This report on Form 10-Q contains information that may constitute "forward-looking statements." The use of words such as "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. As and when made, we believe that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2007 and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.

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

Executive Summary of 2008 Strategy and Operating Plan

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

The Company's strategy has changed since the acquisition of Vela in October 2006. The late clinical stage asset, Dextofisopam, is currently in a 480 patient Phase 2b trial, following a successful Phase 2a trial. The Company has determined that the trial is the principal shareholder value driver and consequently is optimizing the allocation of cash resources to this program. The Company may also partner / out license Dextofisopam to an appropriate strategic partner.

The Company is currently seeking a partner who will take the lead in both operating and funding the ongoing research programs in Israel, namely the CB2 receptor selective library of compounds, including preclinical development of PRS-639,058 for neuropathic pain. Also available for licensing or partnership is Pharmos' proprietary 3% diclofenac NanoEmulsion cream currently in Phase 2a clinical trial as topical treatment for osteoarthritis pain. The study is being conducted at several Israeli hospitals with completion of subject recruitment expected in mid-2008. To facilitate these efforts, the Company has engaged a boutique life science investment bank.

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 and VPI-013 to treat hypoactive sexual desire disorder and potentially neuropathic pain.

Pharmos' lead product, Dextofisopam, 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. The design of a larger, Phase 2b, dose-ranging study was discussed at a 2005 meeting with FDA, and 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 have significant safety concerns, Dextofisopam's novel non-serotonergic activity offers a unique and innovative approach to IBS treatment.

In research efforts over the past decade, the Company has developed a significant expertise in cannabinoid biology and chemistry, and has generated significant know-how and an intellectual property estate pertaining to multiple areas of cannabinoid biology. The Company is focusing its preclinical research efforts in CB2-selective cannabinoids, and has generated both clinical-stage drugs and late preclinical compounds which appear promising in preclinical testing.

The Company's core proprietary discovery platform focuses on synthetic cannabinoid compounds. Cannabinor, the initial CB2-selective receptor agonist candidate, has completed two Phase 2a clinical trials for pain relief with an intravenous (IV) formulation. In January 2007, Pharmos reported that in the first of these studies intravenous (i.v.) Cannabinor was generally safe and well tolerated, but failed to meet the primary endpoint of reversing capsaicin-induced pain. However, analysis of additional endpoints of heat-induced and pressure-induced pain looking at the non capsaicin sensitized skin indicated that i.v. Cannabinor did in fact exhibit a statistically significant systemic analgesic effect compared to placebo. In April 2007, Pharmos reported that the lowest dose of Cannabinor (12mg) produced a statistical significant decrease in pain versus placebo as in subjects undergoing third molar dental extraction model, but that this effect was not seen in the higher dose groups (24mg and 48 mg). This is an unexpected pattern of results and as such the Company has determined that it will not continue with the development of Cannabinor at this time, but will focus resources on other CB2 compounds that have better potential. Cannabinor will be available for outlicensing.

The Company has four libraries of CB2 molecules, and is now conducting preclinical development of PRS-639,058 for neuropathic pain. The molecule is a CB2 agonist and is a follow on to Cannabinor. Two large pharmaceutical companies are conducting their own experiments with Cannabinor under material transfer agreements for indications other than neuropathic pain.

Pharmos is conducting a clinical program to develop its proprietary NanoEmulsion (NE) drug delivery technology. Two Phase I studies in healthy volunteers have been completed and confirmed the safety and tolerability as well as the low systemic exposure of a diclofenac NE topical cream. The Company's NanoEmulsion (NE) drug delivery system, a proprietary asset derived from our formulation expertise, completed a second Phase I trial in 2006 that confirmed the safety, and tolerability as well as low systemic exposure of a more optimized 3% NE diclofenac cream formulation. On June 27, 2007 the Company announced that patient screening had commenced in its Phase 2a clinical trial of its topical NanoEmulsion (NE) drug delivery technology formulated with 3% diclofenac. The trial will compare the safety and analgesic efficacy of the diclofenac NE cream with placebo in approximately 126 subjects with knee osteoarthritis (OA). OA affects approximately 12% of U.S. adults, a significant portion of who are not treated pharmacologically due to side effects associated with the commonly used oral treatments. A site-specific, topical diclofenac product that could deliver a high drug concentration to the affected joint with minimal systemic exposure could reduce the risk of treatment-limiting side effects while maintaining the analgesic effect.

