Pharmos Corporation Reports 2006 Second Quarter Results

CB2-Selective Compounds and Pending Vela Acquisition Driving Pipeline

Iselin NJ, August 10, 2006 – – Pharmos Corporation (Nasdaq: PARS) today reported results for the second quarter ended June 30, 2006. Cash and short-term investments totaled $39.4 million at June 30, 2006. The Company recorded a net loss of $4.1 million, or $0.21 per share, for the second quarter 2006 compared to a net loss of $3.3 million, or $0.18 per share, in the second quarter 2005.

The increase in net loss is due primarily to a 26% increase in operating expenses to $4.6 million compared to $3.7 million in the 2005 second quarter. This was partially offset by a 53% increase in other income to $0.5 million from $0.3 million in the 2005 second quarter. Operating expenses increased due primarily to a 44% increase in selling, general and administrative expenses to $2.5 million compared to $1.7 million in the 2005 second quarter. Despite lower salary expenses in the 2006 second quarter, selling, general and administrative expenses increased due to expenses of $0.5 million incurred for the Company’s forthcoming shareholder meeting including an ongoing proxy contest as well as expenses of $0.4 million in severance payments. Net of the shareholder meeting and severance expenses, the amounts of which significantly exceed historical spending in these categories and are expected to return to more normal levels in the future, selling, general and administrative expenses would be 11% lower than in the second quarter 2005. The adoption by the Company in January 2006 of Statement of Financial Accounting Standards No. 123R (SFAS 123R), under which stock-based compensation cost is recognized as an expense, unfavorably affected selling, general and administrative expenses. The increase in operating expenses was also impacted by a 10% increase in net research and development costs to $2.0 million from $1.8 million as a result of decreased eligible grant expenses. Gross research and development costs decreased 6% to $2.4 million from $2.5 million due to lower clinical trial costs.

For the six months ended June 30, 2006, Pharmos recorded a net loss of $7.1 million, or $0.37 per share. For the same period in the prior year, Pharmos recorded net income of $3.3 million, or $0.18 per share, primarily due to the receipt in the 2005 first quarter of a $10.7 million non-recurring milestone payment from a former marketing partner. Total operating expenses were flat at $8.1 million. Year-to-date selling, general and administrative expenses increased 22% due to the 2006 second quarter costs for the shareholder meeting and severance and the adoption in January 2006 of SFAS 123R, which more than offset lower year-to-date research and development expenses.

Alan Rubino, President and COO of Pharmos, said, “The advancing status of cannabinor, a promising CB2-selective compound from Pharmos’ robust synthetic cannabinoid library, and the potential Vela pipeline assets place Pharmos in a very attractive position for partnership opportunities. Our initiatives to expedite business growth are focused on the goal of increasing shareholder value.”

During the quarter, Pharmos advanced its lead drug, cannabinor, a CB2-selective synthetic cannabinoid drug candidate, into Phase 2 clinical testing in acute pain. The Phase 2a proof-of-concept test, which commenced in June, is evaluating the analgesic activity and safety of cannabinor in healthy subjects experiencing pain following third molar dental extraction. The study will include 100 male subjects, 20 of whom have been enrolled to date, and is expected to be completed in the third quarter of 2006. While the current clinical testing of cannabinor uses an intravenous formulation, Pharmos is also developing an oral formulation for chronic pain conditions that it expects to move into Phase 1 testing in late 2006 or early 2007.

Also during the quarter, Pharmos took steps to complete the acquisition of Vela Pharmaceuticals, Inc. (Vela), a venture-capital backed, privately-owned company specializing in the development of medicines related to diseases of the nervous system including disorders of the “brain-gut axis.” The acquisition will expand Pharmos’ pipeline with later-stage clinical drug candidates including dextofisopam, a promising and innovative new drug that has Phase 2 data showing a potential efficacy for the treatment of diarrhea-predominant and alternating-type irritable bowel syndrome. The transaction is subject to shareholder approval.

About Pharmos Corporation
Pharmos discovers and develops novel therapeutics to treat a range of indications including 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 undergoing Phase II testing in pain. Other compounds from Pharmos’ proprietary synthetic cannabinoid library are in pre-clinical studies targeting pain, multiple sclerosis, rheumatoid arthritis and other disorders.

Statements made in this press release related to the business outlook and future financial performance of the Company, to the prospective market penetration of its drug products, to the development and commercialization of the Company’s pipeline products and to the Company’s expectations in connection with any future event, condition, performance or other matter, are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause results to differ materially from those set forth in these statements. Additional economic, competitive, governmental, technological, marketing and other factors identified in Pharmos’ filings with the Securities and Exchange Commission could affect such results.

