Haim Aviv, Chairman and former
Chief Executive Officer.

On September
6, 2004, the Board of Directors approved the Retention Award Agreements and
Pharmos entered into Retention Award Agreement with Dr. Haim Aviv, Chairman and
former Chief Executive Officer. The Company granted a retention award of
$300,000 cash and 75,950 restricted stock units to Dr. Aviv (the Awards).
Under the agreement, one-half of the Awards vested on December 31, 2005 and the
balance of Dr. Avivs Awards 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, are being expensed
pro rata over the vesting periods. During the three month period ended March
31, 2007, the Company recorded an expense of approximately $105,844 in
connection with the Awards.

On March 4,
2003, the Company raised $4.3 million from the placement of common stock and
warrants. The private placement offering was completed by issuing 1,011,765
shares of common stock at a price of $4.25 per share and approximately 200,000
warrants at an exercise price of $6.25 per share. Additionally, the remaining
balance of the September 2000 Convertible Debenture offering was redeemed for
cash. The original face amount of $3.5 million was redeemed for approximately
$4.0 million, which included accrued and unpaid interest. According to EITF
00-19, the issued warrants meet the requirements of and are being accounted for
as a liability since registered shares must be delivered upon settlement. The
Company calculated the initial value of the warrants, including the placement
agent warrants, as being approximately $394,000 under the Black-Scholes
option-pricing method (assumption: volatility 75%, risk free rate 2.88% and
zero dividend yield). The value of the warrants were being marked to market
each reporting period as a gain/loss until exercised or expiration and amounted
to $11,435 in income at March 31, 2007.

11

Upon exercise
of each of the warrants, the related liability is reduced by recording an
adjustment to additional paid-in-capital.

The fair value
of the warrants were being marked to market using the Black-Scholes
option-pricing model with the same assumptions as used for the stock options.

8. Segment and Geographic Information

The Company is
active in one business segment: designing, developing, selling and marketing
pharmaceutical products. The Company maintains development operations in the
United States and Israel. The Companys selling operations are maintained in
the United States.

Geographic
information for the three months ending March 31, 2007 and 2006 are as follows:

Three months ended 
  March 31,2007

2006Net LossUnited
States

$
(4,730,868
)
$
(2,928,140
)Israel


(22,227
)

(74,546
)$
(4,753,095
)
$
(3,002,686
)Capital
ExpendituresUnited
States

$
6,185

$
Israel


83,848


96,097$
90,033

$
96,097Geographic
information as of March 31, 2007 and December 31, 2006 are as follows:

2007

2006Total AssetsUnited
States

$
21,565,053

$
25,245,098Israel


3,341,634


3,148,240$
24,906,687

$
28,393,338Long Lived
Assets, netUnited
States

$
36,230

$
38,368Israel


577,692


555,089$
613,922

$
593,4579. Legal Proceedings

Class Action Lawsuits

The Company
and certain current officers have been named as defendants in several purported
shareholder class action lawsuits alleging violations of federal securities
laws. These lawsuits were filed beginning in January 2005 and are pending in
the U.S. District Court for the District of New Jersey. These lawsuits assert
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 hereunder. The complaints allege generally that the defendants
knowingly or recklessly made false or misleading statements regarding the
effectiveness of dexanabinol in treating TBI (Traumatic Brain Injury) which had
the effect of artificially inflating the price of the Companys common stock.
The complaints seek unspecified damages. These class actions have been
consolidated by order of the court and lead plaintiffs and lead plaintiffs
counsel have been appointed. An amended complaint was filed in September 2005.

Management
intends to defend this consolidated class action lawsuit vigorously. However, we cannot assure you that
we will prevail in this action, and, if the outcome is unfavorable to
Pharmos, our reputation, profitability and share price could be adversely
affected.

Both of the previously disclosed derivative lawsuits (which alleged, generally, breaches of
fiduciary duty and other state law violations arising from the same set of
underlying facts as the class actions) have been settled, court approval has
been obtained, the settlements are final and the cases have been dismissed
with prejudice.

