~~how related to the compound known as PRS-639,058 and certain follow-on molecules.~~ Pharmos had developed these compounds in preclinical testing for neuropathic pain. It is anticipated that the transaction will close on or before June 6, 2009. As a condition to closing, Reperio must obtain the consent of the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor to Reperio’s assumption of all liabilities and obligations under grant payments that were made to Pharmos in connection with the development of the compounds. At closing, Pharmos will receive $200,000 and ordinary shares of Reperio representing a ten percent pre-money equity ownership, and thereafter will be entitled to certain license and royalty fees in connection with the ongoing development of the compounds.

Pharmos had developed these compounds in preclinical testing for neuropathic pain. The particular patents and know how sold share some of the pharmacological properties with cannabinoids and have a common wide range of beneficial therapeutic indications.

In ~~particular, the compounds sold are useful as analgesic, neuroprotective, immunomodulatory and anti-inflammatory agents.~~

The two companies have executed an Asset Purchase Agreement, which is targeted to close on or before June 6, 2009. As a closing condition, Reperio must reach consent with the Office of the Chief Scientist to clearly define the assumption of potential liabilities for grant payments that were made to Pharmos during the development of the CB2 program.

The sale is consistent with Pharmos’ objectives to conserve its cash resources for the development of Dextofisopam, currently enrolling in a Phase 2b US trial. The Company previously announced the closure of its operations in Israel, effective October 31, 2008.

Two of the Company’s former scientists will join Reperio and the arrangement allows for further development of these CB2 assets. As part of the agreement Pharmos will be granted an equity ownership in Reperio, and will be entitled to license and royalty fees commensurate with the preclinical development stage of the assets.

~~For VPI-013,~~November 2009 the Company ~~has completed~~entered into a Phase IIa clinical trial whose data suggested that VPI-013 may be effective in treating hypoactive sexual desire disorder. Further, preclinical data suggested that VPI-013 may be effective in treating neuropathic pain. However, after seeking to out license this compound without success, and due to resource limitations, the license has been returned to Otsuka Pharmaceutical Co.Ltd.Material Transfer Agreement whereby a European company will perform certain experiments with samples of our synthetic selective cannabinoid receptor CB2 agonist.

Tianeptine, a potential follow-on product to Dextofisopam, has completed late-preclinical development for the treatment of irritable bowel syndrome (IBS). Tianeptine, a racemic molecule, has been marketed outside the United States since 1988 for the treatment of depression. Preclinical studies support the potential utility of Tianeptine for the treatment of functional gastrointestinal disorders and, in particular, IBS. Pharmos has established patent rights for the use of Tianeptine and its enantiomers for the treatment of IBS and functional dyspepsia. Tianeptine is available for out-licensing.

~~To date, our principal sources~~The Company owns the rights to both R and S Tofisopam. Dextofisopam is the R enantiomer of ~~cash have been public~~racemic tofisopam and ~~private financings,~~is being developed for IBS as described above. In December 2009 the ~~sale~~Company entered into a Material Transfer Agreement with a US based company to perform certain experiments with S-Tofisopam.

On March 13, 2009 the Company was officially delisted from the Nasdaq Capital Market, and is currently trading on the OTCBB pink sheets under the symbol “PARS.PK”. The Company was not in compliance with the minimum $2,500,000 stockholders’ equity requirement for continued listing and was unable to comply during the grace period extended by NASDAQ. As a result of ~~our ophthalmic business, revenues from our ophthalmic product line prior to~~trading on the ~~sale, research grants~~OTCBB pink sheets, liquidity for the Company’s common stock may be significantly decreased which could reduce trading price and increase the ~~sale~~transaction costs of ~~a portion~~trading shares of ~~our New Jersey State net operating loss carryforwards.~~the Company’s common stock.

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. The Company had an accumulated deficit of ~~$207~~$209.8 million as of December 31, ~~2008~~2009 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~~Previously the Company ~~has~~had financed its operations with public and private offerings of securities, advances and other funding pursuant to an earlier 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 (NOL’s), and interest income. Although the Company received $3.9 million in December 2009 from the sale of their NOL’s and had approximately $4.6 million of cash and cash equivalents at December 31, 2009, the Company is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional capital to either advance its lead compound, Dextofisopam, for the treatment of IBS or to advance other earlier stage intellectual property assets. During the year, the Company engaged an investment advisor to assist with these strategies but has not been successful to date. The Company has in the past pursued various funding and financing options; however management believes that future funding or financing options may be challenging because of the current environment.

~~Management believes that~~Also, the Company does not currently have the finances and resources to complete full clinical trials for its lead compound, Dextofisopam. As a result it may decide to embark on smaller clinical trials for Dextofisopam or commence pre-clinical development on its other intellectual property assets which could further reduce the company’s current cash, cash equivalents and short term investments, totaling $4.7 million as of December 31, 2008, will be sufficient to support the Company’s currently planned continuing operations through at least March 31, 2009. The above factors raise substantial doubt about the Company’s ability toresources.

The Company has corporate offices in Iselin, New Jersey.

~~continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.~~

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.

~~The Company is not currently in compliance with Nasdaq’s continued listing standards.~~

On September 26, 2007, we received notice from The Nasdaq Stock Market (“Nasdaq”) that the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive business days and that we were therefore not in compliance with Nasdaq listing rules. We had until March 24, 2008 (180 calendar days from September 26, 2007) to regain compliance. On March 25, 2008, Pharmos received notice from Nasdaq that, in accordance with Marketplace Rule 4310(c)(8)(D), Pharmos was provided an additional period of 180 calendar days, or until September 22, 2008, to regain compliance. Nasdaq has subsequently suspended enforcement of the minimum bid rule until April 20, 2009.

On November 11, 2008, we received notice from Nasdaq that we are not in compliance with Nasdaq Marketplace Rule 4310(c)(3), which requires us to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. We were granted additional time to February 24, 2009 to regain compliance. ~~We have not regained compliance and have the option of requesting an appeal hearing.~~

No assurance can be given that we will regain compliance with Nasdaq’s continued listing standards. If our common stock were to be delisted from Nasdaq, liquidity for our common stock could be significantly decreased which could reduce the trading price and increase the transaction costs of trading shares of our common stock.

STRATEGY

Pharmos is currently developing only one compound, Dextofisopam, which has completed a double-blind, placebo-controlled diarrhea-predominant or alternating IBS Phase 2a study with positive effect on primary efficacy endpoint (n=141, p=0.033). In this study, Dextofisopam was well-tolerated and demonstrated significant improvement over placebo, suggesting that Dextofisopam has the potential to become a novel firstline treatment for IBS. Pharmos initiated a Phase 2b trial in February 2007 and in June 2007 the Company announced patient screening had commenced. 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. Unlike the two 5-HT3 or 5-HT4 IBS therapies ~~currently available, both~~recently introduced into the market, and subsequently withdrawn because of ~~which have significant~~ safety concerns, Dextofisopam’s novel non-serotonergic activity offers a unique and innovative approach to IBS treatment.

~~Pharmos needs to raise capital to complete the ongoing~~The results of a Phase 2b ~~Dextofisopam trial. Upon successful completion~~study were announced in September 2009. The primary endpoint of overall adequate relief was not met due to a high placebo response, but drug activity was observed in all drug cohorts, especially the ~~Dextofisopam Phase 2b trial, Pharmos intends to seek~~200 mg dose.

The Company now is seeking a pharmaceutical partner with both scientific and financial capabilities to ~~advance the drug candidate into Phase 3 testing.~~further develop Dextofisopam.

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. With the decision to focus resources on Dextofisopam and w~~ith~~with the closure of the Company’s operations in Israel effective October 31, 2008, no further development work is being performed on the cannabinoid assets and the focus is to partner or sell these assets. ~~As announced on February 18,~~

In November 2009 the Company ~~announced that it had~~ entered into ~~an agreement~~a Material Transfer Agreement whereby a European company will perform certain experiments with ~~an Israel company, Reperio Pharmaceuticals Ltd. for the sale~~samples of ~~the patent rights and technical know how related to the compound known as PRS-639,058 and some follow on molecules.~~our synthetic selective cannabinoid receptor CB2 agonist.

The Company continues to seek, sell or license other CB2 assets, including Cannabinor which was the only CB2 asset to enter human clinical trials.

The Company also maintains a commitment to out-license proprietary technologies and products not consistent with our primary corporate focus. Assets involved are Tianeptine to treat IBS or functional ~~dyspepsia.~~dyspepsia and S-Tofisopam.

The Company owns the rights to both R and S Tofisopam. Dextofisopam is the R enantiomer of racemic tofisopam and is being developed for IBS as described above. In December 2009 the Company entered into a Material Transfer Agreement with a US based company to perform certain experiments with S-Tofisopam.

COMPOUND IN CLINICAL DEVELOPMENT

Pharmos currently has only one compound in clinical development – Dextofisopam. Dextofisopam, a non-serotonergic agent currently being evaluated for the treatment of irritable bowel syndrome (IBS), 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. Dextofisopam represents a novel, first-in-class opportunity with a positive proof-of-concept study in an arena where there are few compounds with unique approaches or positive efficacy results. By structure, Dextofisopam is a member of the homophthalazine class; Dextofisopam binds to specific receptors in areas of the brain affecting autonomic function, including gastrointestinal (GI) function. Unlike the two 5-HT3 or 5-HT4 mediated IBS therapies ~~currently available, both with significant~~recently introduced into the market, and subsequently withdrawn because of safety concerns, Dextofisopam novel non-serotonergic activity offers a unique and innovative approach to IBS treatment.

A double-blind, placebo-controlled diarrhea-predominant or alternating IBS Phase 2a study has been completed with positive effect on primary efficacy endpoint (n=141, p=0.033). In this study, Dextofisopam was well-tolerated and demonstrated significant improvement over placebo suggesting that Dextofisopam has the potential to become a novel firstline treatment for IBS. ~~The design~~

On September 14, 2009, the Company announced the results of aits Phase 2b ~~dose-ranging study~~Dextofisopam clinical trial to evaluate safety and efficacy of the compound in irritable bowel syndrome.

Although the primary efficacy variable (% of weeks responding for adequate overall relief of IBS symptoms) did not reach statistical significance, the percentage responding for the Dextofisopam 200 mg group was ~~discussed at a 2005 meeting with FDA, and Pharmos initiated a~~higher than that observed for the Phase ~~2b trial in February 2007 and~~2a trial. However, the ~~first patient~~placebo response rate was ~~screened in June 2007.~~also higher than expected compared to the Phase 2a placebo response.

An extensive patent estate is in place with Dextofisopam. This consists of an issued composition-of-matter patent, an issued manufacturing patent, and numerous additional pending patent applications in both the United States (including use of Dextofisopam for inflammatory disorders and immunomodulation) in both the United States and foreign counterparts.

Potential pharmaceutical market for Dextofisopam

The development of Dextofisopam for the treatment of Irritable Bowel Syndrome (IBS) is a major goal of Pharmos’ development activity. Direct medical costs associated with IBS have been estimated at $8 billion annually in the U.S. It has been estimated that indirect costs for IBS in the U.S. exceed $20 billion. The few recent products introduced in this market have been limited by poor safety profiles.

Irritable Bowel Syndrome: Disease Description and Diagnosis

Irritable bowel syndrome is defined by a constellation of symptoms that includes abdominal pain or discomfort accompanied by diarrhea, constipation, or an alternation between the two. IBS is classified as a functional disorder; it is diagnosed by symptom-based criteria following exclusion of organic diseases that may produce abdominal pain and altered bowel function.

Although the etiology of IBS is not completely understood, five factors have been proposed as playing a role in the development of IBS:

Psychosocial factors

impact of stress on motor function of the GI tract

approximately 60% of patients seen at referral centers have psychiatric symptoms.

Visceral hypersensitivity - lower threshold for abdominal pain

Altered bowel motility - abnormal motility of the small intestine

Infection and inflammation

Autonomic nervous system dysfunction

studies show that IBS patients have aberrant autonomic nervous system activity

altering autonomic nervous system activity in volunteers produces symptoms of IBS.

This perspective on the pathophysiology of IBS suggests that a drug that improves altered bowel motility, decreases visceral hypersensitivity reduces stress-related impact on GI function, normalizes autonomic dysfunction, and possesses anti-inflammatory properties may provide a superior, broad-spectrum approach to the treatment of IBS. In preclinical studies, ~~dextofisopam~~Dextofisopam exhibits all of these properties.

The diagnostic criteria for IBS have evolved over the years. Today, diagnosis for clinical trials and regulatory purposes is defined by the Rome III Criteria. Diagnosis is based on the patient having a) recurrent abdominal pain or discomfort for at least 6 months, and b) at least two of the following three features on at least 3 days per month over the past 3 months:

Improvement with defecation

Onset associated with a change in frequency of stool

Onset associated with a change in form (appearance) of stool

Based on the clustering of symptoms, IBS patients are usually categorized as either “diarrhea-predominant,” “constipation-predominant,” or “alternating” (also termed “mixed”). For a diagnosis of IBS, specific “red flag” symptoms are usually excluded. These “red flag” symptoms may indicate the presence of organic disease, such as colon cancer (especially if onset is rapid or occurs over the age of 40), ulcerative colitis (rectal bleeding), or Crohn’s disease (weight loss, fever). For the diagnosis of IBS to be made, normal results must have been obtained for blood and stool tests, x-rays, endoscopy, and biopsies.

While not a life-threatening disease, IBS can have a large negative impact on the quality of life of patients. Even mild cases can be life-altering, and severe cases are often debilitating, with the frequency and severity of episodes seriously affecting work, school, and social schedules.

IBS is a leading cause of physician visits, accounting for approximately 3,000,000 visits annually in the U.S., representing 4% of all visits to office-based physicians and 49% of visits to office-based gastroenterologists. The need to eliminate other possible diagnoses (colon cancer, inflammatory bowel disease, and other GI diseases) necessitates expensive in-office procedures. As noted earlier, the annual direct medical costs for IBS in the U.S. have been estimated at $8 billion.

Prevalence of IBS

IBS is a very common disorder, with studies indicating prevalence in the range of 6-15% for North America, Europe, and Japan. Based on a prevalence rate of 12.5%, approximately 36 million individuals in the United States meet diagnostic criteria for IBS. Prevalence rates are similar in the major European markets (France, Germany, Italy, Spain, and the United Kingdom). While prevalence rates for other countries are not well established, published studies support the existence and recognition of IBS throughout the world, including China and India.

Irritable bowel syndrome, or IBS, is a chronic, recurring condition with symptoms that affect more often women than men. IBS is characterized by multiple symptoms that include bowel dysmotility—diarrhea, constipation, or alternating diarrhea and constipation—and abdominal discomfort. Studies have shown that diarrhea-predominant IBS appears to be the most common subtype. For patients with diarrhea-predominant and alternating-type IBS, there are no recently approved treatments for any but the most severely affected women, and none for men.

The prevalence of IBS varies with gender and age. Higher prevalence rates are consistently reported for women than for men (two to three times greater). While IBS is observed in all age groups, including pediatric and geriatric populations, it is more common in the age range of 20 to 60 years for both genders

Current and Recent Therapies

Even with the ~~recent~~ introduction of two new therapies - Lotronex® (alosetron), a 5-HT3 antagonist, and Zelnorm® (tegaserod), a 5-HT4 partial agonist - the IBS market is still largely served by older products, with questionable efficacy and poor tolerability. These older products include antispasmodics, laxatives, and antidiarrheal agents. While antispasmodics at high doses may provide relief of specific symptoms, these drugs are poorly tolerated at those doses. The estimated sales of IBS drugs in the U.S. market totaled ~~$353.7~~$348 M in ~~2003.~~2009.

Lotronex® was introduced into the U.S. IBS market in March 2000, and was withdrawn from the market in November 2000 due to safety issues. Lotronex® was subsequently reintroduced in 2003 with a restricted marketing program (Physician Prescribing Program). The utility of Lotronex® is severely hampered both by its narrow indication (only for women with severe diarrhea-predominant IBS who have failed to respond to conventional therapy) and a major safety issue (the risk of potentially fatal ischemic colitis). Since its reintroduction, Lotronex® has had minimal prescription volume.