The results for the three months ended March 31, 2008 and 2007 were a net loss of $3.6 million and $4.8 million, respectively. On a loss per share basis, this equates to $(0.14) and $(0.19) for the quarters ended March 31, 2008 and 2007, respectively.

Except for 2001, the Company has experienced operating losses every year since inception in funding the research, development and clinical testing of our drug candidates. As of March 31, 2008, the Company's accumulated deficit was approximately $200.3 million. The Company expects to incur additional losses over the next several years as the Company's research and development and clinical trial programs continue. The Company's ability to achieve profitability, if ever, is dependent on its ability to develop and obtain regulatory approvals for its product candidates, to enter into agreements for product development and commercialization with strategic corporate partners and contract to develop or acquire the capacity to manufacture and sell its products.

Results of Operations
Three Months ended March 31, 2008 and 2007

Total operating expenses for the first quarter of 2008 decreased by $1,490,652 or 29%, from $5,100,362 in 2007 to $3,609,710 in 2008.

Research & development gross expenses decreased by $128,505 or 4% from $2,906,739 in 2007 to $2,778,234 in 2008, related to the Company's primary focus of cash resources on the Dextofisopam Phase 2b trial and the downsizing and curtailment of general research and development programs. The Company recorded research and development grants from the Office of the Chief Scientist of Israel's Ministry of Industry and Trade of $-0- and $336,641 during the first quarter of 2008 and 2007, respectively, which reduced research and development expenses. The decline in research and development grants directly related to the decrease in the underlying eligible activity for the grants as the Company focused more research funds on the US based Phase 2b clinical trial for Dextofisopam. Total research and development expenses, net of grants, increased by $208,136 or 8%, from $2,570,098 in 2007 to $2,778,234 in 2008.

During the first quarter, the Company advanced a Phase IIb trial of its lead compound, dextofisopam, in female IBS patients. The Phase IIb trial is expected to enroll approximately 480 patients in about 70 sites over an 18 month period. Costs of $2.0 million were incurred during the quarter in connection with the trial, comprising CRO-related activities and patient recruitment costs. Dextofisopam was one of the compounds the Company obtained through the acquisition of Vela Pharmaceuticals Inc which closed in October 2006. The continued development of this compound through late-stage clinical testing will significantly increase the research and development expenses going forward.

A Phase 2a clinical trial with the Company's NanoEmulsion delivery technology for topical application of analgesic and anti-inflammatory agents commenced in June 2007 targeting 126 patients. Completion of patient recruitment is expected in mid 2008.

General and administrative expenses for the first quarter of 2008 decreased by $1,663,772, or 68%, from $2,460,696 in 2007 to $796,924. The decline reflects decreases in virtually every general and administrative expense category. The primary reductions include a $792,730 reduction in payroll and a $674,286 reduction in consultant and professional fees. The decrease in payroll costs reflect the impact of the third and fourth quarter 2007 restructuring plans which have reduced the Company's head count from 51 employees in March 2007 to 14 employees in March 2008. The decrease in consulting and professional fees in 2008 result from non recurring 2007 costs related to contractual payment obligations associated with the retirement of the Company's chief executive officer, higher legal and accounting fees in 2007 and a non recurring recruitment fee of $42,000 in 2007.

Depreciation and amortization expenses decreased by $35,016, or 50%, from $69,568 in 2007 to $34,552 in 2008. The decrease is due to fixed assets which have become fully depreciated and the disposition of various depreciable assets in conjunction with the Company's 2007 restructuring plans.

Other income (expense) net, decreased by $332,440 from $347,267 in other income in 2007 to $14,827 in other income in 2008. The majority of the decrease is from decreased interest income of $188,023 from a decline in cash, cash equivalents and short term investments. In the first quarter of 2008 the Company recorded $122,862 in interest expense and charges related to the issuance of $4,000,000 in convertible debentures issued on January 3, 2008.