12

Item 2. Managements Discussion and Analysis of Financial Condition and
  Results of OperationsThis report on Form 10Q contains information
that may constitute forward-looking statements. The use of words such as
believe, expect, intend, estimate, anticipate, project,
will and
similar expressions identify forward-looking statements, which generally are not
historical in nature. All statements that address operating performance, events
or developments that we expect or anticipate will occur in the future are
forward-looking statements. As and when made, we believe that these
forward-looking statements are reasonable. However, caution should be taken not
to place undue reliance on any such forward-looking statements because such
statements speak only as of the date when made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In addition, forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from our companys historical experience and
our present expectations or projections. These risks and uncertainties include,
but are not limited to, those described in Part I, Item 1A. Risk Factors
on Form 10K for 2006 and elsewhere in this report and those described from time
to time in our future reports filed with the Securities and Exchange
Commission.

We do not undertake to discuss matters relating to our
ongoing clinical trials or our regulatory strategies beyond those which have
already been made public or discussed herein.

Executive Summary

Pharmos Corporation is a
biopharmaceutical company that discovers and develops novel therapeutics to
treat a range of indications including pain, inflammation, autoimmunity and
select central nervous system (CNS) disorders. We have a portfolio of drug candidates
and compounds in various development stages, including clinical, preclinical
and discovery. The Companys lead product, Dextofisopam, has completed Phase 2a
testing in irritable bowel syndrome (IBS), with positive effect on the primary
efficacy endpoint of mean months of adequate relief (n=141, p=0.033). The
Company plans to initiate a Phase 2b study of Dextofisopam for the treatment of
IBS in mid 2007. Dextofisopam, a non-serotonergic agent, is the R-enantiomer of
racemic tofisopam, a molecule marketed and used safely outside the United
States for over three decades for multiple indications including IBS.

The Companys core
proprietary technology platform focuses on the discovery and development of
synthetic cannabinoid compounds. Collaborative research as well as in-house
research at Pharmos over the last decade has served as a cornerstone of our
scientific foundation, and through such efforts we have extensively
characterized many of the key variables involved in cannabinoid receptor
activation and modulation. In order to identify and optimize promising drug
candidates quickly and efficiently, we combine:


Our extensive knowledge of
  the cannabinoid pathways we believe are responsible for therapeutic effects
  and strategies for minimizing potential adverse effects
Our comprehensive library
  of well-annotated cannabinoid potential drug candidates
Our interdisciplinary drug
  discovery and development approach
Manufacturing capability
  of clinical material, including a cGMP-compliant pilot plant
Pharmaceutical formulation
  expertise, which has provided additional opportunities for developing novel
  drug delivery systems which can be employed both for internal programs in
  pain and inflammation and which also provide partnering opportunities for
  areas outside of our therapeutic focusThe Companys
discovery efforts are focused primarily on CB2-selective compounds which are
small molecule cannabinoid receptor agonists that bind preferentially to CB2
receptors found primarily in peripheral immune cells. Cannabinor, the lead
CB2-selective receptor agonist candidate, has completed two Phase IIa trials in
pain indications with an intravenous (IV) formulation. Other compounds from
Pharmos proprietary synthetic cannabinoid library are in pre-clinical studies
targeting nociceptive, neuropathic and visceral pain, as well as autoimmune
diseases, including multiple sclerosis, rheumatoid arthritis and inflammatory
bowel disease.

The Company
also has a family of synthetic cannabinoid compounds that do not bind to
cannabinoid receptors. Unlike the CB2-selective agonists such as cannabinor,
the pharmacologic activity of these compounds is probably mediated by processes
other than CB receptor signaling. The Company is seeking to partner
dexanabinol, its lead compound from this family, as a preventive agent against
cognitive impairment following cardiac surgery.

The Companys
NanoEmulsion (NE) drug delivery system, a proprietary asset derived from our
formulation expertise was tested

13

in a Phase I
trial in 2006. The data confirmed the safety, and tolerability as well as low
systemic exposure of a more optimized NE diclofenac cream formulation. In mid
2007, the Company expects to initiate a Phase IIa trial in osteoarthritis
patients with this delivery technology for topical application of analgesic and
anti-inflammatory agents. The NanoEmulsion technology has demonstrated
additional potential applications, including vaccine formulation as well as
targeted delivery of local anesthetics and antifungal drugs. The Company is
interested in partnering this technology in these areas.