Zelnorm® was introduced into the U.S. IBS market in July 2002 for short-term use in women with constipation-predominant IBS. In April 2004, a precautionary statement was added to Zelnorm® labeling regarding post-marketing cases of ischemic colitis and a warning for severe diarrhea. Despite these changes to the package insert, the strong marketing and educational efforts supporting Zelnorm® appeared to have increased awareness and expanded utilization. Zelnorm® achieved U.S. sales of $26 M in 2002, $132 M in 2003, $249 M in 2004, $357 M in 2005, and $488 M in 2006, with 2006 worldwide sales of $561 M. Zelnorm® was approved in 30 countries, though not in major EU markets or in Japan. Zelnorm® was voluntarily withdrawn from the market in March 2007 because of severe side effects.

Market Potential (United States and Rest of World)

The market potential for IBS is very large. IBS is a prevalent disorder for which there are currently no safe and broadly effective treatments. Investment research analysts ~~projected~~estimate a U.S. market worth approximately $2.5 ~~B by 2009.~~B. Market research reports project that the current full worldwide (WW) market potential for IBS therapies could be as high as $15 B (over $6 B in the United States alone). Based on its current clinical profile, ~~dextofisopam~~Dextofisopam may have the potential to capture a significant portion of the IBS market.

COMPOUNDS AVAILABLE FOR LICENSING OR SALE

Pharmos is not currently performing any research or discovery work. The ~~entire~~ focus of the Company is to secure a pharmaceutical partnership arrangement for Dextofisopam.

Dextofisopam

As described above the ~~execution~~Company has completed both a Phase 2a and Phase 2b trials of Dextofisopam for IBS. The results of the ~~ongoing~~ Phase 2b ~~Dextofisopam~~ trial ~~for IBS.~~were reported in September 2009 and in October 2009 the Company engaged Cowen and Company to help accelerate a partnership arrangement with a pharmaceutical company possessing greater scientific and financial capabilities than Pharmos.

CB2-selective cannabinoids

Pharmos’ novel CB2-selective cannabinoids are synthetic compounds which belong to the class of nonclassical cannabinoids. Compounds in this class have been demonstrated to possess immunomodulatory and analgesic activities. Importantly, the CB2-selective cannabinoids display fewer of the undesired psychotropic and cardiovascular side-effects seen with some natural cannabinoids because they bind with high affinity to the peripheral cannabinoid type two (CB2) receptor and with lower affinity to the cannabinoid type one (CB1) receptor, located in the central nervous system. In contrast to CB1 receptors, CB2 receptors are expressed mainly outside of the central nervous system, on immune and inflammatory cells. CB2 activation also inhibits the release of pro-nociceptive peptide from the periphery which may prevent activation of primary afferent neurons. CB2 activation also modulates T-cell activity, skewing the T-helper cell type 1 (Th1) responses to the T-helper cell type 2 (Th2) activity. Most autoimmune diseases and models of autoimmunity in which susceptibility is associated with the expression of specific MHC class II allotypes appear to be of the Th1 type. Thus considerable emphasis has been placed on developing means of altering the course of the autoimmune Th1 response to become that of a Th2 response, with the goal of down regulating the autoimmune ~~pathogenesis~~pathogenesis.

Several candidates from Pharmos’ CB2-selective cannabinoid library have demonstrated promise in animal models for autoimmune inflammatory disorders, such as multiple sclerosis and inflammatory bowel disease. These compounds have also demonstrated efficacy in animal models of neuropathic, inflammatory and chronic nociceptive pain. In selected preclinical models, these compounds have demonstrated analgesic activity equivalent or better than Gabapentin.

Pharmos’ chemical library consists of several chemically distinct classes of cannabinoid compounds. The Company primary focused on development of families of CB2-selective compounds which were cannabinoid receptor agonists that bind preferentially to CB2 receptors. These receptors were found primarily in peripheral neurons and immune cells. The compounds possess advantages such as a simple synthesis, increased potency and improved drugability. Pharmos recognized the potential therapeutic promise of CB2 activation in such diverse disease entities as pain, inflammation, autoimmunity, osteoporosis and atherosclerosis.

~~Potential pharmaceutical markets~~Pharmos closed its operations in Israel in late 2008 and has ceased any discovery or development work on CB2 selective cannabinoid program. However these assets are available for ~~Pharmos’ CB2-selective cannabinoids~~

~~The development of novel CB2-selective disease–modifying agents (DMA) that combine anti-inflammatory, immunomodulatory~~licensing and analgesics properties for the treatment of inflammatory/autoimmune diseases is a major goal of Pharmos’ research and discovery activity. Inflammation and immunodysregulation play a pivotal role in a majority of chronic and debilitating autoimmune diseases such as rheumatoid arthritis (RA), inflammatory bowel disease (IBD) and multiple sclerosis (MS). Treatment and healthcare costs associated with these diseases have been estimated to exceed $500 billion annually. Recent products introduced in this market have/ or sale. There has been limited ~~due~~interest to ~~lack of efficacy and/or severe side effect profile.~~

date. In preclinical models, Pharmos’ novel CB2-selective cannabinoids have also demonstrated anti-inflammatory and analgesic properties, suggesting that they may be useful in the treatment of neuropathic pain.

~~The analgesic market where unmet medical needs remain can be categorized~~November 2009 Pharmos entered into ~~five major syndromes: cancer pain, back pain, HIV pain, neuropathies, and arthritic/osteoarthritic pain. The incidence and prevalence of the major pain syndromes continues to increase~~a Material Transfer Agreement whereby a European company will perform certain experiments with an estimated patient potential in 2009 of over 368 million. In 2000, the global market for analgesics was about $16 billion. Global analgesic sales increased to more than $22 billion for 2002 and are predicted to increase to $30 billion by 2009. In the US, spending for drugs to treat neuropathic pain is anticipated to exceed $1 billion by 2009. At present, there is no specific or satisfactory analgesic for neuropathic pain. Opioids and NSAIDs are only marginally effective in a minority of patients. Pfizer’s Lyrica® (pregabalin) was recently FDA-approved for the treatment of various forms of neuropathic pain. In controlled clinical trials, however, only 35% of patients with neuropathic pain had a 50% reduction in pain score, and the most common side effects of Lyrica® included dizziness, somnolence, dry mouth, peripheral edema, blurred vision, weight gain and difficulty with concentration/attention. Lyrica® is also designated as a controlled substance by the FDA. In the first year after launch, the drug generated $291 million in sales, with an additional $639 million in sales for Neurontin® (gabapentin), a closely-related drug widely used for the treatment of neuropathic pain. Neuropathic pain occurs most commonly in diabetes, cancer, multiple sclerosis, stroke, amyotrophic lateral sclerosis, HIV, trigeminal and post-herpetic neuralgia, and after trauma (traumatic neuralgia, phantom limb surgery). The main symptoms are spontaneous (i.e. not triggered by noxious stimuli), severe shooting pains, hyperalgesia and allodynia (painful sensations evoked by light touch or small changes in temperature that do not normally elicit pain).

~~These potential markets are extremely attractive for analgesics that can effectively manage pain experienced by patients suffering from any of these syndromes. The properties~~samples of our ~~CB2-selective cannabinioids place them in a good position for potential deployment in several of these major pain syndromes.~~

~~Cannabinor and other CB2~~synthetic selective compounds in preclinical development demonstrate significant immunomodulatory activity in autoimmune disease models of multiple sclerosis, rheumatoid arthritis and inflammatory bowel disease. The total global market for autoimmune disease therapeutics reached an estimated $11.3 billion in 2000. This was an increase of 23.6% over an estimated $4.8 billion in 1996. Key market drivers at that time included products such as Celebrex®, Vioxx®, Enbrel®, Avonex®, Betaseron®, Rebif®, and Synthroid®. In 2006, the market is expected to generate estimated revenues of $21.1 billion, reflecting a 15.9% increase from 2000 to 2006. The largest segment by disease area within the global autoimmune disease market was the rheumatoid arthritis market, with 55.9% share in 2000.

More than two million Americans suffer from Rheumatoid arthritis (RA), which causes stiffness, swelling and limitation in the motion and function of multiple joints. RA is a chronic, progressive disease, and if left untreated, patients can become disabled from joint damage caused by the disease, limiting their ability to function. RA is associated with substantial disability and economic losses, and one study showed that one-third of patients in the United Kingdom who were employed became work-disabled within two years of disease onset. Rheumatologic disorders also account for 25 percent of Social Security disability payments in the United States. Radiographic changes occur within two years of disease onset in 50 percent to 70 percent of RA patients. The American College of Rheumatology suggests control of disease progression should start early to limit joint damage in RA. Therapy for patients with RA has improved dramatically over the past 25 years. Current treatments offer most patients good to excellent relief of symptoms and the ability to continue to function at or near normal levels. Since there is no cure for RA, the goal of treatment is to minimize patients’

symptoms and disability by introducing appropriate drug therapy early in the course of the disease before permanent damage to the joints has occurred. No one treatment is effective for all patients, and many patients will need to change therapies during the course of their disease. Successful management of RA requires early diagnosis and, at times, aggressive treatment. Non-steroidal anti-inflammatory drugs (most commonly referred to as NSAIDs, such as ibuprofen or naproxen) and/or corticosteroids (such as prednisone) given orally at low doses or via injection into the joints may be used first with the primary aim of quickly reducing joint inflammation. All RA patients with persistent swelling in the joints are candidates for treatment with disease-modifying anti-rheumatic drugs (called DMARDs for short) that are typically used in conjunction with NSAIDs and/or low dose corticosteroids. The DMARD class of drugs has greatly improved the symptoms and function as well as the quality of life for the vast majority of patients with RA. DMARDs include: methotrexate (Rheumatrex ® and Folex ®), hydroxychloroquine (Plaquenil ®), sulfasalazine (Azulfidine ®), gold given orally (Auranofin ®) or intramuscularly (Myochrisine ®), minocycline (Minocin ®, Dynacin ® and Vectrin ®), azothiaprine (Imuran ®), cyclosporine (Sandimmune ® and Neoral ®), leflunomide (Arava ®). The benefits from these medications may take weeks or months to be apparent. Because they are associated with toxic side effects, frequent monitoring of blood tests while on these medications is imperative. Another class of medications, referred to as biologic disease response modifiers or “biologic agents” can specifically target parts of the immune system that lead to joint and tissue damage in RA. FDA approved treatments include agents etanercept (Enbrel ®), infliximab (Remicade ®), adalimumab (Humira ®), and anakinra (Kineret ®). These drugs are associated with variable degrees of immune suppression, and long-term use of anti-TNF-alpha agents can lead to the development of autoantibodies. Anti-idiotype antibodies may develop against the Fab portion of monoclonal antibodies. Antinuclear antibodies and, less commonly, anti-double-stranded DNA antibodies have been noted with anti-TNF-alpha therapy, but clinical lupus is rare. Demyelinating diseases such as multiple sclerosis may also occur. With their unique mechanism of immunomodulation, CB-2 agonists such as cannabinor could be viable therapeutic candidates for study in patients with RA.

Multiple sclerosis is a chronic and disabling disease, with healthcare costs disproportionate to the numbers affected. In the US alone, costs are estimated to exceed $10 billion per year. Estimates suggest that about 2.5 million people worldwide have MS, an inflammatory disease of the nervous system characterized by recurrent relapses followed by periods of remission. After trauma, it is the second most common neurological disability to affect young and middle-aged adults. It affects twice as many women as men, with the relapsing forms of MS the most common. Patients with MS display a range of symptoms which arise from demyelination in the central nervous system, including the brain, spinal cord and optic nerves. While symptoms vary between patients, they commonly include blurred vision, slurred speech, numbness or tingling in the limbs and problems with balance and coordination, due to the loss of control over vital functions such as seeing, walking and talking.

Despite recent advances in treatment, there remains a need for more efficacious drugs for MS and especially for primary progressive MS, the most aggressive form of the disease. Tysabri® (natalizumab) was recently introduced by Biogen-Idec as a potential advance in the treatment of MS; however, cases of a neurological disease called progressive multifocal leukoencephalopathy (PML) were reported in users of natalizumab. The disease is most likely caused by a virus, and is associated with being immunocompromised. The drug was withdrawn from the market. Prior to market withdrawal, estimates of sales of up to $3 billion were projected. Tysabri® has subsequently re-entered into the market, but is only available through a special distribution program.

The introduction of the first generation of disease-modifying drugs, which include interferon beta-1a and 1b as well as glatiramer acetate, represented an important advance in the treatment of MS when introduced into clinical practice. Approved for the treatment of relapsing forms of MS, they reduce the frequency and severity of exacerbations as well as the number of lesions seen on magnetic resonance imaging (MRI). However, while these agents have an immunomodulatory effect that alters the course of the disease they do not reverse the neurological damage that occurs in MS. Currently, no marketed treatments for MS can produce remyelination and so treatment aims to:

~~Reduce relapse rates~~

~~Prevent fixed disability directly associated to relapse~~

~~Provide symptomatic management of fixed neurological deficits~~

~~Prevent disability arising from disease progression~~

On February 18, 2009, the Company announced that it has entered into an agreement with an Israel based company, Reperio Pharmaceuticals Ltd. (Reperio) for the sale of the patent rights and technical know how related to the compound known as PRS-639,058 and some follow on molecules.cannabinoid receptor agonist.

~~NanoEmulsion Drug Delivery System~~

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. Pharmos invented and owns a family of patents covering novel NanoEmulsion formulations as vehicles for lipophilic drugs. NanoEmulsions are solvent-free, injection-free topical vehicles based on drug entrapment in oil-in-water nanoemulsion droplets. Such vehicles allow for high loading of water-insoluble drugs and offer enhanced skin penetration over competing technologies. A topical application of the nanotechnology has already demonstrated excellent targeted delivery of lipophilic drugs to muscle and joints in animal models, and has undergone two Phase I testing in humans, demonstrating excellent local safety and tolerability with low systemic exposure. Pharmos has formulated several NSAIDs into this platform technology and initiated a Phase IIa clinical study in 2007 in Osteoarthritis patients. This platform technology also offers the potential for topical delivery of a wide variety of water-insoluble compounds in addition to NSAIDs, and the possibility of incorporating other drug candidates into the delivery system continue to be evaluated, either for internal development or for out-licensing.

~~On November 18, 2008, Pharmos Corporation announced results from its Phase 2a clinical trial of its topical NanoEmulsion (NE) drug delivery technology formulated with 3% Diclofenac Diethanolamine.~~

The multi-center, randomized, double-blinded, placebo-controlled study evaluated the safety and efficacy of the Company's 3% Diclofenac Diethanolamine NanoEmulsion cream in 104 patients with chronic pain due to osteoarthritis of the knee. Patients applied the topical cream three times daily for 28 days.

The study did not achieve statistical significance in its primary efficacy endpoint, nor in several secondary endpoints. The effect witnessed did measure up to other topical NSAID (non-steroidal anti-inflammatory drug ) products already approved or currently in development in the US.

This study confirmed the safety of the 3% NanoEmulsion Diclofenac Diethanolamine cream previously demonstrated in the Phase I study. The majority of the reported AE's were defined as mild in severity and most of them were regarded by the investigators as not drug related. No Serious AE's were reported and the effect of the NanoEmulsion cream on the skin was minimal.

~~Pharmos decided to discontinue its topical NanoEmulsion drug delivery program.~~

COMPETITION

The pharmaceutical industry is highly competitive. Pharmos competes with a number of pharmaceutical companies that have financial, technical and marketing resources that are significantly greater than those of Pharmos. Some companies with established positions in the pharmaceutical industry may be better equipped than Pharmos to develop market and distribute products in the global markets that Pharmos is seeking to enter. A significant amount of pharmaceutical research is also being carried out at universities and other not-for-profit research organizations. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology they have developed. They may also market competitive commercial products on their own or through joint ventures and will compete with Pharmos in recruiting highly qualified scientific personnel. Further, these institutions will compete with Pharmos in recruiting qualified patients for enrollment in their trials.

Pharmos is pursuing areas of product development in which there is a potential for extensive technological innovation. Pharmos’ competitors may succeed in developing products that are more effective than those of Pharmos. Rapid technological change or developments by others may result in Pharmos’ potential products becoming obsolete or non-competitive.

We know of a number of programs in various stages that compete in the area of IBS.