During the quarter, the Company recorded, in other income, royalties of $2,456 compared with $897 in 2007 per the licensing agreement with Herbamed Ltd, a company controlled by Dr. Haim Aviv, the Company's former Chairman and former CEO.

No tax provision is required at this time since the Company expects to be in a tax loss position at year-end

December 31, 2007 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.

Liquidity and Capital Resources

The Company incurred cumulative operating losses since 2002 and had an accumulated deficit of $200.3 million at March 31, 2008. The Company has financed its operations with public and private offerings of securities, advances and other funding pursuant to an earlier marketing and asset agreement with Bausch & Lomb, grants from the Office of the Chief Scientist of Israel, research contracts, the sale of a portion of its New Jersey State Net Operating Loss carryforwards, and interest income. Should the Company be unable to raise adequate financing or generate revenue in the future, operations will need to be scaled back or discontinued.

In January 2008, the Company completed an initial closing of a private placement of its 10% Convertible Debentures due November 2012 [See Note 2 to Financial Statements] and obtained net proceeds of $4.0 million.

The following table describes the Company's liquidity and financial position on March 31, 2008, and on December 31, 2007:

                                                  March 31, 2008     December 31, 2007
                                                 ----------------   -------------------

Working capital                                  $     10,031,767   $         9,504,348
--------------------------------------------- -- -- ------------- - -- ---------------- -

Cash and cash equivalents                        $     11,327,248   $         7,481,741
--------------------------------------------- -- -- ------------- - -- ---------------- -

Short term investments                           $              -   $         3,686,568
--------------------------------------------- -- -- ------------- - -- ---------------- -

Total cash, cash equivalents and short term
investments                                      $     11,327,248   $        11,168,309
--------------------------------------------- -- -- ------------- - -- ---------------- -

Current working capital position

As of March 31, 2008, the Company had working capital of $10.0 million consisting of current assets of $12.0 million and current liabilities of $2.0 million. This represents an increase of $0.5 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. This increase in working capital of $0.5 million was principally associated with the funding of research and development and general and administrative activities offset by the proceeds from the convertible debenture proceeds.

Current and future liquidity position

Management believes that the current cash, cash equivalents and short term investments, totaling $11.3 million as of March 31, 2008, will be sufficient to support the Company's currently planned continuing operations through at least March 2009. The Company routinely pursues various funding options, including additional equity offerings, equity-like financing, strategic corporate alliances, business combinations and the establishment of product related research and development limited partnerships, to obtain additional financing to continue the development of its products and bring them to commercial markets. Should the Company be unable to raise adequate financing or generate revenue in the future, long-term operations will need to be scaled back or discontinued.

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 has been provided an additional period of 180 calendar days, or until September 22, 2008, to regain compliance.

No assurance can be given that we will regain compliance during any additional compliance period. 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.

Cash

At March 31, 2008, cash and cash equivalents totaled $11.3 million. At December 31, 2007 cash and cash equivalents totaled $7.5 million. This net increase in cash of $3.8 million was due primarily to the net conversion of $3.7 million of short term investments into cash, $4.0 million in proceeds from the issuance of convertible debentures and $3.9 million spent for normal operating requirements. The cash, cash equivalents will be used to fund Research & Development activities and general and administrative costs.

Operating activities

Net cash used in operating activities for the first three months of 2008 was $3.9 million compared to net cash used of $3.9 million for the first three months of 2007. There is virtually no change in cash used in operating activities between the two periods. However, a greater portion of the cash was utilized for R&D spending over G&A spending in 2008 as compared to 2007 which reflects the focus of expenditures on the Dextofisopam clinical trial and the cost reduction benefits from the 2007 restructuring programs.

Investing activities

During the first three months of 2008, the Company had net investment proceeds from the sale of short term investments of $3.7 million, proceeds from the disposition of assets of $42,000 and a severance pay funding benefit of $58,000.

Financing activities

The Company realized $4 million in proceeds from the issuance of convertible debentures. See note 2 regarding the issuance of the convertible debentures.