Depending when
resources allow, the Company may acquire later stage product candidates for
treating diseases in line with its research and development  expertise and targeted areas of interest,
including pain, gastrointestinal inflammation, autoimmunity and select CNS
disorders.

The Company
continues to refine its commercialization and business development strategy
with the intention of capitalizing on internal resources through strategic
alliances and scientific and academic collaborations, out-licensing and
co-development opportunities, as well as balancing the portfolio with strategic
acquisitions and in-licensing opportunities.

14

2007 Strategy and
Operating Plan

Pharmos business
is the discovery and development of new drugs to treat a range of indications
including pain, inflammation, autoimmunity and select CNS disorders, including
disorders of the CNS-gut axis. Our discovery program is focused on
capitalizing on our expertise in the biology, chemistry and manufacturing of
cannabinoid-based therapeutics, with the goal of developing increasingly
potent, drugable and selective cannabinoid receptor agonists and antagonists
for the treatment of a variety of human diseases. Modulation of these receptors
in preclinical models of disease suggests that potential areas for therapeutic
intervention include the treatment of pain, autoimmune disease, osteoporosis,
asthma, allergy, atherosclerosis and obesity. Based on our advanced preclinical
testing of drug candidates, we are currently focused on the use of
CB2-selective compounds for the treatment of pain and autoimmunity.

We have a
portfolio of drug candidates and compounds in various development stages,
including clinical, preclinical and discovery. To complement our own drug
development platforms, the Company periodically evaluates expanding its
portfolio of internally developed products with either in-licensed products or
acquisitions in selected related therapeutic areas. Also, we seek to enter into
targeted strategic alliances/scientific collaborations with established
pharmaceutical companies to complete development and commercialization of
selected products.  The Company also
maintains a commitment to out-license proprietary technologies and products not
consistent with our primary corporate focus.

Pharmos lead
product, Dextofisopam, has completed a
double-blind, placebo-controlled Phase 2a study in patients with
diarrhea-predominant or alternating IBS. In this study, Dextofisopam was
well-tolerated and demonstrated significant improvement over placebo on the
primary efficacy endpoint (n=141, p=0.033) of adequate relief, suggesting that
Dextofisopam has the potential to become a novel firstline treatment for IBS.
Pharmos plans to initiate a Phase 2b trial in mid 2007. Dextofisopam is the
R-enantiomer of racemic tofisopam, a molecule marketed and used safely outside
the United States for over three decades for multiple indications including
IBS. It binds to specific receptors in areas of the brain affecting autonomic
function, including gastrointestinal (GI) function. Unlike 5-HT3 or 5-HT4 IBS
therapies currently available, both of which have significant safety concerns,
Dextofisopams novel non-serotonergic, brain-gut mechanism offers a unique and
innovative approach to IBS treatment.

In research
efforts over the past decade, the Company has developed a significant expertise
in cannabinoid biology and chemistry, and has generated significant know-how
and an intellectual property estate pertaining to multiple areas of cannabinoid
biology. The Company is focusing its preclinical research efforts in
CB2-selective cannabinoids, and has generated both clinical-stage drugs and
late preclinical compounds which appear promising in preclinical testing. From
the CB2-selective portfolio of compounds, Cannabinor is the most advanced,
having begun its clinical development in 2005 using an intravenously delivered
formulation and completed a Phase I safety study in January of 2006. A Phase
IIa clinical study in subjects exposed to experimentally-induced forms of pain
was completed in January 2007. Although Cannabinor did not meet the primary
endpoint of an analgesic effect compared to placebo against capsaicin-induced
pain, it did have a statistically significant advantage over placebo in
attenuating the pain induced by punctuate pressure and heat. In addition, this
trial confirmed safety and tolerability observed in previous studies. In April
2007, the Company completed a Phase IIa trial of Cannabinor in patients
experiencing nociceptive pain from 3rd molar extraction. The lowest dose of
Cannabinor (12mg) produced a statistically significant decrease in pain versus
placebo as measured by the primary endpoint, but this drug effect was not seen
in the higher dose groups (24mg and 48 mg). This is an unexpected pattern of
results and the Company continues to explore possible explanations.