~~Dextofisopam~~Salix Pharmaceuticals is currently targeted for the treatment of diarrhea-predominant IBS and/or alternating-type IBS. To the best of our knowledge, there are no competing compounds in development specifically for the treatment of alternating-type IBS. Several compounds are reported to be in development for the potential treatment of diarrhea-predominant IBS. These include DDP-225, a mixed 5-HT3 ~~antagonist/norepinephrine reuptake blocker, reportedly in Phase 2 (Dynogen);~~developing rifaximin, an antibiotic marketed for the treatment of traveler’s ~~diarrhea (Salix) in Phase 3; arverapamil,~~diarrhea. Salix is conducting clinical development studies to assess the utility of rifaximin for the treatment of irritable bowel disease. Ocera Therapeutics is developing AST-120 for a ~~compound with 5-HT~~3 ~~antagonist and calcium channel blocking properties, reportedly in Phase 3 (AGI); TRN-002,~~number of conditions, including IBS; Lexicon Genetics is developing LX1031, which has completed a ~~chloride channel blocker reportedly in~~ Phase 2 ~~(Trine);~~clinical trial. LX1031 is an orally-delivered small molecule designed to regulate gastrointestinal (GI) function by reducing the amount of serotonin available for receptor activitation in the GI tract without affecting serotonin levels in the brain. Serotonin is a key regulator of GI function, and ~~LX1031, reportedly in Phase 1 (Lexicon Genetics).~~is associated with the most common symptoms of IBS: problems of bowel motility and GI discomfort. Several other compounds are reported to be in development for the treatment of IBS. However, it is not clear if these compounds are intended for a specific type of IBS, e.g., diarrhea-predominant, constipation-predominant, or alternating-type IBS. Such compounds include a glucagon-like peptide-1 agonist (Gastrotech) and asimadoline, a kappa opiate agonist (Tioga), both reportedly in Phase 2. Several other compounds are reported to be in development for the treatment of constipation-predominant IBS. While such compounds may not directly compete with ~~dextofisopam,~~Dextofisopam, it is possible that they may eventually be developed for diarrhea-predominant or alternating-type IBS, or that ~~dextofisopam~~Dextofisopam may eventually be developed for constipation-predominant IBS. Such compounds include ~~DDP-733, a 5-HT~~3 ~~partial agonist reportedly in Phase 2 (Dynogen) and~~ MD-1100, a guanylate cyclase C agonist reportedly in Phase ~~2 (Microbia)~~3 (Ironwood).

Dextofisopam is currently targeted for the treatment of diarrhea-predominant IBS and/or alternating-type IBS. To the best of our knowledge, there are no competing compounds in development specifically for the treatment of alternating-type IBS. However, the alternating results have been mixed between the Phase 2a and Phase 2b trials and the numbers of patients were small. Several compounds are reported to be in development for the potential treatment of diarrhea-predominant IBS.

The IBS area remains a difficult development area. During the past year some of our potential competition has reported disappointing or failed clinical trials. However, as IBS represents a large unmet medical need, we expect other competition to emerge.

Collaborative Relationships

The Company’s principal focus is to seek a pharmaceutical partner with the appropriate GI clinical and scientific expertise for further development of Dextofisopam. On October 21, 2009 the Company announced that it had engaged Cowen and Company as advisors to assist with accelerating a partnership arrangement for Dextofisopam.

Depending on the availability of financial, marketing and scientific resources, among other factors, Pharmos may license its technology or products to others and retain profit sharing, royalty, manufacturing, co-marketing, co-promotion or similar rights. Any such arrangements could limit Pharmos’ flexibility in pursuing alternatives for the commercialization of its products. Due to the often unpredictable nature of the collaborative process, Pharmos cannot be certain that it will be able to establish any additional collaborative arrangements or that, if established, any of these relationships will be successful.

Patents and Proprietary Rights

Proprietary protection generally has been important in the pharmaceutical industry, and the commercial success of products incorporating Pharmos' technologies may depend, in part, upon the ability to obtain strong patent protection.

Pharmos generally maintains, at its expense, U.S. and foreign patent rights with respect to both the licensed technology and its own technology and files and/or prosecutes the relevant patent applications in the U.S. and foreign countries. Pharmos also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop its competitive position. Pharmos' policy is to protect its technology by, among other things, filing, or requiring the applicable licensor to file, patent applications for technology that it considers important to the development of its business. Pharmos intends to file additional patent applications, when appropriate, relating to its technology, ~~improvments~~improvements to its technology and to specific products it develops.

The patent positions of pharmaceutical firms, including Pharmos, are uncertain and involve complex factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before or after the patent is issued. Consequently, Pharmos does not know whether any of the pending patent applications underlying the licensed technology will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the U.S. and elsewhere publish only 18 months after priority date, and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, Pharmos cannot be certain that it or its licensors, as the case may be, were the first creators of inventions covered by pending and issued patents or that it or its licensors, as the case may be, were the first to file patent applications for such inventions. Moreover, it may be necessary for Pharmos to participate in interference proceedings declared by the U.S. Patent and Trademark Office in order to determine priority of invention. Involvement in these proceedings could result in substantial cost to Pharmos, even if the eventual outcomes are favorable to Pharmos. Because the results of the judicial process are often uncertain, we cannot be certain that a court of competent jurisdiction will uphold the patents, if issued, relating to the licensed technology, or that a competitor's product will be found to infringe those patents.

Other pharmaceutical and drug delivery companies and research and academic institutions may have filed patent applications or received patents in Pharmos' fields. If patents are issued to other companies that contain competitive or conflicting claims and those claims are ultimately determined to be valid, it is possible that Pharmos would not be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology.

Pharmos also relies upon trade secret protection for its confidential and proprietary information. It is always possible that others will independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Pharmos' trade secrets.

It is Pharmos' policy to require its employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting or advisory relationships with Pharmos. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual's relationship with Pharmos is to be kept confidential and not disclosed to third parties except in specific circumstances. Further, these agreements provide for the maintenance of confidentiality following the termination of the individual’s relationship with Pharmos. In the case of employees and certain consultants, the agreements provide that all inventions conceived by the individual in the course of their employment or consulting relationship shall be the exclusive property of Pharmos. Due to the vital nature of trade secrets and the often uncertain results of the judicial process, we cannot be sure, however, that these agreements will provide meaningful protection or adequate remedies for Pharmos' trade secrets in the event of unauthorized use or disclosure of such information. Pharmos' patents and licenses underlying its potential products described herein are summarized below.

~~Additional Pharmos assets include dextofisopam (previously known as R-tofisopam) and tianeptine for the treatment of irritable bowel syndrome.~~

Dextofisopam to Treat IBS. ~~Irritable bowel syndrome, or IBS, is a chronic, recurring condition with symptoms that affect up to 15% of American adults, more often women than men. IBS is characterized by~~ multiple symptoms that include bowel dysmotility—diarrhea, constipation, or alternating diarrhea and constipation—and abdominal discomfort. Studies have shown that diarrhea-predominant IBS appears to be the most common subtype. For patients with diarrhea-predominant and alternating-type IBS, there are no recently approved treatments for any but the most severely affected women, and none for men.

Dextofisopam is a novel non-serotonergic agent in development for the treatment of IBS. Dextofisopam is the R-enantiomer of racemic tofisopam. Pharmos holds an issued composition-of-matter patent in the United States on ~~dextofisopam~~Dextofisopam which expires in 2019. Pharmos owns certain counterpart foreign patents and patent applications, as well. Pharmos has filed additional patent applications for the treatment of IBS in the United States, and abroad.

Tianeptine to Treat IBS or Functional Dyspepsia. Tianeptine is a racemic molecule marketed and used outside the United States for the treatment of depression. Pharmos’ patent protection for tianeptine consists of a United States method-of-use patent covering tianeptine and its two enantiomers for the treatment of IBS and non-ulcer dyspepsia. This patent expires in 2024. Additional foreign patents related to this United States patent are pending.

Government Regulation

FDA and Comparable Authorities in Other Countries

Regulation by governmental authorities in the U.S. and other countries is a significant factor in our ongoing research and development activities and in the production and marketing of our products. Pharmaceutical products intended for therapeutic use in humans are governed in the U.S. by the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 321 et seq.) and by FDA regulations and by comparable agency regulations in other countries. Specifically, in order to undertake clinical tests, and to produce and market products for human therapeutic or diagnostic use, mandatory procedures and safety standards established by the FDA and Department of Health and Human Services in the U.S. and comparable agencies in other countries must be implemented and followed. These standards include protection of human research subjects.

The following is an overview of the steps that must be followed before a drug product may be marketed lawfully in the U.S.:

~~(i)~~ ~~Preclinical studies including pharmacology, laboratory evaluation and animal studies to test for initial safety and efficacy;~~

(i)

Preclinical studies including pharmacology, laboratory evaluation and animal studies to test for initial safety and efficacy;

(ii)

Submission to the FDA of an Investigational New Drug (IND) Application, which must become effective before human clinical trials may commence;

(iii)

Adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug in its intended application;

(iv)

Submission to the FDA of a New Drug Application (NDA), which application is not automatically accepted by the FDA for consideration; and

~~(ii)~~ ~~Submission to the FDA of an Investigational New Drug (IND) Application, which must become effective before human clinical trials may commence;~~

~~(iii)~~ ~~Adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug in its intended application;~~

~~(iv)Submission to the FDA of a New Drug Application (NDA), which application is not automatically accepted by the FDA for consideration; and~~

~~(v)~~ F~~DA approval of the New Drug Application prior to any commercial sale or shipment of the drug.~~

(v)

FDA approval of the New Drug Application prior to any commercial sale or shipment of the drug.

In addition to obtaining FDA approval for each product, each drug-manufacturing establishment must be registered or licensed by the FDA for each product sold within the US that is manufactured at that facility. Manufacturing establishments are subject to inspections by the FDA and by other national and local agencies and must comply with current Good Manufacturing Practices (cGMPs) requirements that are applicable to the manufacture of pharmaceutical drug products and their components.

Preclinical studies include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulation. The results of the preclinical studies are submitted to the FDA as part of an IND, and unless the FDA objects, the application will become effective 30 days following its receipt by the FDA. If the potential of addiction is found in the animal tests, then additional regulatory requirements may be imposed by the FDA and DEA.

Clinical trials involve the administration of the drug to healthy volunteers as well as to patients under the supervision of a qualified “principal investigator,” who is a medical doctor. Clinical trials in humans are necessary because effectiveness in humans may not always be gleaned from findings of effectiveness in animals. They are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the application. Each clinical study is approved and monitored by an independent Institutional Review Board (IRB) (Ethics Committee) at each clinical site. The IRB must consider, among other things, the process of obtaining the informed consents of each study subject, the safety of human subjects, the possible liability of the institution conducting a clinical study, as well as various ethical factors.

Clinical trials typically are conducted in three sequential phases, although the phases may overlap. In Phase I, the initial introduction of the drug to humans, the drug is tested in a small group of healthy volunteers for safety and clinical pharmacology such as metabolism and tolerance. Phase I trials may also yield preliminary information about the product’s effectiveness and dosage levels. Phase II involves detailed evaluation of safety and efficacy of the drug in patients with the disease or condition being studied. It also involves a determination of optimal dosage and identification of possible side effects in a larger patient group. Phase III trials consist of larger scale evaluation of safety and efficacy and usually require greater patient numbers and multiple clinical trial sites, depending on the clinical indications for which marketing approval is sought.

The process of completing clinical testing and obtaining FDA approval for a new product is likely to take a number of years and requires the expenditure of substantial resources. The FDA may grant an unconditional approval of a drug for a particular indication or may grant approval conditioned on further post-marketing testing. The FDA also may conclude that the submission is not adequate to support an approval and may require further clinical and preclinical testing, re-submission of the New Drug Application, and further review. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product for clinical indications other than those for which the product was approved initially. This could delay the NDA approval process.

The 1962 amendments to the Federal Food, Drug and Cosmetic Act required for the first time that drug effectiveness be proven by adequate and well-controlled clinical trials. The FDA interpretation of that requirement is that at least two such trials are necessary to demonstrate effectiveness for approval of an NDA. This interpretation is based on the scientific need for independent substantiation of study results. However, Section 115 of FDAMA revised Section 505 of the Act to read, in pertinent part that “based on relevant science, data from one adequate and well-controlled clinical investigation and confirmatory evidence … are sufficient to establish effectiveness.” The FDA has not issued comprehensive standards of testing conditions for pivotal trials. The FDA maintains a preference for at least two adequate and well-controlled clinical trials. Cannabinor and dexanabinol have been shown to be devoid of psychotropic properties, and Pharmos believes that the potential of addictive properties is remote. However, because cannabinor and dexanabinol are cannabinoids, the Company will conduct a test to specifically evaluate any addictive potential. If the test shows the possibility of addiction, additional regulatory requirements would have to be met which could delay the NDA approval process.

Pharmos’ products will be subject to foreign regulatory approval before they may be marketed abroad. Marketing beyond the US is subject to regulatory requirements that vary widely from country to country. In the European Union, the general trend has been towards coordination of the common standards for clinical testing of new drugs. Centralized approval in the European Union is coordinated through the European Medicines Evaluation Agency (EMEA). The time required to obtain regulatory approval from comparable regulatory

agencies in each country may be longer or shorter than that required for FDA or EMEA approval. Further, in certain markets, reimbursement may be subject to governmentally mandated prices.”

Corporate History

Pharmos Corporation, (formerly known as Pharmatec, Inc.) a Nevada corporation, was incorporated under the laws of the State of Nevada on December 20, 1982. On October 29, 1992, Pharmatec, the Nevada Corporation, completed a merger with a privately held New York corporation known as Pharmos Corporation founded by Dr. Haim Aviv (the name of the post-merger Nevada ~~corporation~~Corporation was changed to Pharmos Corporation).

Human Resources

As of December 31, ~~2008,~~2009, Pharmos had 4 full-time ~~and 1 part-time employees in the U.S. During the year the Company closed it operations in Israel resulting in the termination of 11 employees. Additionally, the Company terminated 3~~ employees in the U.S.

Pharmos’ employees are not covered by a collective bargaining agreement. To date, Pharmos has not experienced employment-related work stoppages and considers its employee relations to be excellent.

Public Funding and Grants

Pharmos’ subsidiary, Pharmos Ltd., has received certain funding from the Chief Scientist of the Israel Ministry of Industry and Trade (the Chief Scientist) for: (1) research and development of dexanabinol; (2) SubMicron Emulsion technology for injection and nutrition; (3) research relating to pilocarpine, dexamethasone and ophthalmic formulations for dry eyes; (4) research and development of CB2, including cannabinor. As of December 31, ~~2008,~~2009, the total amounts received under such grants amounted to $17,897,830. Under the terms of the grant agreements, aggregate future royalty payments related to sales of products developed, if any, as a result of the grants are limited to $16,408,890 based on grants received through December 31, ~~2008.~~2009. Pharmos will be required to pay royalties to the Chief Scientist ranging from 3% to 5% of product sales, if any, as a result of the research activities conducted with such funds. Aggregate royalty payments per product are limited to the amount of funding received to develop that product and interest. Additionally, funding by the Chief Scientist places certain legal restrictions on the transfer of know-how and the manufacture of resulting products outside of Israel. With the closure of the Israel location, the Company will not be eligible for further OCS grants and received none in ~~2008.~~2008 or 2009.

~~During 2004,~~The Company closed its operations in Israel effective August 31, 2008 and has subsequently reconciled and repaid a Chief Scientist grant that was overpaid. All obligations of the Company ~~signed an agreement with Consortium Magnet~~have been settled except the requirement to ~~develop a supply~~pay royalties should any of ~~water-soluble products of lipophilic compounds that improve their bioavailability~~the related technologies be licensed out and biopharmaceutical properties. Under such agreement the Company is entitled to a non-refundable grant amounting to approximately 60% of actual research and development and equipment expenditures on approved projects. No royalty obligations are required within the framework. As of December 31, 2006, the Company received grants totaling $546,609 from this program which was completed and closed.further developed.

Availability of SEC Filings

All reports filed by the Company with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 100 F Street NE, Washington, D.C., 20549. The company also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge available through its website at http://investors.pharmoscorp.com/sec.cfm as soon as reasonably practicable after filing electronically such material with the SEC. Copies are also available, without charge, from Pharmos Corporation, 99 Wood Avenue South, Suite 311, Iselin, NJ, 08830.

Item 1A. Risk Factors

We are very largely dependent upon the success of our lead drug candidate, Dextofiosopam, currently being developed for Irritable Bowel Syndrome, for diarrhea predominant patients.

We currently have one product candidate, Dextofisopam that has completed Phase 2b clinical trials. Our other drug candidate assets are in earlier stages of development and are not currently being developed. Our primary focus is on the development and partnering of Dextofisopam. We engaged Cowen and Company in late 2009 to help us accelerate and secure a partnership arrangement for Dextofisopam with a pharmaceutical company with greater scientific and financial resources than we have. If we fail to secure a partnership arrangement, or raise additional capital, our operations will need to be scaled back or discontinued.