In connection with its proposed acquisition of Vela Pharmaceuticals Inc., Pharmos has filed a preliminary proxy statement and other relevant materials, and will be filing additional relevant materials in the near future, with the Securities and Exchange Commission (SEC) relating to a special meeting of shareholders. Investors and security holders of Pharmos are urged to read these documents because they contain important information about Pharmos, Vela and the acquisition. The proxy statement and other existing and forthcoming relevant materials, and any other documents filed by Pharmos with the SEC, may be obtained free of charge at the SEC’s website at In addition, investors and security holders may obtain free copies of the documents filed with the SEC by Pharmos by directing a written request to: Pharmos Corporation, 99 Wood Avenue South, Suite 311, Iselin, New Jersey 08830, Attention: Investor Relations. Investors and security holders are urged to read the proxy statement and the other existing and forthcoming relevant materials before making any voting or investment decision with respect to the acquisition.

Pharmos and its executive officers and directors may be deemed to be participants in the solicitation of proxies from the shareholders of Pharmos in connection with the proposal to issue shares of Pharmos’ common stock in the acquisition. Information about those executive officers and directors of Pharmos and their ownership of Pharmos’ common stock is set forth in Pharmos’ Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC. Investors and security holders may obtain additional information regarding the direct and indirect interests of Pharmos’ executive officers and directors in the acquisition by reading the preliminary proxy statement and other existing and forthcoming relevant materials.

    Condensed Consolidated Statements of Operations

                                 Three months ended        Six months ended
                                      June 30,                 June 30,
                                 2006         2005         2006        2005
     Research and
      development, gross     $2,381,974   $2,540,597   $4,249,088  $5,045,236
     Grants                    (367,626)    (711,879)    (668,261)   (731,455)
     Research and
      development, net
      of grants               2,014,348    1,828,718    3,580,827   4,313,781
     Selling, general and
      administrative          2,495,322    1,736,035    4,308,543   3,530,746
     Depreciation and
      amortization               86,394       98,752      164,878     213,677
       Total operating
        expenses              4,596,064    3,663,505    8,054,248   8,058,204

    Loss from operations     (4,596,064)  (3,663,505)  (8,054,248) (8,058,204)

    Other income (expense)

     Bausch & Lomb payment            -            -            -  10,725,688
     Interest income            458,626      357,520      924,330     627,016
     Interest expense                 -       (2,826)                (163,372)
     Change in value of
      warrants                    7,624       11,753       21,728     242,684
     Other (expense) income      31,438      (41,380)       7,128     (34,723)
       Other income, net        497,688      325,067      953,186  11,397,293

    Net income (loss)       $(4,098,376) $(3,338,438) $(7,101,062) $3,339,089

    Net income (loss) per
     - basic                $     (0.21) $     (0.18) $     (0.37) $     0.18
     - diluted              $     (0.21) $     (0.18) $     (0.37) $     0.18

    Weighted average shares
     - basic                 19,062,389   18,973,944   19,050,077  18,973,944
     - diluted               19,062,389   18,973,944   19,050,077  18,974,011

    Condensed Consolidated Balance Sheets
                                                 June 30,         December 31,
                                                   2006              2005
     Cash and cash equivalents                 $14,387,375       $10,289,127
     Short-term investments                     24,997,722        35,748,343
     Restricted cash                                81,095            79,527
     Research and development grants
      receivable                                   438,830           734,237
     Prepaid expenses and other current
      assets                                       731,805           543,109
       Total current assets                     40,636,827        47,394,343

     Capitalized merger costs                      832,924                 -
     Fixed assets, net                             708,283           742,860
     Restricted cash                                63,346            62,874
     Severance pay funded                          869,943           772,199
     Other assets                                   18,496            18,496

       Total assets                            $43,129,819       $48,990,772

    Liabilities and Shareholder's Equity
     Accounts payable                          $   711,900       $   519,404
     Accrued expenses                              928,779           575,222
     Warrant liability                              17,153            38,880
     Accrued wages and other compensation        1,296,218         1,497,781
       Total current liabilities                 2,954,050         2,631,287

     Other liability                                36,530           110,904
     Severance pay                               1,189,698         1,014,647
       Total liabilities                         4,180,278         3,756,838

    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;
      60,000,000 shares authorized,
      19,065,783 issued                            571,973           571,973
     Deferred compensation                               -          (529,393)
     Paid-in capital in excess of par          191,380,616       191,093,338
     Accumulated deficit                      (153,002,622)     (145,901,558)

     Treasury stock, at cost, 2,838 shares            (426)             (426)
       Total shareholders' equity               38,949,541        45,233,934

       Total liabilities and
        shareholders' equity                  $ 43,129,819      $ 48,990,772