Pharmos is
conducting a clinical program to develop its proprietary NanoEmulsion (NE) drug
delivery technology applied to a widely approved and used non-steroidal
anti-inflammatory (NSAID) drug-diclofenac. Two Phase I studies in healthy
volunteers have been completed and confirmed the safety and tolerability as
well as the low systemic exposure of a diclofenac NE topical cream. The Company
plans to initiate a Phase IIa clinical trial in osteoarthritis patients in mid
2007 to evaluate the analgesic effects of the topical NE cream form of
diclofenac.

The results
for the three months ended March 31, 2007 and 2006 were a net loss of $4.8
million and $3.0 million respectively. On a loss per share basis, this equates
to $(0.19) and $(0.16) respectively.

Except for
2001, the Company has experienced operating losses every year since inception
in funding the research, development and clinical testing of our drug
candidates. As of March 31, 2007, the Companys accumulated deficit was
approximately $185.8 million. The Company expects to incur additional losses
over the next several years as the Companys research and development and clinical
trial programs continue. The Companys ability to achieve profitability, if
ever, is dependent on its ability to develop and obtain regulatory approvals
for its product candidates, to enter into agreements for product development
and commercialization with strategic corporate partners and contract to develop
or acquire the capacity to manufacture and sell its products.

15

Results of Operations
Three Months ended March 31, 2007 and 2006

Total
operating expenses for the first quarter of 2007 increased by $1,642,178 or
47%, from $3,458,184 in 2006 to $5,100,362 in 2007.

During the
quarter, the Company conducted clinical trials on its intravenously delivered
Cannabinor drug candidate for pain. Two Phase 2a studies were conducted, one
with 24 patients for experimentally-inducted pain and one for acute pain with
100 patients. The experimentally-induced pain trial results were announced in
January 2007 and the acute pain results in April 2007.

Additional
research and development expenses were incurred during the quarter in preparing
for a Phase 2a clinical trial with NanoEmulsion for Osteoarthritis pain. This
trial is targeted to commence in mid 2007. During the quarter the Company
continued to conduct basic research and discovery to identify new and potentially
more potent, CB2 agonists.

The Companys
Dextofisopam Phase 2b trial is planned to commence mid 2007 involving about 50
sites with 480 patients. Costs of $0.9 million incurred during the quarter were
for planning with the CRO that will manage the trial, site selection and
evaluation visits, investigator meeting preparations and commitments and CMC
packaging of the clinical trial supplies. Dextofisopam was one of the compounds
the Company obtained through the acquisition of Vela Pharmaceuticals Inc which
closed on October 25, 2006. The continued development of this compound through
late stage clinical testing will significantly increase the research and
development expenses going forward.

The Company
considers major research & development projects to be those projects that
have reached at least Phase II level of clinical development. Cannabinor was in
Phase II at the end of the first quarter. During the first quarter of 2007, the
gross cost of development and review was approximately $0.8 million. Total costs
since the Cannabinor project entered Phase II development in 2006 through March
31, 2007 were $3.3 million.

Gross expenses
for other research and development projects in early stages of development for
the first quarter of 2007 and 2006 were $1,235,281 and $1,130,495,
respectively. Research & development (R&D) gross expenses increased by
$1,039,625 or 56% from $1,867,114 to $2,906,739 in 2007, related to higher
clinical study activities over 2006. The Company recorded research and
development grant receivables from the Office of the Chief Scientist of
Israels Ministry of Industry and Trade of $336,641and $300,635 during the
first quarter of 2007 and 2006, respectively, which reduced research and
development expenses. Total research and development expenses, net of grants,
increased by $1,003,619 or 64%, from $1,566,479 in 2006 to $2,570,098 in 2007.

General and
administrative expenses for the first quarter of 2007 increased by $647,475, or
36%, from $1,813,221 in 2006 to $2,460,696. The increase primarily reflects
contractual payment obligations of $646,000 associated with the retirement of
the Companys former chief executive officer. Professional fees increased by
$156,085 resulting from additional legal and recruitment services. The increase
in professional fees is offset by reductions in investor relation costs of
$55,901 and a reduction in insurance costs of $99,898 reflecting favorable
renewal rates and reduced policy coverage levels.

Depreciation
and amortization expenses decreased by $8,916, or 11%, from $78,484 in 2006 to
$69,568 in 2007. The decrease is due to fixed assets which have become fully
depreciated.