We closed our operations in Israel in late 2008 and those earlier stage assets are available for licensing.

We are at an early stage of development.

We are at an early stage of development. Our sole product candidate, Dextofisopam, has completed a Phase 2b trial for the treatment of Irritable Bowel Syndrome (IBS). While the trial did not meet the primary endpoint, the drug treatment group at 200 mg demonstrated activity and secondary response variables of adequate relief of abdominal pain and discomfort, and overall IBS symptoms ratings showed statistical significance and trends favoring the Dextofisopam group compared to placebo. Although the primary efficacy variable did not reach statistical significance, the percentage responding for the Dextofisopam 200 mg group was higher than that observed in the successful Phase 2a trial. However, the placebo was also higher than the Phase 2a trial. We plan to seek a pharmaceutical partner with the appropriate GI clinical and scientific expertise for further development of Dextofisopam; however, there can be no assurance that we will be able to find such a partner. We have no other products in development.

We will need to raise additional capital.

Our ability to operate as a going concern is dependent upon raising adequate ~~financing.~~

~~Management believes that~~financing or securing a partnership arrangement for Dextofisopam. Except for 2001, the ~~current cash, cash equivalents~~Company has experienced operating losses every year since inception in funding the research, development and ~~short term investments, totaling $4.7~~clinical testing of our drug candidates. The Company had an accumulated deficit of $209.8 million as of December 31, ~~2008, will be sufficient to support our currently planned continuing operations through at least March 31, 2009. The above factors raise substantial doubt about our ability~~2009 and expects to continue ~~as a~~to incur losses going concern. We are actively pursuing various funding options, including equity offerings, equity-like financing, strategic corporate alliances, business combinations and the establishment of product relatedforward. Such losses have resulted principally from costs incurred in research and development ~~limited partnerships,~~and from general and administrative expenses. Previously the Company had financed its operations with public and private offerings of securities, advances and other funding pursuant to ~~obtain~~an earlier 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 (NOL’s), and interest income. Although the Company received $3.9 million in December 2009 from the sale of their NOL’s and had approximately $4.6 million of cash and cash equivalents at December 31, 2009, the Company is largely dependent upon achieving a collaboration with a pharmaceutical partner or raising additional ~~financing~~capital to ~~continue~~either advance its lead compound, Dextofisopam, for the ~~development~~treatment of ~~our products and bring them~~IBS or to ~~commercial markets. We are actively seeking~~advance other earlier stage intellectual property assets. During the year, the Company engaged an investment advisor to ~~raise capital and/or sell non-core assets. There can be no assurance that we will be~~assist with these strategies but has not been successful ~~in our efforts~~ to ~~raise additional capital. Should we be unable to raise adequate financing or generate revenue~~date. The Company has in the past pursued various funding and financing options; however management believes that future ~~our operations will need to~~funding or financing options may be ~~scaled back or discontinued.~~challenging because of the current environment.

Also, the Company does not currently have the finances and resources to complete full clinical trials for its lead compound, Dextofisopam. As a result it may decide to embark on smaller clinical trials for Dextofisopam or commence pre-clinical development on its other intellectual property assets which could further reduce the company’s current resources.

We ~~are~~have been delisted from Nasdaq.

On March 13, 2009, the Company was officially delisted from the Nasdaq Capital Market, and is currently trading on the OTCBB pink sheets. The Company was not in compliance with ~~Nasdaq’s continued listing standards.~~

~~On September 26, 2007, we received notice from The Nasdaq Stock Market (“Nasdaq”) that~~ the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive business days and that we were therefore not in compliance with Nasdaq listing rules. We had until March 24, 2008 (180 calendar days from September 26, 2007) to regain compliance. On March 25, 2008, Pharmos received notice from Nasdaq that, in accordance with Marketplace Rule 4310(c)(8)(D), Pharmos was provided an additional period of 180 calendar days, or until September 22, 2008, to regain compliance.

On September 23, 2008, we were notified by Nasdaq that we had failed to regain compliance with Marketplace Rule 4310. We requested a hearing on the matter. Subsequent to the hearing request, we received notice from Nasdaq that the minimum bid price and market value of publicly held shares requirements were suspended through January 16, 2009 which has been again extended to April 20, 2009.

~~On November 11, 2008, we received notice from Nasdaq that we were not in compliance with Nasdaq Marketplace Rule 4310(c)(3), which requires us to have a minimum of~~ $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. At December 31, 2008, our stockholders’ equity was $341,219, the market value of our listed securities was $2,096,823, and we have had net losses from its continuing operations for the three most recently completed fiscal years. ~~We were granted additional time to February 24, 2009 to regain compliance. We have not regained compliance and have the option of requesting an appeal hearing.~~

Nasdaq rules regarding the composition of an audit committee require three independent directors. With the resignation of Lloyd Miller on August 5, 2008, the committee is currently composed of two members with Dr. Evnin being designated a financial expert. The Company plans to increase the size of the board and board committees upon the successful completion of a financing.

~~Under these circumstances, Nasdaq is reviewing our eligibility~~requirement for continued listing and was unable to comply during the grace period extended by Nasdaq. As a result of trading on the Nasdaq Capital Market. In order to facilitate this review, we provided to Nasdaq, our specific plan to achieve and sustain compliance with all of the Nasdaq continued listing requirements, including the time frame for completion of the plan. Regaining compliance is contingent upon completion of a financing.

~~No assurance can be given that we will regain compliance with Nasdaq’s continued listing standards. If our common stock were to be delisted from Nasdaq,~~OTCBB pink sheets, liquidity for our common stock ~~could~~may be significantly decreased which could reduce ~~the~~ trading price and increase the transaction costs of trading shares of ~~our~~the company’s common stock.

The price of our Common Stock may experience volatility.

The trading price of our Common Stock could be subject to wide fluctuations in response to variations in our quarterly operating results, the failure of trial results, the failure to bring products to market, conditions in the industry, and the outlook for the industry as a whole or general market or economic conditions. In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many companies, often unrelated to the operating performance of the specific companies. Such market fluctuations could have a material adverse effect on the market price for our securities.

We have certain obligations to indemnify our officers and directors.

We have certain obligations to indemnify our officers and directors and to advance expenses to such officers and directors. Although we have purchased liability insurance for our directors and officers, if our insurance carriers should deny coverage, or if the indemnification costs exceed the insurance coverage, we may be forced to bear some or all of these indemnification costs directly, which could be substantial and may have an adverse effect on our business, financial condition, results of operations and cash flows. If the cost of our liability insurance increases significantly, or if this insurance becomes unavailable, we may not be able to maintain or increase our levels of insurance coverage for our directors and officers, which could make it difficult to attract or retain qualified directors and officers.

~~We are at an early stage of development.~~

We are at an early stage of development. Our sole product candidate, dextofisopam, has completed Phase 2a testing for irritable bowel syndrome (“IBS”), and patient screening commenced for a Phase 2b study of dextofisopam for the treatment of IBS in June 2007. The success of the Company is now binary, in that if the Phase 2b results are not positive, the Company has no other products in development. Additionally, the Company needs to raise further capital to complete the current Phase 2b Dextofisopam trial.

We have a history of operating losses and expect to sustain losses in the future.

We have experienced significant operating losses since our inception. As of December 31, ~~2008,~~2009, we had an accumulated deficit of approximately ~~$207~~$210 million. We expect to incur operating losses over the next several years as our research and development efforts and preclinical and clinical testing activities continue. Our ability to generate revenues and achieve profitability depends in part upon our ability, alone or with others, to successfully complete development of our proposed products, to obtain required regulatory approvals and to manufacture and market our products.

Our product candidates may not successfully complete clinical trials required for commercialization, and as a result our business may never achieve profitability.

To obtain regulatory approvals needed for the sale of our drug candidates, we must demonstrate through testing and clinical trials that each drug candidate is both safe and effective for the human population that it was intended to treat. In general, two successful Phase III clinical trials are required. The clinical trial process is complex and the regulatory environment varies widely from country to country. Positive results from testing and early clinical trials do not ensure positive results in the Phase III human clinical trials. Many companies in our industry have suffered significant setbacks in Phase III, potentially pivotal clinical trials, even after promising results in earlier trials. The results from our trials, if any, may show that our drug candidates produce undesirable side effects in humans or that our drug candidates are not safe or effective or not safe or effective enough to compete in the marketplace. Such results could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a drug candidate. Moreover, we, the FDA, or foreign regulatory authorities may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks or that our drug candidates are not safe or effective enough. Clinical trials are lengthy and expensive. They require adequate supplies of drug substance and sufficient patient enrollment. Patient enrollment is a function of many factors, including:

~~the size of the patient population,~~

·	the size of the patient population,

~~• the nature of the protocol (i.e., how the drug is given, and the size and frequency of the dose and use of placebo control),~~

·	the nature of the protocol (i.e., how the drug is given, and the size and frequency of the dose and use of placebo control),

~~the proximity of patients to clinical sites, and~~

·	the proximity of patients to clinical sites, and

~~• the eligibility criteria for the clinical trial (i.e., age group, level of symptoms, concomitant diseases or medications etc.).~~

·	the eligibility criteria for the clinical trial (i.e., age group, level of symptoms, concomitant diseases or medications etc.).

Delays in patient enrollment or negative trial outcomes can result in increased costs and longer development times. Even if we successfully complete clinical trials, we may not be able to file any required regulatory submissions in a timely manner and we may not receive regulatory approval for the particular drug candidate that was tested.

In addition, if the FDA or foreign regulatory authorities require additional clinical trials, we could face increased costs and significant development delays. Changes in regulatory policy or additional regulations adopted during product development and regulatory review of information we submit could also result in delays or rejections.

Our clinical trials depend on third party investigators who are outside our control.

We depend upon the personnel of third party independent investigators to conduct our clinical trials. Such personnel are not our employees, and we cannot control the amount of time or resources that they devote to our programs. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If such third-party personnel fail to devote sufficient time and resources to our clinical trials, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. Such third-party investigators may also have relationships with other commercial entities that compete with us. If they assist our competitors at our expense, our competitive position would be harmed.

We face extensive governmental regulation and any failure to adequately comply could prevent or delay product approval or cause the disallowance of our products after approval.

The FDA and comparable agencies in foreign countries impose many requirements on the introduction of new drugs through lengthy and detailed clinical testing procedures, and other costly and time consuming compliance procedures. These requirements make it difficult to estimate when any of our products in development will be available commercially, if at all. In addition, the FDA or other comparable agencies in foreign countries may impose additional requirements in the future that could further delay or even stop the commercialization of our products in development.

Our proprietary compounds in development require substantial clinical trials and FDA review as new drugs. Even if we successfully enroll patients in our clinical trials, patients may not respond to our potential drug products. We think it is prudent to expect setbacks and possible product failures. Failure to comply with the regulations applicable to such testing may delay, suspend or cancel our clinical trials, or the FDA might not accept the test results. The FDA, or any comparable regulatory agency in another country, may suspend clinical trials at any time if it concludes that the trials expose subjects participating in such trials to unacceptable health risks. Further, human clinical testing may not show any current or future product candidate to be safe and effective to the satisfaction of the FDA or comparable regulatory agencies or the data derived there from may be unsuitable for submission to the FDA or other regulatory agencies.

We cannot predict with certainty when we might submit any of our proposed products currently under development for regulatory review. Once we submit a proposed product for review, the FDA or other regulatory agencies may not issue their approvals on a timely basis, if at all. If we are delayed or fail to obtain such approvals, our business may be damaged due to the resulting inability to generate revenues from the sale of such product. If we fail to comply with regulatory requirements, either prior to approval or in marketing our products after approval, we could be subject to regulatory or judicial enforcement actions. These actions could result in:

	•·	injunctions;
	•	~~criminal prosecution;~~

·	criminal prosecution;

•·

refusals to approve new products and withdrawal of existing approvals; and

•

enhanced exposure to product liabilities.

We ~~may~~ need to find collaborative partners.

Our strategy for the development, clinical testing, manufacture, marketing and commercialization of our products includes the use of collaborations with corporate partners, licensors, licensees and others.

Due to the often unpredictable nature of the collaboration process, we cannot be sure that any present or future collaborative agreements will be successful. To the extent we choose not to or are not able to establish such arrangements, we would experience increased capital requirements. In addition, we may encounter significant delays in introducing our products currently under development into certain markets or find that the development, manufacture, or sale of those products is hindered by the absence of collaborative agreements due to the relatively small size of our company as compared with that of some of our potential competitors.

The value of our research could diminish if we cannot protect or enforce our intellectual property rights adequately.

We actively pursue both domestic and foreign patent protection for our proprietary products and technologies. We have filed for patent protection for our technologies in all markets we believe to be important for the development and commercialization of our drug products; however, our patents may not protect us against our competitors. We may have to file suit to protect our patents or to defend our use of our patents against infringement claims brought by others. Because we have limited cash resources, we may not be able to afford to pursue or defend against litigation in order to protect our patent rights. As a result, while we currently have no specific concerns about gaps in our intellectual property portfolio, we recognize that for companies like ours, where intellectual property constitutes a key asset, there is always a risk that a third party could assert a patent infringement claim or commence a patent interference action. Defending against any such claims or actions could be very costly to us, even if they were without merit.

We also rely on trade secret protection for our unpatented proprietary technology. However, trade secrets are difficult to protect. While we enter into proprietary information agreements with our employees and consultants, these agreements may not successfully protect our trade secrets or other proprietary information.

We face large competitors and our limited financial and research resources may limit our ability to develop and market new products.

The pharmaceutical industry is highly competitive. We compete with a number of pharmaceutical companies that have financial, technical and marketing resources that are significantly greater than ours. Some companies with established positions in the pharmaceutical industry may be better equipped than we are to develop, market and distribute products in the global markets we seek to enter. A significant amount of pharmaceutical research is also being carried out at universities and other not-for-profit research organizations. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology they have developed. They may also market competitive commercial products on their own or through joint ventures and may compete with us in recruiting highly qualified scientific personnel. Further, these institutions may compete with us in recruiting qualified patients for enrollment in their trials.

We are pursuing areas of product development in which there is a potential for extensive technological innovation. Our competitors may succeed in developing products that are more effective than those we develop. Rapid technological change or developments by others may result in our potential products becoming obsolete or non-competitive.

We lack manufacturing capability.

Other than for the production of clinical trial material, we currently do not have manufacturing facilities. Should any of our products receive approval for marketing, we would likely need to find third party manufacturers to assist in their production. If we should be unable to find such manufacturers with which to work on commercially reasonable terms, it could delay or restrict any potential revenues from such products.

We use hazardous materials in our research.

As with most other pharmaceutical companies, our research and development involves the controlled use of hazardous materials. Our laboratories store and/or produce carbon monoxide, nitric acid and ammonia. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply in all material respects with the standards prescribed by government regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any resulting damages which may or may not be covered by insurance.

	December 31, 2009		December 31, 2008
Working capital	$	4,238,033	$	4,232,549
Cash and cash equivalents	$	4,629,486	$	4,730,282
Convertible debentures	$	1,000,000	$	4,000,000

Current working capital position

As of December 31, ~~2008,~~2009, the Company had working capital of $4.2 million consisting of current assets of $4.6 million and current liabilities of $0.4 million. This represents no net change from its working capital of $4.2 million on current assets of $5.8 million and current liabilities of $1.6 ~~million. This represents a decrease of $5.3 million from its working capital of $9.5 million on current assets of $11.5 million and current liabilities of $2.0~~ million as of December 31, ~~2007.~~2008.

Current and future liquidity position

~~Management believes that~~At December 31, 2009 the ~~current~~Company had approximately $4.6 million of cash and cash equivalents, ~~and short term investments, totaling $4.7 million as of December 31, 2008, will~~which at current operating levels should be sufficient to ~~support~~continue operations at least through December 31, 2011. However, the Company’s ~~currently planned continuing operations through at least March 31, 2009 The above factors raise substantial doubt about~~success will be dependent upon achieving a pharmaceutical partnership for the ~~Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from~~advancement of its lead compound, Dextofisopam for the ~~outcome~~treatment of ~~this uncertainty.~~IBS. Further, the Company may embark on smaller clinical trials, the expense of which would reduce cash resources available.

