Pharmos Corporation Reports 2006 Third Quarter Results

Iselin NJ, November 6, 2006 – Pharmos Corporation (Nasdaq: PARS) today reported results for the third quarter ended September 30, 2006. The Company recorded a net loss of $4.2 million, or $0.22 per share, for the third quarter 2006, compared to a net loss of $3.3 million, or $0.17 per share, in the 2005 third quarter. Cash and short-term investments totaled $35.3 million at September 30, 2006.

The acquisition of Vela Pharmaceuticals Inc. (Vela) was a major focus during the quarter. The transaction, completed on October 25, 2006, expands Pharmos’ pipeline with later-stage clinical drug candidates including dextofisopam, a promising and innovative new drug that has demonstrated positive Phase 2a data for the treatment of diarrhea-predominant and alternating-type irritable bowel syndrome (IBS).

The increase in net loss for the third quarter is due primarily to a 27% increase in operating expenses to $4.7 million compared to $3.7 million in the 2005 third quarter. Operating expenses increased due primarily to a 57% increase in general and administrative expenses to $2.7 million compared to $1.7 million in the 2005 third quarter. The increase in general and administrative expenses is largely due to expenses of $0.8 million incurred for professional and other services in connection with a proxy contest and the Vela acquisition. Excluding the proxy contest and acquisition costs, general and administrative costs would have increased by $0.2 million due to increased business development activities. Gross research and development costs increased 7% to $2.3 million from $2.2 million in the third quarter of 2005 due to higher clinical trial costs in connection with the Phase 2a testing of cannabinor in pain indications and a Phase 1 trial with a topical NanoEmulsion drug delivery technology.

For the nine months ended September 30, 2006 (“year-to-date”), Pharmos recorded a net loss of $11.3 million, or $0.60 per share. For the same period in the prior year, the Company essentially broke even 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 year-to-date operating expenses increased by $1.0 million to $12.8 million compared to the prior year same period. The increase in operating expenses is primarily due to year-to-date general and administrative costs of $7.0 million, a $1.8 million increase compared the same period in the prior year. The increase in general and administrative expenses is largely due to expenses of $2.2 million incurred for professional and other services in connection with a proxy contest and the Vela acquisition, and to severance costs, which were partially offset by reduced compensation costs of $0.9 million from workforce reduction compared with the same period in the prior year.

About Pharmos Corporation
Pharmos discovers and develops novel therapeutics to treat a range of indications including specific diseases of the nervous system such as disorders of the brain-gut axis (GI/IBS), pain/inflammation, and autoimmune disorders. The Company’s lead product, dextofisopam, has completed Phase 2a testing in IBS, a common GI disorder particularly prevalent in women, with positive effect on primary efficacy endpoint (n=141, p=0.033). The Company plans a Phase 2b study of dextofisopam for the treatment of IBS in 2007. 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 2a testing in pain. Other compounds in Pharmos’ pipeline are in clinical and pre-clinical studies targeting pain, multiple sclerosis, rheumatoid arthritis and other disorders.

Safe Harbor Statement
Statements made in this press release related to the business outlook and future financial performance of Pharmos, to the prospective market penetration of its drug products, to the development and commercialization of its pipeline products and to its 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.


    Condensed Consolidated Statements of Operations

                               Three months ended        Nine months ended
                                  September 30,            September 30,

                               2006         2005         2006         2005
      Research and
       development, gross   $2,338,392   $2,180,137   $6,587,480   $7,225,373
      Grants                  (415,203)    (284,185)  (1,083,464)  (1,015,640)
      Research and
       development, net
       of grants             1,923,189    1,895,952    5,504,016    6,209,733
      General and
       administrative        2,730,064    1,734,493    7,038,607    5,265,239
      Depreciation and
       amortization             77,034       87,841      241,912      301,518
        Total operating
         expenses            4,730,287    3,718,286   12,784,535   11,776,490

    Loss from operations    (4,730,287)  (3,718,286) (12,784,535) (11,776,490)

    Other income (expense)

      Bausch & Lomb payment         --           --           --   10,725,688
      Interest income          482,907      416,267    1,407,237    1,043,283
      Interest expense              --       (2,219)          --     (165,591)
      Change in value of
       warrants                  7,051       11,562       28,779      254,246
      Other (expense) income    (1,224)           0        5,904      (34,723)
        Other income, net      488,734      425,610    1,441,920   11,822,903

    Net income (loss)      ($4,241,553) ($3,292,676)($11,342,615)     $46,413

    Net income (loss) per share
      - basic                   ($0.22)      ($0.17)      ($0.60)       $0.00
      - diluted                 ($0.22)      ($0.17)      ($0.60)       $0.00

    Weighted average shares
      - basic               19,062,945   18,974,338   19,054,413   18,974,120
      - diluted             19,062,945   18,974,338   19,054,413   18,974,954

    Condensed Consolidated Balance Sheets

                                                September 30,   December 31,
                                                     2006           2005

      Cash and cash equivalents                   $9,122,377    $10,289,127
      Short-term investments                      26,209,172     35,748,343
      Restricted cash                                 82,009         79,527
      Research and development grants receivable     211,730        734,237
      Prepaid expenses and other current assets      810,986        543,109
        Total current assets                      36,436,274     47,394,343

      Advance to Vela                                527,302             --
      Capitalized merger costs                       885,315             --
      Fixed assets, net                              647,297        742,860
      Restricted cash                                 63,631         62,874
      Severance pay funded                           928,488        772,199
      Other assets                                    18,496         18,496

        Total assets                             $39,506,803    $48,990,772

    Liabilities and Shareholder's Equity
      Accounts payable                              $493,529       $519,404
      Accrued expenses                             1,794,337        575,222
      Warrant liability                               10,101         38,880
      Accrued wages and other compensation           958,656      1,497,781
        Total current liabilities                  3,256,623      2,631,287

      Other liability                                 34,637        110,904
      Severance pay                                1,257,910      1,014,647
        Total liabilities                          4,549,170      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           191,630,271    191,093,338
      Accumulated deficit                       (157,244,185)  (145,901,558)
      Treasury stock, at cost, 2,838 shares             (426)          (426)
        Total shareholders' equity                34,957,633     45,233,934

        Total liabilities and shareholders'
         equity                                  $39,506,803    $48,990,772