Other income
(expense) net, decreased by $108,231 from $455,498 in 2006 to $347,267 in 2007.
The majority of the decrease is from decreased interest income from a decline
in cash, cash equivalents and short term investments. During the quarter, the
Company recorded, in other income, royalties of $897 compared with $991 in 2006
per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim
Aviv, the Companys Chairman and former CEO.

No tax
provision is required at this time since the company expects to be in a tax
loss position at year-end December 31, 2007 and has net operating losses from
previous years. The Company has established a 100% valuation allowance against
the deferred tax asset.

16

Liquidity
and Capital Resources

The Company incurred cumulative operating losses since
2002 and had an accumulated deficit of $185.8 million at March 31, 2007. The
Company has financed its operations with public and private offerings of
securities, advances and other funding pursuant to a marketing and asset
agreement with Bausch & Lomb, grants from the Office of the Chief Scientist
of Israel, research contracts, the sale of a portion of its New Jersey State
Net Operating Loss carryforwards, and interest income. Should the Company be
unable to raise adequate financing or generate revenue in the future,
operations will need to be scaled back or discontinued.

The following table describes the Companys liquidity
and financial position on March 31, 2007, and on December 31, 2006:

March 31,
  2007

December
  31, 2006Working capital

$
20,055,594

$
24,168,153Cash and cash equivalents

$
9,319,810

$
12,757,013Short term investments

$
12,761,286

$
13,172,673Total cash, cash equivalents and short term
  investments

$
22,081,096

$
25,929,686Current
working capital position

As of March 31, 2007, the Company had working capital
of $20.0 million consisting of current assets of $23.3 million and current
liabilities of $3.3 million. This represents a decrease of $4.2 million from
its working capital of $24.2 million on current assets of $26.7 million and
current liabilities of $2.5 million as of December 31, 2006. This decrease in working
capital of $4.2 million was principally associated with the funding of R&D
and G&A activities.

Current
and future liquidity position

Management believes that the current cash, cash
equivalents and short term investments, totaling $22.0 million as of March 31,
2007, will be sufficient to support the Companys continuing operations beyond
March 31, 2008. The Company routinely pursues various funding options,
including additional equity offerings, equity-like financing, strategic
corporate alliances, business combinations and the establishment of product
related research and development limited partnerships, to obtain additional
financing to continue the development of its products and bring them to
commercial markets. Should the Company be unable to raise adequate financing or
generate revenue in the future, long-term operations will need to be scaled
back or discontinued.

Cash

At March 31, 2007, cash and cash equivalents totaled
$9.3 million. At December 31, 2006 cash and cash equivalents totaled $12.8
million. This net decrease in cash of $3.5 million was due to the net
conversion of $0.4 million of short term investments into cash, $4.0 million
for normal operating requirements and $0.1 million for capital expenditures.
The cash, cash equivalents short term investments will be used to fund Research
& Development activities.

17

Operating
activities

Net cash used in operating activities for the first
quarter of 2007 was $3.9 million compared to net cash used of $3.5 million for
the first quarter of 2006. The increase in cash used of $0.4 million is
primarily due to higher R&D spending related to the initiation of the
Dextofisopam Phase IIb trial in the first quarter of 2007.

Investing
activities

During the first quarter of 2007, the Company had a
net investment proceeds in short term investments of $0.4 million, fixed asset
purchases of $0.1 million and a severance pay funding benefit of $0.1 million

Capital expenditures for property, plant and equipment
for the three months ended March 31, 2007 and 2006 totaled approximately
$90,000 and $96,000, respectively for normal replacements and improvements.

Financing
activities

There were no financing activities in the first  quarter of 2007 or 2006.