The Company ~~is continuing to actively pursue~~has in the past pursued various funding options, including additional equity offerings, strategic corporate alliances, and business combinations, as well as grants and the ~~establishment~~sale of ~~product related research and development limited partnerships to obtain additional financing to continue the development~~some of its ~~products~~New Jersey net operating loss carry forwards. Future equity financings will be challenging because of the low market capitalization of the Company and ~~bring them~~the move from the Nasdaq market to ~~commercial markets.~~trading on the over the counter Pink Sheets in March 2009.

Cash

At December 31, 2009, cash and cash equivalents totaled $4.6 million. At December 31, 2008 cash and cash equivalents totaled $4.7 million. ~~At December 31, 2007 cash and cash equivalents totaled $7.5 million.~~ This net decrease in cash of ~~$2.8~~$0.1 million was due to the utilization of cash for operating ~~activities.~~activities offset by the proceeds from the sale of the NJ NOL and the equity financing. The cash and cash equivalents ~~in combination with the short term investments,~~ will be used to finance future operating expenses.

~~A deposit of $38,998 was included in restricted cash at December 31, 2008 relating to the Pharmos Ltd. lease.~~

Operating activities

Net cash used in operating activities for ~~2008~~2009 was ~~$11.0~~$2.3 million compared to ~~$15.4~~$11.0 million for ~~2007.~~2008. The decrease is primarily attributed to lower research and development expenses and general and administrative expenses incurred in ~~2008. General~~2009. Research and development expenses declined from $9.0 million in 2008 to $4.4 million in 2009 while general and administrative expenses declined from ~~$6.7 million in 2007 to~~ $2.0 million in ~~2008.~~2008 to $1.5 million in 2009.

Capital expenditures

Our capital expenditures for property, plant and equipment for 2009, 2008 ~~2007~~ and ~~2006~~2007 totaled approximately $0, $2,000 ~~$177,000~~ and ~~$165,000~~$177,000 respectively for normal replacements and improvements.

Investing activities

In ~~2008, all~~2009 the only significant activity was the cash received related to the disposition of the Companies short term investment positions were either sold or matured by March 31, 2008. The short term investment proceeds of $3,686,568 were held as cash and cash equivalents. Prior to 2008, short term investments were reinvested upon maturity to the extent that the funds are not needed to meet operating activity cash flow needs.Israeli fixed assets.

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 were 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

Financing activities

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 andIn April 2009 the proceeds from ~~maturities~~the issuance of ~~short term securities~~common stock and ~~sales~~warrants, net of ~~auction rate securities.~~

~~At December 31, 2007 we held $2,650,000~~issuance costs, were recorded in ~~Auction Rate Securities (“ARS”). As~~the amount of March 31, 2008 all ARS securities were sold and converted to cash and cash equivalents with no loss of principal. Commencing March 31, 2008 all investible cash was held in government money market securities.

$1,779,777.

Common Stock Transactions

At the closing of the Vela Pharmaceuticals Inc. acquisition on October 25, 2006, the Company issued 6.5 million shares of common stock and paid $6 million to Vela shareholders. Pharmos also agreed to reimburse Vela for $679,000 of operating expenses from July 1, 2006 through closing. The amended Merger Agreement also includes additional performance-based milestone payments to the Vela stockholders related to the development of ~~dextofisopam,~~Dextofisopam, aggregating up to an additional $8 million in cash and the issuance of up to an additional 13,500,000 shares of Pharmos common stock. In the event that such shares or payments are issued or funded in future periods, a determination will then be made as to whether the values are to be written off as in-process research and development and charged to results of operations; any such future charge could be material. None of the conditions requiring issuance of these contingent shares or funding these payments had been met as of December 31, 2008 except for a $1.0 million milestone payment made by Pharmos due upon the study’s commencement.

On January 3, 2008, the Company entered into an Amendment to the Merger Agreement relating to its acquisition of Vela. The Amendment defers the payment by the Company of certain cash milestones payable by the Company to the former stockholders of Vela upon (A) the enrollment of the final patient in the Company’s current Phase 2b clinical trial for ~~dextofisopam~~Dextofisopam ($1 million payment obligation) and (B) the successful completion of such Phase 2b trial ($2 million payment obligation). Payment of such cash milestones will be deferred until such time as (X) the Company has successfully entered into a strategic collaboration or licensing agreement with a third party for the development of ~~dextofisopam~~Dextofisopam resulting in an upfront cash fee of at least $10 million, or a financing with net proceeds of at least such amount, and (Y) payment of one or both of the cash milestones would still leave the Company with at least one year’s operating cash. Additionally, the Company’s obligations to issue to the former Vela stockholders 2 million ~~share~~shares of Common Stock after final patient enrollment in the ~~dextofisopam~~Dextofisopam Phase 2b clinical trial and was deferred until November 2009, and the 2 million patient enrollment milestone shares were issued in November 2009. Finally the 2.25 million shares of Common Stock after a successful Phase 2b trial milestone was not met as the Phase 2b dextofisopam trial did not meet its primary endpoints, as it did not meet the definition of a successful trial. Therefore the 2.25 million shares related to this milestone are ~~deferred until November 2009.~~not payable.

Other

In 2009, 2008, ~~2007,~~ and ~~2006,~~2007, the Company sold $49,707,690, $15,290,510 ~~$12,136,911,~~ and ~~$7,781,267,~~$12,136,911, respectively, of its State Net Operating Loss carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the Program). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The proceeds from the sale in 2009, 2008, and 2007 were $3,914,481, $1,204,128 and ~~2006 were $1,204,128,~~ $955,782, ~~and $612,775,~~ respectively and such amounts were recorded as a tax benefit in the consolidated statements of operations. The New Jersey State Governor must approve the Program each year on July 1st within the approval of the annual state budget. The maximum amount of benefits a participant can apply to sell is capped at $10,000,000 annually per company. The remaining NOL’s which qualify under the program through 2008 amount to $6,890,541. When the 2009 tax returns are finalized they too will be included in the Company’s application to sell losses. We cannot be certain if we will be able to sell any of our remaining or future carryforwards under the Program.

Under Internal Revenue Code Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the Company’s net operating losses (NOL) asset may be impaired. The Company believes that substantially all of its Federal NOL ~~generated since 1995 are not impaired, except for approximately $60 million relating~~is subject to ~~Vela’s results of operations prior~~restrictions as to ~~Vela’s acquisition by Pharmos. Should the Company be successful with the capital raise it is seeking, it is likely that a Section 382 ownership change will occur and thus restrict the~~ future use ~~of the Federal NOL’s.~~in accordance with IRS Code Section 382.

Commitments and Long Term Obligations

The table below sets out our current contractual obligations. However, the nature of these contracts with various clinical research organizations is such that work may have to be stopped with very short notice and we will then only be obligated to pay costs incurred to date.

	Payments Due by Period												Payments Due by Period
	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years		Undetermined		Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years		Undetermined
Operating Leases	$	235,399	$	232,654	$	2,745	$	-	$	-	$	-	$	45,945	$	45,945	$	-	$	-	$	-	$	-
ICON CRO Vendor		1,332,401		1,332,401
Essential CRO Vendor		3,610,518		3,610,518
Convertible Debenture Interest		1,533,333		400,000		800,000		333,333						283,333		100,000		183,333
Convertible Debenture		4,000,000		-		-		4,000,000		-		-		1,000,000		-		1,000,000		-		-		-
Total	$	10,711,651	$	5,575,573	$	802,745	$	4,333,333	$	-	$	-	$	1,329,278	$	145,945	$	1,183,333	$	-	$	-	$	-

In connection with the acquisition of Vela Pharmaceuticals which closed on October 25, 2006 the Company is obligated to pay certain performance based milestones connected to the development of ~~dextofisopam.~~

The $1.0 million cash milestone payable when the first patient enrolled in the Phase 2b trial was paid on June 26, 2007 as that milestone was achieved in the second quarter of 2007. Such amount was included in research and development expense (net).Dextofisopam.

The remaining potential future milestones are as follows:

$1 million cash + 2 million shares of Pharmos common stock: Final patient enrolled in Phase 2b trial (1)

$2 million cash + 2.25 million shares: Successful completion of Phase 2b~~(1)~~

(milestone not met)

$2 million + 2 million shares: NDA submission

$2 million cash +2.25 million shares: FDA approval

1 million shares: Approval to market in Europe or Japan

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

(1) The ~~above milestones have been amended~~milestone related the final patient was enrolled in the Dextofisopam Phase 2b trial was booked in the first quarter of 2009 as all probability criteria were met. The milestone had two components, a cash portion of $1,000,000 and ~~deferred as~~ a ~~condition~~share portion of 2,000,000 shares valued at $180,000. The total charge was $1,180,000. The shares were issued in November 2009. The payment of the ~~convertible debentures issued January 3, 2008. If the respective milestone is achieved, payment of these milestones will be~~cash portion was deferred until such time as 1) the Company ~~has~~ successfully entered into a strategic collaboration or licensing agreement with a third party for the development of ~~dextofisopam~~Dextofisopam resulting in an upfront cash fee orof at least $10 million, and 2) payment of ~~one or both of~~ the cash ~~milestones~~milestone would still leave the Company with ~~at least~~ one year’s operating cash. ~~Additionally,~~

The Company recorded the milestone in the first quarter as it met the accounting requirements of under ACS 450. The results of the Phase 2b trial were announced in September 2009 and reported that while there was clearly drug activity, the trial did not achieve its primary endpoints. Cowen and Company were subsequently engaged to help the Company achieve a pharmaceutical partnership. Under the terms of the Vela acquisition agreement ~~has~~as amended, the 2 million shares were issued on November 2, 2009. The cash portion was also expensed in Q1 2009 but was reversed in Q4 2009 since it is not probable that the amended terms will be met in the foreseeable future, which includes receipt of at least $10 million cash upfront payment. Since the trial results were not successful, no other milestones have been ~~amended to defer the equity milestones issuable to the Vela shareholders related to such Phase 2b events until November 2009 at the earliest.~~

achieved.

Management believes that the current cash and cash equivalents, ~~and short term investments,~~ totaling ~~$4.7~~approximately $4.6 million as of December 31, ~~2008,~~2009, will be sufficient to support the Company’s currently planned continuing operations through at least ~~March~~December 31, 2009. The above factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.2011.

The Company’s strategic focus is to seek a pharmaceutical partnership for its lead compound Dextofisopam for IBS-D. The Company ~~is continuing to actively~~may pursue ~~various funding options, including additional equity offerings,~~ strategic corporate alliances, and / or business combinations ~~and the establishment of product related research and development limited partnerships~~ to ~~obtain additional financing to continue~~advance the development of ~~its products and bring them to commercial markets.~~Dextofisopam.

New accounting pronouncements

Recently Issued Accounting Standards

In ~~September 2006,~~August 2009, the FASB issued ~~SFAS~~Accounting Standards Update No. ~~157, “Fair~~2009-05, Measuring Liabilities at Fair Value ~~Measurements” (“SFAS 157”~~ ("ASU 2009-05"). ~~SFAS 157 establishes~~ASU 2009-05 amends Accounting Standards Codification Topic 820, Fair Value Measurements. Specifically, ASU 2009-05 provides clarification that in circumstances in which a ~~single authoritative definition of~~quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value ~~sets out~~using one or more of the following methods: (1) a ~~framework~~valuation technique that uses (a) the quoted price of the identical liability when traded as an asset or (b) quoted prices for ~~measuring~~similar liabilities or similar liabilities when traded as assets and/or (2) a valuation technique that is consistent with the principles of Topic 820 of the Codification (e.g. an income approach or market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption of this standard did not have an impact on the Company's financial statements other than the requisite disclosures.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). The consensus to ASU 2009-13 provides accounting principles and ~~requires additional disclosures about fair-value measurements. SFAS 157 applies only~~application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value ~~measurements that are already required or permitted by~~of undelivered products and services and instead provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other ~~accounting standards (except for measurements of share-based payments) and is expected~~means to ~~increase~~determine the ~~consistency of those measurements. Accordingly, SFAS 157 does not require any new~~ fair value ~~measurements. However,~~of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for ~~some entities,~~each item when the ~~application~~item is sold separately by the vendor. Under EITF 00-21, if the fair value of ~~SFAS 157 will change current practice. SFAS 157~~all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after ~~November~~June 15, ~~2007,~~2010 and ~~interim periods within those fiscal years. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.~~

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

On June 27, 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-03”). Currently, under FASB Statement No. 2, “Accounting for Research and Development Costs”, nonrefundable advance payments for future research and development activities for materials, equipment, facilities, and purchased intangible assets that have no alternative future use are expensed as incurred. EITF 07-03 addresses whether such non-refundable advance payments for goods or services that have no alternative future use and that will be used or rendered for research and development activities should be expensed when the advance payments are made or when the research and development activities have been performed. The consensus reached by the FASB requires companies involved in research and development activities to capitalize such non-refundable advance payments for goods and services pursuant to an executory contractual arrangement because the right to receive those services in the future represents a probable future economic benefit. Those advance payments will be capitalized until the goods have been delivered or the related services have been performed. Entities will be required to evaluate whether they expect the goods or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment will be charged to expense. The consensus on EITF 07-03 is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. Entities are required to recognize the effects of applying the guidance in EITF 07-03 prospectively for new contracts entered into after the effective date. The Company adopted EITF 07-03 on January 1, 2008. At December 31, 2008 there was $519,000 in capitalized prepayments.

3430

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable users of the financial statements to better understand the effects on an entity’s financial position, financial performance, and cash flows. It is effective

allows for ~~financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.~~retroactive application. The Company is currently evaluating the potential impact of ~~adopting SFAS 161~~this standard on ~~our~~its financial ~~statements.~~position and results of operations.

In May 2008, the FASB issued ~~FSP Accounting Principles Board ("APB") 14-1,~~standards relating to "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("These are covered by ASC Topic 470 (formerly FSP APB 14-1"). ~~FSP APB 14-1~~Topic 470 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability

(debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. ~~FSP APB 14-1 is~~The standard was effective for fiscal years beginning after December 15, 2008 on a retroactive ~~basis and will be~~basis. The Company adopted by the ~~Company~~standard in the first quarter of ~~its year ending December 31,~~ 2009. The ~~Company is currently evaluating~~adoption of this standard did not have an impact on the ~~impact that FSP APB 14-1 will have on its~~Company's financial ~~statements.~~position or results of operations.

Item 7A. 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 and cash equivalents, short term investments and restricted cash. Due to the short-term nature of the cash and cash equivalents, short term investments and restricted cash, we have determined that the risks associated with interest rate fluctuations related to these financial instruments do not pose a material risk to us.

Item 8. Financial Statements and Supplementary Data

The information called for by this Item 8 is included following the “Index to Consolidated Financial Statements” contained in this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

~~None.~~On October 19, 2009, Pharmos Corporation dismissed its independent registered public accounting firm, PricewaterhouseCoopers LLP. The dismissal was approved by the Pharmos Audit Committee. During the two most recent fiscal years and through October 19, 2009, there have been no disagreements between Pharmos and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their reports on the financial statements for such years. During the two most recent fiscal years and through October 19, 2009, there were no reportable events (as defined in Item 304(a)(1)(v)) of Regulation S-K. Neither of the reports of PricewaterhouseCoopers LLP for the past two years contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, except that their report dated February 25, 2009 contained an explanatory paragraph expressing substantial doubt about Pharmos' ability to continue as a going concern. On October 20, 2009, Pharmos Corporation engaged Friedman LLP as its new independent accounting firm.

Item ~~9A.~~9A(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by our company in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the principal executive officer and principal 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.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we

conducted an evaluation of the effectiveness of Pharmos’ internal control over financial reporting based on the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded that Pharmos’ internal control over financial reporting was effective as of December 31, ~~2008.~~2009. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

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.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The directors, officers and key employees of the Company are as follows:

Name	Age	Position
Robert F. Johnston	72 73	Executive Chairman of the Board of Directors
S. Colin Neill	62 63	President, Chief Financial Officer, Secretary and Treasurer
Srinivas Akkaraju, MD, Ph.D*	40 41	Director
Anthony B. Evnin, Ph.D*	67 68	Director
Charles W. Newhall III	64 65	Director

*	Members of the Audit Committee

Robert F. Johnston became Executive Chairman of the Board of Directors of Pharmos in January 2008. Mr. Johnston, a venture capitalist, is President of Johnston Associates which he founded in 1968 to provide financing for emerging companies in the biotechnology and healthcare fields. Mr. Johnston was a founder and Chairman of Vela Pharmaceuticals, Inc., which merged into Pharmos in late 2006, and has founded numerous public companies including Sepracor, Cytogen, I-STAT (sold to Abbott), Ecogen, Genex and ~~Envirogen.~~Envirogen (sold to Shaw Environmental). He also played an active and key role in the early formations of private companies such as Sonomed, Immunicon (sold to J&J), PharmaStem (formerly Biocyte), ExSAR and Targent. Mr. Johnston served as CEO of Cytogen from July 1988 to April 1989. He is also a member of the Advisory Council of the Department of Molecular Biology at Princeton ~~University and the Executive Committee of the Friends of the Institute for Advanced Study in Princeton, as well as Founder~~University. Mr. Johnston is a founder and President of Educational Ventures, a foundation focused on funding improvements in the educational system; and Vice-Chairman of Center for Education Reform (CER) an advocate for charter schools. Mr. Johnston received his ~~B.A.~~B.A from Princeton University and his M.B.A. from New York University.

S. Colin Neill became President of Pharmos in January 2008, and has served as Chief Financial Officer, Secretary, and Treasurer of Pharmos since October 2006. Prior to becoming President, he also served as Senior Vice President from October 2006 to January 2008. From September 2003 to October 2006, Mr. Neill served as Chief Financial Officer, Treasurer and Secretary of Axonyx Inc., a biopharmaceutical company that ~~develops~~developed products and technologies to treat Alzheimer's disease and other central nervous system disorders, where he played an integral role in the merger between Axonyx and TorreyPines Therapeutics Inc., a privately-held biopharmaceutical company. Mr. Neill served as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of ClinTrials Research Inc., a $100 million publicly traded global contract research organization in the drug development business, from 1998 to its successful sale in 2001. Following that sale from April 2001 to September 2003 Mr. Neill served as an independent consultant assisting small start-up and development stage companies in raising capital. Earlier experience was gained as Vice President Finance and Chief Financial Officer of BTR Inc., a $3.5 billion US subsidiary of BTR plc, a British diversified manufacturing company, and Vice President Financial Services of The BOC Group Inc., a $2.5 billion British owned industrial gas company with substantial operations in the health care field. Mr. Neill served four years with American Express Travel Related Services, first as chief internal auditor for worldwide operations and then as head of business planning and financial analysis. Mr. Neill began his career in public accounting with Arthur Andersen LLP in Ireland and later with Price Waterhouse LLP as a senior manager in New York City. He also served with Price Waterhouse for two years in Paris, France. Mr. Neill graduated from Trinity College, Dublin with a first class honors degree in Business/Economics and he holds a masters degree in Accounting and Finance from the London School of Economics. He is a Certified Public Accountant in New York State and a Chartered Accountant in Ireland. Mr. Neill serves on the board of Pro Pharmaceuticals, Inc. and from April 2004 to June 2008 on the board of OXIS International, Inc.

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Srinivas Akkaraju, M.D., Ph.D.,, a director since October 2006, is a Managing Director of New Leaf Venture Partners. Dr. Akkaraju joined New Leaf in January 2009. Previously he was a managing director of Panorama Capital, LLC, a private equity firm founded by the former venture capital investment team of J.P. Morgan Partners, LLC, and a private equity division of JPMorgan Chase & Co. Panorama Capital is advising J.P. Morgan Partners as to its investment in the Company. Prior to August 1, 2006, Dr. Akkaraju was a Partner with J.P. Morgan Partners, LLC which he joined in April 2001. Prior to JPMorgan Partners, LLC, from October 1998 to April 2001, Dr. Akkaraju was in the Business and Corporate Development group at Genentech, Inc. where he served in various capacities, most recently as Senior Manager and project team leader for one of Genentech’s clinical development products. Dr. Akkaraju is currently a member of the Board of Directors of ~~Amarin, Inc.,~~ Seattle Genetics, Inc., and several private biotechnology companies. Dr. Akkaraju received his undergraduate degrees in Biochemistry and Computer Science from Rice University and his M.D. and Ph.D. in Immunology from Stanford University.

Anthony B. Evnin, Ph.D.,, a director since October 2006, is a ~~General~~ Partner of Venrock, a venture capital firm, where he has been a Partner since 1975. He is currently a member of the Board of Directors of Icagen, Inc., and Infinity Pharmaceuticals, ~~Inc and Sunesis Pharmaceuticals,~~ Inc., as well as being on the Board of Directors of a number of private companies. Dr. Evnin is a Trustee of The Rockefeller University, a Trustee Emeritus of Princeton University, and a Member of the Board of Overseers of Memorial Sloan-Kettering Cancer Center. He received an A.B. in Chemistry from Princeton University and a Ph.D. in Chemistry from the Massachusetts Institute of Technology.

Charles W. Newhall, III,, a director since October 2006, co-founded New Enterprise Associates (NEA). Founded in 1977, Baltimore-based NEA is one of the largest Venture Capital firms in the United States. To date Mr. Newhall has served as a director of over 40 venture backed companies. Many have gone public and have been acquired. Several of these companies achieved market capitalizations in excess of $1 billion. He also started several healthcare information technology companies like PatientKeeper, TargetRx, and LifeMetrix. Some of his current board memberships include Vitae Pharmaceuticals, Supernus Pharmaceuticals, Bravo Health, TargetRx, Sensors for Medicine and Science, and BrainCells Inc. In 1986 he founded the Mid-Atlantic Venture Capital Association (MAVA), which now has over 80 venture capital firms that are members, and is one of the most active regional venture associations in the country. He is Chairman Emeritus of MAVA. Before NEA, Mr. Newhall was a Vice President of T. Rowe Price. He served in Vietnam commanding an independent platoon including an initial reconnaissance of Hamburger Hill. His decorations include the Silver Star and Bronze Star V (1st OLC). He received an MBA from Harvard Business School, and an Honors Degree in English from the University of Pennsylvania.

Role of the Board; Corporate Governance Matters

It is the paramount duty of the Board of Directors to oversee the Chief Executive Officer and other senior management in the competent and ethical operation of the Company on a day-to-day basis and to assure that the long-term interests of the shareholders are being served. To satisfy this duty, the directors set standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics.

Members of the Board bring to the Company a wide range of experience, knowledge and judgment. The governance structure in the Company is designed to be a working structure for principled actions, effective decision-making and appropriate monitoring of both compliance and performance. The key practices and procedures of the Board are outlined in the Company’s Code of Ethics and Business Conduct, which is available on the Company’s website at www.pharmoscorp.com. Click “Investors,” and then “Corporate Governance.”

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If the stock is sold or gifted within either one year after the date of purchase or two years after the date of grant (a “disqualifying disposition”), the participant generally will have taxable ordinary income at the time of the sale or gift to the extent that the fair market value of the stock at the date of exercise was greater than the exercise price. This amount will be taxable in the year of sale or disposition even if no gain is realized on the sale, and the Company would be entitled to a corresponding deduction. A capital gain would be realized upon the sale of the shares to the extent the sale proceeds exceed the fair market value of those shares on the date of purchase. A capital loss would be realized to the extent the sales price of the shares disposed of is less than the fair market value of such shares on the date of purchase. Special tax consequences may follow from dispositions other than a sale or gift.

2009 Incentive Compensation Plan.

~~1997 Employees~~Under the 2009 Plan, the total number of shares of common stock of our company reserved and ~~Directors Warrants~~available for delivery is 8,000,000 shares. The foregoing limit shall be increased by the number of shares of common stock with respect to which awards previously granted under the 2009 Plan are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are tendered (either actually or by attestation) or withheld upon exercise of an award to pay the exercise price or any tax withholding requirements. Awards issued in substitution for awards previously granted by a company acquired by our company or a related entity, or with which our company or any related entity combines, do not reduce the limit on grants of awards under the 2009 Plan. The 2009 Plan imposes individual limitations on the amount of certain awards in part to comply with Code Section 162(m).

The ~~1997 Employees~~persons eligible to receive awards under the 2009 Plan are the officers, directors, employees, consultants and ~~Directors Warrants~~other persons who provide services to our company or any related entity. An employee on leave of absence may be considered as still in the employ of our company or a related entity for purposes of eligibility for participation in the 2009 Plan.

The 2009 Plan ~~was approved~~is to be administered by the ~~Stock Option~~Compensation Committee, provided, however, that except as otherwise expressly provided in the 2009 Plan, our Board of ~~February 12, 1997 and March 19, 1997. 206,000 Warrants to purchase 206,000 shares of Common Stock were~~Directors may exercise any power or authority granted to ~~certain employees~~the Compensation Committee under the 2009 Plan. Subject to the terms of the ~~Company. Of such warrants, 191,000 were granted at an exercise price~~2009 Plan, the Compensation Committee is authorized to select eligible persons to receive awards, determine the type, number and other terms and conditions of, ~~$7.95 per share~~ and ~~15,000 were granted~~all other matters relating to, awards, prescribe award agreements (which need not be identical for each participant), and ~~an exercise price of $8.30 per share (together,~~ the ~~“1997 Employees Warrants”). The 1997 Employees Warrants become exercisable in increments of 25% each on their first, second, third~~rules and ~~fourth anniversaries, respectively, and expired in~~regulations for the ~~year 2007. 20,000 Warrants to purchase 20,000 shares of Common Stock were granted to directors~~administration of the ~~Company at an exercise price of $7.95 per share (the “1997 Directors Warrants”) on February 12, 1997. The 1997 Directors Warrants become exercisable in increments of 25% each on~~2009 Plan, construe and interpret the ~~first, second, third~~2009 Plan and ~~fourth anniversaries of February 12, 1997~~award agreements, correct defects, supply omissions or reconcile inconsistencies therein, and ~~shall expire on February 12, 2007. At December 31, 2008, there were no employee warrants outstanding.~~

~~Upon termination of a Warrant Holder’s employment, consultancy~~make all other decisions and determinations as the Compensation Committee may deem necessary or ~~affiliation with~~advisable for the Company, all Warrants held by such Warrant Holder will terminate, except that any Warrant that was exercisable on the date which the employment, consultancy or affiliation terminated may, to the extent then exercisable, be exercised within three months thereafter (or one year thereafter if the termination is the result of permanent and total disabilityadministration of the holder). If a Warrant Holder dies while he or she is an employee, consultant or affiliate of the Company, or during such three month period, the Warrant may be exercised within one year after death by the decedent’s estate or his legatees or distributees, but only to the extent exercisable at the time of death.2009 Plan.

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The Compensation Committee is authorized to grant stock options, including both incentive stock options (“ISOs”), which can result in potentially favorable tax treatment to the participant, and non-qualified stock options, and stock appreciation rights entitling the participant to receive the amount by which the fair market value of a share of common stock on the date of exercise exceeds the grant price of the stock appreciation right. The exercise price per share subject to an option and the grant price of a stock appreciation right are determined by the Compensation Committee, but must not be less than the fair market value of a share of common stock on the date of grant. For purposes of the 2009 Plan, the term “fair market value” means the fair market value of common stock, awards or other property as determined by the Compensation Committee or under procedures established by the Compensation Committee. Unless otherwise determined by the Compensation Committee, the fair market value of common stock as of any given date shall be the closing sales price per share of common stock as reported on the principal stock exchange or market on which common stock is traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported or the average of the closing bid and asked prices for the common stock quoted by an established quotation service for over-the-counter securities, if the common stock is not then traded on a national securities exchange, or, in the discretion of the Committee, the last sale price or the closing price. The maximum term of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the Compensation Committee, except that no option or stock appreciation right may have a term exceeding ten years. Methods of exercise and settlement and other terms of the stock appreciation right are determined by the Compensation Committee. The Compensation Committee, thus, may permit the exercise price of options awarded under the 2009 Plan to be paid in cash, shares, other awards or other property (including loans to participants). Options may be exercised by payment of the exercise price in cash, shares of common stock, outstanding awards or other property having a fair market value equal to the exercise price, as the Compensation Committee may determine from time to time.

The Compensation Committee is authorized to grant restricted stock and deferred stock. Restricted stock is a grant of shares of common stock which may not be sold or disposed of, and which shall be subject to such risks of forfeiture and other restrictions as the Compensation Committee may impose. A participant granted restricted stock generally has all of the rights of a stockholder of our company, unless otherwise determined by the Compensation Committee. An award of deferred stock confers upon a participant the right to receive shares of common stock at the end of a specified deferral period, subject to such risks of forfeiture and other restrictions as the Compensation Committee may impose. Prior to settlement, an award of deferred stock carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents may be granted, as discussed below.

The Compensation Committee is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred basis, cash, shares of common stock, other awards or other property equal in value to dividends paid on a specific number of shares of common stock or other periodic payments. Dividend equivalents may be granted alone or in connection with another award, may be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional shares of common stock, awards or otherwise as specified by the Compensation Committee.

The Compensation Committee is authorized to grant shares of common stock as a bonus free of restrictions, or to grant shares of common stock or other awards in lieu of company obligations to pay cash under the 2009 Plan or other plans or compensatory arrangements, subject to such terms as the Compensation Committee may specify.

The Compensation Committee or our Board of Directors is authorized to grant awards that are denominated or payable in, valued by reference to, or otherwise based on or related to shares of common stock. The Compensation Committee determines the terms and conditions of such awards.

The Compensation Committee is authorized to grant performance awards to participants on terms and conditions established by the Compensation Committee. The performance criteria to be achieved during any performance period and the length of the performance period is determined by the Compensation Committee upon the grant of the performance award; provided however, that a performance period cannot be shorter than 12 months or longer than 5 years. Performance awards may be valued by reference to a designated number of shares (in which case they are referred to as performance shares) or by reference to a designated amount of property including cash (in which case they are referred to as performance units). Performance awards may be settled by delivery of cash, shares or other property, or any combination thereof, as determined by the Compensation Committee.

Awards may be settled in the form of cash, shares of common stock, other awards or other property, in the discretion of the Compensation Committee. The Compensation Committee may require or permit participants to defer the settlement of all or part of an award in accordance with such terms and conditions as the Compensation Committee may establish, including payment or crediting of interest or dividend equivalents on deferred amounts, and the crediting of earnings, gains and losses based on deemed investment of deferred amounts in specified investment vehicles. The Compensation Committee is authorized to place cash, shares of common stock or other property in trusts or make other arrangements to provide for payment of our company’s obligations under the 2009 Plan. The Compensation Committee may condition any payment relating to an award on the withholding of taxes and may provide that a portion of any shares of common stock or other property to be distributed will be withheld (or previously acquired shares of common stock or other property be surrendered by the participant) to satisfy withholding and other tax obligations. awards granted under the 2009 Plan generally may not be pledged or otherwise encumbered and are not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death, except that the Compensation Committee may, in its discretion, permit transfers for estate planning or other purposes subject to any applicable restrictions under Rule 16b-3.

Awards under the 2009 Plan are generally granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law. The Compensation Committee may, however, grant awards in exchange for other awards under the 2009 Plan, awards under other company plans, or other rights to payment from our company, and may grant awards in addition to and in tandem with such other awards, rights or other awards.

Employment Contracts

~~Elkan R. Gamzu.~~ Dr. Gamzu resigned on January 3, 2008. In February 2007, the Compensation and Stock Option Committees of the Board of Directors recommended, and the Board approved, an employment agreement for Dr. Gamzu as full time Chief Executive Officer of the Company. Dr. Gamzu’s base compensation for 2007, effective February 26, was $300,000. Dr. Gamzu’s agreement allows for an annual bonus of up to 25% of his base salary upon the attainment of agreed upon goals and milestones. In subsequent years, the bonus is to range from minimum of 25% of base salary to target of 50% of base salary, with no maximum limit, based on milestones and determined by the CEO and Compensation Committee. The other provisions of Dr. Gamzu’s employment agreement relate to benefits, severance arrangements, automatic renewal and confidentiality and non-competition obligations.

S. Colin Neill. In October 2006, the Compensation and Stock Option Committees of the Board of Directors recommended, and the Board approved, a one year employment agreement for Mr. Neill as full time Senior Vice President, Chief Financial Officer, Secretary and Treasurer of the Company. Mr. Neill’s initial base compensation was $265,000. The other provisions of Mr. Neill’s employment agreement relate to benefits, severance arrangements, automatic renewal and confidentiality and non-competition obligations. Mr. Neill received a sign-on bonus of $20,000 in October 2006. Mr. Neill was named President on January 3, 2008 and retained all previous titles and positions.