Commitment
and Contingencies

As of March 31, 2007, the Company had the following
contractual commitments and long-term obligations:

Total

Less than
  1 Year

1 - 3
  Years

3 - 5
  Years

More than
  5 Years

UndeterminedOperating Leases

$
887,948

$
485,995

$
401,953

$
0

$


$
Other long-term liabilities reflected on our balance
  sheet*


1,261,977














1,261,977Other Commitments**


150,000


150,000











Total

$
2,299,925

$
635,995

$
401,953

$
0

$


$
1,261,977*
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 $853,909.**
Represents cash portion of the September 2004
  Retention Award Agreement given to the CEO. The Company has accrued $150,000
  through March 31, 2007.  This was paid
  to Dr. Aviv in early April 2007 in conjunction with his March 31, 2007
  retirement.New
accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value measurements. SFAS 157 applies
only to fair value measurements that are already required or permitted by other
accounting standards (except for measurements of share-based payments) and is
expected to increase the consistency of those measurements. Accordingly, SFAS
157 does not require any new fair value measurements. However, for some
entities, the application of SFAS 157 will change current practice. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company does not expect the adoption of
SFAS 157 to have a material impact on our consolidated financial statements.

In February 2007, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115 (SFAS No. 159), which is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. SFAS No. 159 permits entities to measure eligible
financial assets, financial liabilities and firm commitments at fair value, on
an instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other generally accepted accounting
principles. The fair value measurement election is irrevocable and subsequent
changes in fair value must be recorded in earnings.  The Company is
currently evaluating the impact that SFAS No. 159 will have on its consolidated
financial statements.

18

Item 3. Quantitative
and Qualitative Disclosures About Market Risk

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

Item 4T.
Controls And Procedures

(a) Evaluation of Disclosure Controls and Procedures:
An evaluation of Pharmos disclosure controls and procedures (as defined in
Section13a-15(e) of the Securities Exchange Act of 1934 (the Act)) was
carried out under the supervision and with the participation of Pharmos Chief
Executive Officer and Chief Financial Officer and several other members of
Pharmos senior management at March 31, 2007. Based on this evaluation, Pharmos
Chief Executive Officer and Chief Financial Officer concluded that as of March
31, 2007, Pharmos disclosure controls and procedures were effective, at a
reasonable level of assurance, in ensuring that the information required to be
disclosed by Pharmos in the reports it files or submits under the Act is (i)
accumulated and communicated to Pharmos management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.

(b) Changes in Internal Control over Financial
Reporting:  There were no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended) during our last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over financial
reporting.

19

Part
II   Other Information

Item
1   Legal Proceedings

Class Action Suits

The Company and certain current officers have been
named as defendants in several purported shareholder class action lawsuits
alleging violations of federal securities laws. These lawsuits were filed
beginning in January 2005 and are pending in the U.S. District Court for the
District of New Jersey. These lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The
complaints allege generally that the defendants knowingly or recklessly made
false or misleading statements regarding the effectiveness of dexanabinol in
treating TBI (Traumatic Brain Injury) which had the effect of artificially
inflating the price of the Companys common stock. The complaints seek
unspecified damages. These class actions have been consolidated by order of the
court and lead plaintiffs and lead plaintiffs counsel have been appointed. An
amended complaint was filed in September 2005.

Management intends to defend this consolidated class
action lawsuit vigorously. However, we cannot assure you that we will prevail
in this action, and, if the outcome is unfavorable to Pharmos, our reputation,
profitability and share price could be adversely affected.

Both of the previously disclosed derivative lawsuits (which alleged, generally,
breaches of fiduciary duty and other state law violations arising from the same
set of underlying facts as the class actions) have been settled, court approval
has been obtained, the settlements are final and the cases have been
dismissed with prejudice.

20

Item 1A Risk
Factors

There are no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006.

Item 2 Unregistered Sales of Equity
  Securities and Use of Proceeds
NONEItem 3 Defaults upon Senior
  Securities
NONEItem 4 Submission of Matters to
  Vote of Security Holders
NONEItem 5 Other Information
NONEItem 6 ExhibitsNumber

Exhibit10.1

Employment Agreement between Pharmos Corporation and
  Elkan R. Gamzu, dated as of March 20, 2007 (incorporated by reference to
  Exhibit 10.1 of the registrants Current Report on Form 8-K filed March 26,
  2007).10.2

Letter Agreement between Pharmos Corporation and
  Haim Aviv, dated March 20, 2007 (incorporated by reference to Exhibit 10.2 of
  the registrants Current Report on Form 8-K filed March 26, 2007).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 2002.21

SIGNATURE

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

PHARMOS CORPORATIONDated: May 10, 2007by:
/s/ S. Colin NeillS. Colin NeillSenior Vice President and Chief Financial Officer(Principal Accounting and Financial Officer)22