Compensation of Directors

Our Director ~~compensation~~Compensation policy is as follows:

At the election of each Director, either (i) 20,000 fully vested ten-year stock options are granted in January and 20,000 fully vested ten-year stock options are granted on July 1, or (ii) a cash payment of $6,000 is made in January and $6,000 on July 1; and

The Chairman of the Audit Committee will be granted an additional 5,000 fully vested ten-year stock options in January and 5,000 fully vested ten-year stock options on July 1; and the Chairmen of the Compensation and the Governance and Nominating Committees will each be granted an additional 2,500 fully vested ten-year stock options in January and 2,500 fully vested ten-year stock options on July 1.

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DIRECTOR COMPENSATION FOR ~~2008~~2009

The table below summarizes the compensation paid by the Company to non-employee Directors for the fiscal year ended December 31, ~~2008:~~2009:

Name	Fees Earned or Paid in Cash($)		Option Awards		Total		Fees Earned or Paid in Cash($)		Option Awards ($) (1)			Total ($)		Number of Shares
Srinivas Akkaraju, M.D., Ph.D.		0	$	16,711	$	16,711		0	$	15,728	(2)	$	15,728	140,000
Anthony B. Evnin, Ph.D.		0	$	17,967	$	17,967		0	$	15,071		$	15,071	52,500
Elkan R. Gamzu, Ph.D. (2)		0	$	22,457	$	22,457
Lloyd I. Miller, III (3)		0	$	17,001	$	17,001
Charles W. Newhall, III		0	$	17,967	$	17,967		0	$	14,060		$	14,060	47,500

(1)

Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, ~~2008~~2009 in accordance with FAS ~~123(R),~~ASC Topic 718, and thus includes amounts from awards granted in and prior to ~~2008. Other than the options issued to Mr. Miller, which expired 90 days after his departure from the Board on August 5, 2008, all~~2009. All options awarded to Directors in ~~2008~~2009 remained outstanding at fiscal year-end.

~~(2)~~

~~Dr. Gamzu retired from~~(2)

In addition to his regular compensation for service on the Board ~~at the end~~ of ~~his elected term on December 30, 2008.~~

~~(3)~~

~~Mr. Miller retired from~~Directors, Dr Akkaraju was granted 100,000 ten-year options in May 2009 for providing special service and advice to the Board ~~effective August 5, 2008.~~in his capacity as a Director.

At December 31, 2009 the aggregate number of director options was 430,000 which consisted of the following breakdown (Akkaraju 200,000, Evnin 117,500 and Newhall 112,500).

The fair value of the director options awarded during 2009 was as follows: Akkaraju $23,761, Evnin $8,406 and Newhall $7,395.

The Executive Chairman, Robert F. Johnston, is not an independent director. At December 31, 2009 he had a total of 350,000 shares of options outstanding.

Director Retirements and New Director Appointment in ~~2008~~2009

On January 3, 2008, the Company announced the retirement of Haim Aviv, Ph.D., David Schlachet and Mony Ben Dor from the Board of Directors. On that date, the Board appointed Robert F. Johnston to the Board to serve as Executive Chairman.

Abraham Sartani retired from the Board on February 11, 2008, Lloyd I. Miller retired from the Board effective August 5, 2008, and Elkan Gamzu, PhD, retired from the board at the end of his elected term on December 30, 2008.

None

Compensation Committee Interlocks and Insider Participation

The members of the Compensation and Stock Option Committee in ~~2008~~2009 were Anthony B. Evnin and Charles W. Newhall, III. There were no interlocks on the Compensation and Stock Option Committee in ~~2008.~~2009.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

EQUITY COMPENSATION PLAN INFORMATION

The table below provides certain information concerning our equity compensation plans as of December 31, ~~2008.~~2009.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)
Equity compensation plans approved by security holders	2,775,081	$3.27	1,799,017		3,685,130	$	2.42		8,872,568
Equity compensation plans not approved by security holders	N/A	N/A	N/A		N/A		N/A		N/A
Total	2,775,081	$3.27	1,799,017		3,685,130	$	2.42		8,872,568

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information with respect to the beneficial ownership of the Company’s Common Stock as of February ~~18, 2009,~~22, 2010, except as set forth in the footnotes, by (i) each person who was known by the Company to own beneficially more than 5% of any class of the Company’s Stock, (ii) each of the Company’s executive officers and Directors, and (iii) all current Directors and executive officers of the Company as a group. Except as otherwise noted, each person listed below has sole voting and dispositive power with respect to the shares listed next to such person’s name.

Name and Address of Beneficial Owner	Amount of Beneficial Ownership				Percentage of Total (1)
Robert F. Johnston c/o Pharmos Corporation 99 Wood Avenue South, Suite 311, Iselin, NJ 08830		18,025,118	(2	)		27.5	%
Srinivas Akkaraju, M.D., Ph.D. c/o Panorama Management, LLC 2440 Sand Hill Road, Suite 302, Menlo Park, CA 94025		116,250	(3	)		*
Anthony B. Evnin c/o Venrock Associates 530 Fifth Avenue, 22nd Floor, New York, NY 10036		13,656,886	(4	)		21.5	%
Charles W. Newhall, III c/o New Enterprise Associates 1119 St. Paul Street, Baltimore, MD 21202		22,422,341	(5	)		33.2	%
S. Colin Neill c/o Pharmos Corporation 99 Wood Avenue South, Suite 311, Iselin, NJ 08830		257,499	(6	)		*
All Current Directors and Executive Officers as a group (five persons)		54,478,094	(7	)		69.6	%
New Enterprise Associates 10, LP 1119 St. Paul Street, Baltimore, MD 21202		22,288,591	(8	)		33.1	%
Venrock Assoicates Venrock Associates III LP Venrock Entrepreneurs Fund III LP 530 Fifth Avenue, 22nd Floor, New York, NY 10036		13,518,136	(9	)		21.3	%

Name and Address of Beneficial Owner Amount of Beneficial Ownership    Percentage of Total (1)

Robert F. Johnston
c/o Pharmos Corporation
99 Wood Avenue South, Suite 311, Iselin, NJ 08830

1,488,806

(2)

5.5%
Srinivas Akkaraju, M.D., Ph.D.
c/o Panorama Management, LLC
2440 Sand Hill Road, Suite 302, Menlo Park, CA 94025
2,915,160
(3)

10.8%
Anthony B. Evnin
c/o Venrock Associates
530 Fifth Avenue, 22nd Floor, New York, NY 10036
1,656,376
(4)

6.2%
Charles W. Newhall, III
   c/o New Enterprise Associates
   1119 St. Paul Street, Baltimore, MD 21202
2,253,988
(5)

8.4%
S. Colin Neill
c/o Pharmos Corporation
99 Wood Avenue South, Suite 311, Iselin, NJ 08830
187,500
(6)

*
All Current Directors and
Executive Officers as a group (five persons)
8,501,830
(7)

30.8%
JP Morgan Partners BHCA LLP
c/o JP Morgan Partners, LLC
270 Park Avenue, 39th Floor, New York, NY 10017
2,845,160    10.6%
New Enterprise Associates 10, LP
    1119 St. Paul Street, Baltimore, MD 21202
2,176,488 8.1%
Venrock Assoicates
    Venrock Associates III LP
    Venrock Entrepreneurs Fund III LP
    530 Fifth Avenue, 22nd Floor, New York, NY 10036
1,578,876 5.9%

* Less than 1%.

(1)

Based on ~~26,798,526~~59,438,213 shares of common stock outstanding as of February 22, 2010, plus each individual’s warrants or options which are either currently exercisable or will be exercisable within 60 days of the date set forth above. Assumes that no other individual will exercise any warrants and/or options.

(2)	Consists of ~~1,043,099~~5,811,230 outstanding shares, ~~136,111~~213,888 shares issuable upon exercise of currently exercisable options, and ~~309,596~~6,000,000 outstanding shares ~~issuable upon conversion of a debenture.~~and 6,000,000 currently exercisable warrants held by Demeter Trust.

(3)	Consists of ~~shares beneficially owned by JP Morgan Partners BHCA LLP and 70,000~~116,250 shares issuable upon exercise of currently exercisable options.

(4)	Consists of shares beneficially owned by Venrock Associates, Venrock Associates III LP and Venrock Entrepreneurs Fund III LP and ~~77,500~~138,750 shares issuable upon exercise of currently exercisable options.

(5)	Consists of shares beneficially owned by New Enterprise Associates 10, LP and ~~77,500~~133,750 shares issuable upon exercise of currently exercisable options.

(6)	Consists of 75,000 outstanding shares and ~~112,500~~182,499 shares issuable upon exercise of currently exercisable options.

(7)	Consists of ~~7,718,623~~35,692,957 outstanding shares, ~~473,611~~785,137 shares issuable upon exercise of currently exercisable options and ~~309,596~~18,000,000 shares issuable upon ~~conversion~~exercise of ~~a debenture.~~currently exercisable warrants.

(8)	Consists of 14,288,591 outstanding shares and 8,000,000 shares issuable upon exercise of currently exercisable warrants.

(9)	Consists of 9,518,136 outstanding shares and 4,000,000 shares issuable upon exercise of currently exercisable warrants.

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Item 13. Certain Relationships, Related Transactions and Director Independence

Director Independence. The Company has determined that three of the four Directors serving at December 31, ~~2008~~2009 (Srinivas Akkaraju, Anthony B. Evnin, and Charles W. Newhall, III), were ~~independent under applicable Nasdaq rules.~~independent.

Item 14. Principal Accounting Fees and Services

On October 19, 2009, Pharmos Corporation dismissed its independent registered public accounting firm, PricewaterhouseCoopers LLP. The dismissal was approved by the Pharmos Audit Committee. During the two most recent fiscal years and through October 19, 2009, there have been no disagreements between Pharmos and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their reports on the financial statements for such years. During the two most recent fiscal years and through October 19, 2009, there were no reportable events (as defined in Item 304(a)(1)(v)) of Regulation S-K. Neither of the reports of PricewaterhouseCoopers LLP for the past two years contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, except that their report dated February 25, 2009 contained an explanatory paragraph expressing substantial doubt about Pharmos' ability to continue as a going concern. On October 20, 2009, Pharmos Corporation engaged Friedman LLP as its new independent accounting firm.

Audit fees

~~Aggregate~~

For 2009 the aggregate fees billed by Friedman LLP for professional services rendered for the audit of the Company’s annual financial statements for the year ending December 31, 2009 and for the review of the financial statements included in the Company’s quarterly reports on Form 10-Q for the quarter ended September 30, 2009 was $36,000.

For 2009 the aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the review of the financial statements included in ~~connection with its~~the Company’s quarterly reports on Form 10Q for the quarters ended March 31, 2009 and June 30, 2009 were $40,000. PricewaterhouseCoopers LLP also billed $7,700 for the reissuance of the 2008 audit opinion. The Pricewaterhouse Israel fee for the statutory audit of the ~~Company's consolidated~~Pharmos Limited financial statements ~~as of and~~was $4,000.

For 2008 the aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the ~~years~~audit of the Company’s annual financial statements for the year ended December 31, 2008 and ~~2007, its~~for the reviews of the ~~Company's unaudited consolidated interim~~ financial statements ~~and~~included in the Company’s quarterly reports on Form 10-Q for ~~SEC filings were $208,000 and $257,000, respectively.~~the same fiscal year was $185,000. The fee charged by Pricewaterhouse Israel for the statutory audit of the Pharmos Limited financial statements was $23,000.

Audit-related fees

There were no audit—related fees in ~~2008~~2009 and ~~2007.~~2008.

Tax fees

Aggregate fees for professional services rendered by PricewaterhouseCoopers LLP in connection with its income tax compliance and related tax services for the years ended December 31, ~~2008~~2009 and ~~2007~~2008 were $0 and $0, respectively.

Nevada	36-3207413
(State or other jurisdiction of	(IRS Employer Id. No.)
incorporation or organization)

Year ended December 31, 2009	HIGH		LOW

4th Quarter	$	.17	$	.06
3rd Quarter		.48		.15
2nd Quarter		.30		.06
1st Quarter		.14		.03

Year ended December 31, 2008	HIGH		LOW

4th Quarter	$	.20	$	.08
3rd Quarter		.39		.16
2nd Quarter		.53		.36
1st Quarter		.94		.32

Year ended December 31, 2008	HIGH		LOW

4th Quarter	$	.20	$	.08
3rd Quarter		.39		.16
2nd Quarter		.53		.36
1st Quarter		.94		.32

Year ended December 31, 2007	HIGH		LOW

4th Quarter	$	.96	$	.31
3rd Quarter		1.45		.79
2nd Quarter		2.28		1.33
1st Quarter		1.88		1.36

	Year Ended December 31,
	2009			2008			2007			2006			2005
Revenues		—			—			—			—			—
Operating expenses	$	(6,147,384	)	$	(11,100,184	)	$	(17,579,259	)	$	(37,542,519	) (1)	$	(15,708,888	)
Other income (expense), net		(821,431	)		(193,348	)		997,652			1,792,775			12,288,382	(2)
Loss before income taxes		(6,968,815	)		(11,293,532	)		(16,581,607	)		(35,749,744	)		(3,420,506	)
Net loss		(3,054,334	)		(10,089,406	)		(15,625,825	)		(35,136,969	)		(2,929,872	)
Net loss applicable to common shareholders	$	(3,054,334	) (3)	$	(10,089,406	) (3)	$	(15,625,825	) (3)	$	(35,136,969	) (3)	$	(2,929,872	) (3)
Net loss per share applicable to common shareholders - basic and diluted	$	(0.06	)	$	(0.39	)	$	(0.61	)	$	(1.74	)	$	(0.15	)
Total assets	$	4,689,022		$	5,972,164		$	12,374,959		$	28,393,338		$	48,990,772
Long term obligations	$	1,000,000		$	4,044,316		$	410,594		$	1,388,306		$	1,125,551
Cash dividends declared		—			—			—			—			—
Average shares outstanding - basic and diluted		47,445,014			25,934,973			25,591,660			20,249,714			18,974,175

	Year Ended December 31,
	2008			2007			2006			2005			2004
Revenues		—			—			—			—			—
Operating expenses	$	(11,100,184	)	$	(17,579,259	)	$	(37,542,519	) (1)	$	(15,708,888	)	$	(19,880,151	)
Other income (expense), net		(193,348	)		997,652			1,792,775			12,288,382	(2)		(2,532,390	)
Loss before income taxes		(11,293,532	)		(16,581,607	)		(35,749,744	)		(3,420,506	)		(22,412,541	)
Net loss		(10,089,406	)		(15,625,825	)		(35,136,969	)		(2,929,872	)		(21,967,767	)
Net loss applicable to common shareholders	$	(10,089,406	) (3)	$	(15,625,825	) (3)	$	(35,136,969	) (3)	$	(2,929,872	) (3)	$	(21,967,767	) (3)
Net loss per share applicable to common shareholders - basic and diluted	$	(0.39	)	$	(0.61	)	$	(1.74	)	$	(0.15	)	$	(1.22	)
Total assets	$	5,972,164		$	(12,374,959	)	$	28,393,338		$	48,990,772		$	57,664,842
Long term obligations	$	4,044,316		$	410,594		$	1,388,306		$	1,125,551		$	1,236,451
Cash dividends declared		—			—			—			—			—
Average shares outstanding - basic and diluted		25,934,973			25,591,660			20,249,714			18,974,175			18,033,358

	December 31, 2008		December 31, 2007
Working capital	$	4,232,549	$	9,504,348
Cash and cash equivalents	$	4,730,282	$	7,481,741
Short term investments	$	-	$	3,686,568
Total cash, cash equivalents and short
term investments	$	4,730,282	$	11,168,309
Convertible debentures	$	4,000,000	$	-

Name/Principal Position	Year	Salary		Bonus		Option Awards	All Other Compensation		Total Compensation	Year	Salary			Bonus			Option Awards		All Other Compensation			Total Compensation

S. Colin Neill(1)	2008	$300,000		-		$ 38,426	$21,517	(3)	$359,943	2009	$	300,000		$	80,000		$	56,383	$	21,967	(3)	$	458,350
President,	2007	$265,000		$75,000	(2)	$ 31,036	$20,712	(3)	$391,748	2008	$	300,000			-		$	38,426	$	21,517	(3)	$	359,943
Chief Financial Officer,	2006	$62,938	(1)	$38,750		$ 40,199	$ 2,800	(3)	$144,687	2007	$	265,000		$	75,000	(2)	$	31,036	$	20,712	(3)	$	391,748
Secretary & Treasurer

Elkan R. Gamzu, Ph.D,	2008	-		-		-	-		-	2009		-			-			-		-			-
Former Director and former	2007	$452,500	(4)			$18,346	$6,750	(5)	$477,596	2008		-			-			-		-			-
Chief Executive Officer	2006	-		-		-	-		-	2007	$	452,500	(4)				$	18,346	$	6,750	(5)	$	477,596

Robert F. Johnston	2008	-		-		$ 27,681	-		$27,681	2009		-		$	80,000		$	61,685		-		$	141,685
Executive Chairman	2007	-		-		-	-		-	2008		-			-		$	27,681		-		$	27,681
	2006	-		-		-	-		-	2007		-			-			-		-			-


Name	Grant Date	All other Option Awards: Number of Securities Underlying Options (#)	Exercise or Base Price of Option Awards ($/Sh)	Grant Date Fair Value of Stock and Option Awards ($)	Grant Date	All other Option Awards: Number of Securities Underlying Options (#)	Exercise or Base Price of Option Awards ($/Sh)	Grant Date Fair Value of Stock and Option Awards ($)

S. Colin Neill (1)	1/23/2008	130,000	$0.35	$30,844	5/11/2009	600,000	$0.22	$105,820
Robert F. Johnston (2)	1/23/2008	350,000	$0.35	$83,042	5/11/2009	1,200,000	$0.22	$264,000

OPTION EXERCISES AND STOCK VESTED IN ~~2008~~2009

	Option Awards		Stock Awards

Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)	Number of Shares Acquired on Vesting (#)	Value Realized on ~~Vesting ($~~Vesting($)
~~S. Colin Neill~~None	-	$ -	~~75,000 (1)~~-	~~$ 26,250~~-

OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END
OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END								OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END

	Option Awards					Stock Awards			Option Awards										Stock Awards
Name	Number of securities underlying unexercised options (#) Exercisable	Number of securities underlying unexercised options (#) Unexercisable	Equity Incentive Plan awards: Number of securities underlying unexercsied Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That have not vested ($)		Number of securities underlying unexercised options (#) Exercisable		Number of securities underlying unexercised options (#) Unexercisable			Equity Incentive Plan awards: Number of securities underlying unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That have not vested ($)


S. Colin Neill	0	130,000 (1)	130,000	$0.35	1/23/2018					0		600,000	(1)		600,000	$	0.22	5/11/2019
	17,500	22,500 (2)	40,000	$1.84	1/17/2017					56,875		73,125	(2)		130,000	$	0.35	1/23/2018
	55,000	35,000 (3)	90,000	$1.75	10/5/2016					27,500		12,500	(3)		40,000	$	1.84	1/17/2017
	72,500	187,500	260,000							75,000		15,000	(4)		90,000	$	1.75	10/5/2016
										159,375		700,625			860,000

Robert F. Johnston(6)	116,667	233,333 (4)	350,000	$0.35	1/23/2018					194,444		155,556	(5)		350,000	$	0.35	1/23/2018	1,200,000	$264,000

Reports of Independent Registered Public Accounting Firms
Consolidated balance sheets as of December 31, 2009 and 2008
Consolidated statements of operations for the years ended
December 31, 2009, 2008 and 2007
Consolidated statements of changes in shareholders’ equity
for the years ended December 31, 2009, 2008 and 2007
Consolidated statements of cash flows for the years ended
December 31, 2009, 2008, and 2007
Notes to consolidated financial statements

Signature	Title	Date



/s/ S. Colin Neill
S. Colin Neill	President and Chief Financial Officer	February 22, 2010
	(Principal Financial and Accounting Officer)

/s/ Srinivas Akkaraju
Srinivas Akkaraju, MD, Ph.D	Director	February 22, 2010


/s/ Anthony B. Evnin
Anthony B. Evnin, Ph.D	Director	February 22, 2010


/s/ Charles W. Newhall, III
Charles W. Newhall, III	Director	February 22, 2010

~~Report~~Reports of Independent Registered Public Accounting ~~Firm~~ Firms		F-2
Consolidated balance sheets as of December 31, ~~2008~~2009 and ~~2007~~ 2008	~~F-3~~	F-4
Consolidated statements of operations for the years ended
December 31, 2009, 2008 ~~2007~~ and ~~2006~~ 2007	~~F-4~~	F-5
Consolidated statements of changes in shareholders’ equity
for the years ended December 31, 2009, 2008 ~~2007~~ and ~~2006~~2007	~~F-5~~	F-6
Consolidated statements of cash flows for the years ended
December 31, 2009, 2008, ~~2007,~~ and ~~2006~~2007	~~F-6~~	F-7
Notes to consolidated financial statements	~~F-7~~	F-8

PHARMOS CORPORATION
Consolidated Balance Sheets
	December 31,							December 31,
	2008			2007				2009			2008
Assets
Current Assets
Cash and cash equivalents	$	4,730,282		$	7,481,741			$	4,629,486		$	4,730,282
Short-term investments		-			3,686,568
Restricted cash		38,998			86,695				-			38,998
Research and development grants receivable		-			3,859
Prepaid expenses and other current assets		1,049,898			225,185				25,678			1,049,898
Total current assets		5,819,178			11,484,048				4,655,164			5,819,178

Fixed assets, net		9,692			424,458				1,379			9,692
Restricted cash		-			65,031
Severance pay funded		-			264,934
Other assets		143,294			136,488				32,479			143,294

Total assets	$	5,972,164		$	12,374,959			$	4,689,022		$	5,972,164

Liabilities and Shareholder's Equity
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	883,966		$	768,768			$	73,717		$	883,966
Accrued expenses		615,663			404,937				148,414			615,663
Accrued wages and other compensation		87,000			805,995				195,000			87,000
Total current liabilities		1,586,629			1,979,700				417,131			1,586,629

Other liability		44,316			51,888				-			44,316
Severance pay		-			358,706
Convertible debentures		4,000,000			-				1,000,000			4,000,000
Total liabilities		5,630,945			2,390,294				1,417,131			5,630,945

Shareholders’ Equity
Preferred stock, $.03 par value, 1,250,000 shares authorized, none issued and outstanding		-			-				-			-
Common stock, $.03 par value; 60,000,000 shares authorized, 26,210,290 and 25,603,759 issued in 2008 and 2007, respectively		786,307			768,112
Common stock, $.03 par value; 120,000,000 and 60,000,000 shares authorized, 59,291,154 and 26,210,290 issued in 2009 and 2008, respectively									1,778,735			786,307
Paid-in capital in excess of par		206,309,096			205,881,331				211,301,675			206,309,096
Accumulated deficit		(206,753,758	)		(196,664,352	)			(209,808,093	)		(206,753,758	)
Treasury stock, at cost, 2,838 shares		(426	)		(426	)			(426	)		(426	)
Total shareholders' equity		341,219			9,984,665				3,271,891			341,219

Total liabilities and shareholders' equity	$	5,972,164		$	12,374,959			$	4,689,022		$	5,972,164

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

	Common Stock										Treasury Stock
	Shares		Amount		Paid-in Capital in Excess of Par			Accumulated Deficit			Shares		Amount			Total Stockholders’ Equity
December 31, 2006		25,565,784	$	766,973	$	204,700,030		$	(181,038,527	)		2,838	$	(426	)	$	24,428,050

Stock and option issuance for employee compensation and amortization of retention award						1,182,440											1,182,440
Issuance of Retention Award Shares		37,975		1,139		(1,139	)
Net Loss									(15,625,825	)							(15,625,825	)
December 31, 2007		25,603,759		768,112		205,881,331			(196,664,352	)		2,838		(426	)		9,984,665

Stock and option issuance for employee compensation		160,716		4,821		281,561											286,382
Issuance of Common Stock for Debenture Interest payment		445,815		13,374		146,204											159,578
Net Loss									(10,089,406	)							(10,089,406	)
December 31, 2008		26,210,290		786,307		206,309,096			(206,753,758	)		2,838		(426	)		341,219
Stock and option issuance for employee compensation						175,438											175,438
April 2009 financing net		18,000,000		540,000		1,239,777											1,779,777
Debenture converted to equity		10,909,091		327,275		3,268,829											3,596,104
Reversal of deferred financing fees						(78,382	)										(78,382	)
Vela Milestone		2,000,000		60,000		120,000											180,000
Restricted stock grant		1,200,000		36,000		(36,000	)										-
Issuance of Common Stock for Debenture Interest payment		971,773		29,153		302,917											332,070
Net Loss									(3,054,335	)							(3,054,335	)
December 31, 2009		59,291,154	$	1,778,735	$	211,301,675		$	(209,808,093	)		2,838	$	(426	)	$	3,271,891

PHARMOS CORPORATION Consolidated Statements of Operations
	Year ended December 31,
Expenses		2008			2007			2006
Research and development, gross	$	9,028,705		$	11,457,566		$	8,956,821
Grants		-			(812,042	)		(1,445,513	)
Research and development, net of grants		9,028,705			10,645,524			7,511,308
In-process acquired research and development		-			-			20,607,575
General and administrative		1,965,243			6,698,601			9,108,867
Depreciation and amortization		106,236			235,134			314,769
Total operating expenses		11,100,184			17,579,259			37,542,519

Loss from operations		(11,100,184	)		(17,579,259	)		(37,542,519	)

Other income (expense)

Interest income		255,751			938,312			1,778,042
Interest expense		(490,537	)		-			-
Change in value of warrants		-			11,435			27,445
Other income (expense)		41,438			47,905			(12,712	)
Other (expense) income, net		(193,348	)		997,652			1,792,775

Loss before income taxes	$	(11,293,532	)	$	(16,581,607	)	$	(35,749,744	)
Income tax benefit		(1,204,126	)		(955,782	)		(612,775	)


Net loss	$	(10,089,406	)	$	(15,625,825	)	$	(35,136,969	)

Net loss per share
- basic and diluted	$	(0.39	)	$	(0.61	)	$	(1.74	)

Weighted average shares outstanding
- basic and diluted		25,934,973			25,591,660			20,249,714

~~Pharmos Corporation~~
~~Consolidated~~ ~~Statements of Cash Flows~~
	~~Year Ended December 31,~~

Cash flows from investing activities
Purchases of fixed assets		(1,730	)		(176,592	)		(165,366	)
Proceeds from disposition of fixed assets		153,937			122,839			-
Purchase of short-term investments		-			(6,933,488	)		(23,312,980	)
Proceeds from sale of short-term investments		3,686,568			16,419,593			45,888,650
Severance pay funding		264,934			710,876			(203,611	)
Decrease (increase) in restricted cash		112,728			(4,878	)		(4,447	)
Net cash provided by investing activities		4,216,437			10,138,350			22,202,246

Cash flows from financing activities
Costs from registration of common stock issued with Vela Acquisition		-			-			(32,007	)
Proceeds from issuance of convertible debentures		4,000,000			-			-
Net cash provided by (used in) financing activities		4,000,000			-			(32,007	)

Net increase (decrease) in cash and cash equivalents		(2,751,459	)		(5,275,272	)		2,467,886

Cash and cash equivalents at beginning of year		7,481,741			12,757,013			10,289,127

Cash and cash equivalents at end of year	$	4,730,282		$	7,481,741		$	12,757,013

	2009		2008
Stock options		3,647,155		2,737,106
Restricted stock		1,200,000		-
Convertible debenture		1,428,571		5,714,286
Warrants		18,000,000		-
Total potential dilutive securities not included in loss per share		24,275,726		8,451,392

Laboratory, pilot plant and other equipment	7 years to 14 years
Leasehold improvements	5 years to 14 years
Office furniture and fixtures	3 years to 17 years
Computer equipment	3 years to 4 years
Vehicles	5 years to 7 years

	2007
Securities greater than 90 days	$	1,036,568
Auction Rate Securities	$	2,650,000
Total Short Term Investments	$	3,686,568

~~Laboratory, pilot plant and other equipment~~	~~7 years to 14 years~~
~~Leasehold improvements~~	~~5 years to 14 years~~
~~Office furniture and fixtures~~	~~3 years to 17 years~~
~~Computer equipment~~	~~3 years to 4 years~~
~~Vehicles~~	~~5 years to 7 years~~

F Fair value of Pharmos shares issued at closing	$	13,000
Cash and advances paid		6,679
		19,679
Transaction costs incurred by Pharmos		1,422
Purchase price	$	21,101

Proceeds receivable from sale of New Jersey State net operating losses	$	493
In-process research and development		20,608
Total	$	21,101

	December 31, 2006
Net loss attributable to common shareholders	$	(37,760,577	)
Net loss per share attributable to common shareholders:
Basic and diluted	$	(1.48	)
Weighted average shares outstanding		25,565,783



	Warrants		Weighted Average Exercise Price

Warrants Outstanding at 12/31/05	1,176,310		$	9.05
Cancelled	(751,541	)	$	2.04
Warrants Outstanding at 12/31/06	424,769		$	7.02
Cancelled	(127,030	)	$	7.10
Warrants Outstanding at 12/31/07	297,739		$	6.99
Cancelled	(297,739	)	$	7.10
Warrants Outstanding at 12/31/08	-			-

Warrants Exercisable at 12/31/08	-		$	0.00
Warrants Exercisable at 12/31/07	297,739		$	6.99
Warrants Exercisable at 12/31/06	424,769		$	7.02

	Option			Weighted Average Exercise Price

Options Outstanding at 12/31/05		1,198,299		$	8.63

Granted		881,000		$	2.09
Cancelled		(154,677	)	$	8.82
Options Outstanding at 12/31/06		1,924,622		$	5.62

Granted		870,000		$	1.70
Cancelled		(374,236	)	$	7.06
Options Outstanding at 12/31/07		2,420,386		$	3.99

Granted		854,000		$	0.36
Cancelled		(537,280	)	$	2.76
Options Outstanding at 12/31/08		2,737,106		$	3.10




Options exercisable at 12/31/08		2,244,735		$	3.63

Options exercisable at 12/31/07		1,606,763		$	5.12

Options exercisable at 12/31/06		879,467		$	9.62

	Options Outstanding					Options Exercisable
Range of Exercise Prices	Options Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
$0.35 - $0.39		751,000	8.4 years	$	0.35		361,666	$	0.36
$1.46 - $2.01		625,063	5.1 years	$	1.78		522,936	$	1.78
$2.15 - $3.95		1,020,588	5.8 years	$	2.41		1,019,678	$	2.41
$5.10 - $8.75		83,467	3.3 years	$	5.33		83,467	$	5.33
$9.38 - $21.20		256,988	3.7 years	$	16.30		256,988	$	16.30
		2,737,106	6.1 years	$	3.10		2,244,735	$	3.63

	2008			2007 (1)			2009			2008
Domestic NOLs	$	79,876,000		$	75,906,000		$	73,004,000		$	79,876,000
Israeli NOLs		827,000			877,000			-			827,000
Research and Development Credit Carryforwards		6,990,000			6,831,000			7,380,000			6,990,000
Accrued expenses, compensation and other		1,322,000			1,204,000			664,000			1,322,000
Net Deferred Tax Assets		89,015,000			84,818,000			81,048,000			89,015,000
Valuation allowance		(89,015,000	)		(84,818,000	)		(81,048,000	)		(89,015,000	)
	$	-		$	-		$	-		$	-


	Lease Commitments
2009	$	232,654
2010		2,745
2011		-
2012		-
2013		-
	$	235,399

Year ended
December 31, 2009	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Operating Expenses2	$	3,531,295		$	1,631,580		$	1,391,610		$	(407,101	)
Gain or (loss) from Operations		(3,531,295	)		(1,631,580	)		(1,391,610	)		407,101
Other income (loss)		(147,157	)		(618,920	)		(25,697	)		(29,657	)
Net gain or (loss)1	$	(3,678,452	)	$	(2,250,500	)	$	(1,417,307	)	$	4,291,925
Net gain or (loss) per share - basic and diluted*	$	(.14	)	$	(.05	)	$	(.02	)	$	.07


Year ended
December 31, 2008	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Operating Expenses	$	3,609,710		$	2,613,967		$	2,760,493		$	2,116,014
Loss from Operations		(3,609,710	)		(2,613,967	)		(2,760,493	)		(2,116,014	)
Other income (loss)		14,827			(53,591	)		(83,859	)		(70,725	)
Net loss1	$	(3,594,883	)	$	(2,667,558	)	$	(2,844,352	)	$	(982,613	)
Net loss per share - basic and diluted*	$	(.14	)	$	(.10	)	$	(.11	)	$	(.04	)