SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

Forthe Fiscal Year Ended                             Commission File No. 0-11550
December 31, 2003

                               PHARMOS CORPORATION
             (Exact name of registrant as specified in its charter)


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


                         99 WOOD AVENUE SOUTH, SUITE 311
                                ISELIN, NJ 08830
               (Address of principal executive offices) (zip code)

       Registrant's telephone number, including area code: (732) 452-9556

           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE
                                (Title of Class)

           Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.03 PAR VALUE
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     Indicate by  check  mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes [x ]  No [ ].

     The  aggregate  market value of the  registrant's  Common Stock at June 30,
2003  held by  those  persons  deemed  to be  non-affiliates  was  approximately
$176,106,260.

     As of March 15, 2004, the Registrant had outstanding  87,913,692  shares of
its $.03 par value Common Stock.



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                                     PART I


This Form 10-K contains "forward-looking"  statements, as defined in the Private
Securities Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections.  Statements that are not historical facts,  including
statements about our beliefs and expectations,  are forward-looking  statements.
These statements  involve potential risks and uncertainties;  therefore,  actual
results may differ materially.  You are cautioned not to place undue reliance on
these forward-looking statements,  which speak only as of the date on which they
were made.  We do not undertake  any  obligation  to update any  forward-looking
statements, whether as a result of new information, future events or otherwise.

Important  factors  that may  affect  these  expectations  include,  but are not
limited to: the risks and uncertainties  associated with completing pre-clinical
and clinical trials of our compounds that demonstrate such compounds' safety and
effectiveness;  manufacturing losses and risks associated  therewith;  obtaining
additional  financing  to support  our  operations;  obtaining  and  maintaining
regulatory  approval for such  compounds and complying  with other  governmental
regulations applicable to our business; obtaining the raw materials necessary in
the development of such compounds;  consummating  and maintaining  collaborative
arrangements  with  corporate  partners  for  product   development;   achieving
milestones under collaborative arrangements with corporate partners;  developing
the capacity to  manufacture,  market and sell our products,  either directly or
with collaborative partners; developing market demand for and acceptance of such
products;  competing  effectively with other pharmaceutical and biotechnological
products;  obtaining adequate reimbursement from third party payers;  attracting
and retaining key personnel;  obtaining  patent  protection for  discoveries and
risks  associated  with  commercial  limitations  imposed  by  patents  owned or
controlled by third parties; and those other factors set forth in "Risk Factors"
in the Company's most recent Registration Statement.

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.

ITEM 1.  BUSINESS

INTRODUCTION

Pharmos Corporation (the "Company" or "Pharmos") is a bio-pharmaceutical company
that  discovers  and develops  new drugs to treat a range of  neuro-inflammatory
disorders. We have a portfolio of drug candidates under development,  as well as
discovery,  preclinical  and  clinical  capabilities.  Prior  to the sale of our
ophthalmic  product  line to  Bausch & Lomb  Incorporated  ("Bausch  & Lomb") in
October of 2001, we had two  successful  ophthalmic  products on the market.  To
date,  our  principal  sources  of cash  have  been the  sale of our  ophthalmic
business,  revenues  from  our  ophthalmic  product  line,  public  and  private
financings and research grants.

Our main  product,  dexanabinol,  is a  synthetic  non-psychotropic  cannabinoid
currently  in  late-stage  clinical  development  for the  treatment  of  severe
traumatic  brain  injury  (TBI).  In  mid-March  2004,  the  Company   completed
enrollment  of U.S. and  international  TBI  patients in its pivotal,  Phase III
clinical  trial of  dexanabinol.  The Phase II trial,  completed  in early 2000,
demonstrated  a good  safety  profile  and  showed  a trend of  efficacy  in the
drug-treated  groups versus the placebo group. The trial also  demonstrated that
dexanabinol  significantly inhibited the increase in intracranial pressure above
20mmHg, the level of pressure  necessitating  immediate treatment.  In addition,
neurological  recovery  appeared to be  accelerated in the  dexanabinol  treated
group, such that the percentage of dexanabinol  treated patients  achieving good
recovery at one month after injury was significantly higher than patients in the
placebo group.

In September  2003, the FDA granted fast track  designation  to dexanabinol  for
treatment of severe traumatic brain injury.  Fast track  designation  allows New
Drug  Application  (NDA)  submission  on a  rolling  basis  as each  section  is
completed and requires an FDA priority review of the full NDA.



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Our development of dexanabinol  for severe  traumatic  brain injury involves
only one pivotal clinical trial.  Assuming a successful clinical trial,  Pharmos
plans to submit a New Drug  Application to the FDA. A requirement by the FDA for
further significant clinical testing after the completion of the current pivotal
Phase III clinical trial or a rejection of our NDA would have a material adverse
effect on Pharmos and its operations.

In March 2003, the Company initiated a double-blinded  placebo  controlled Phase
II trial of dexanabinol as a preventive  agent against the cognitive  impairment
(CI) that can follow coronary surgery involving cardiopulmonary bypass (CS-CPB).
This  trial is being  conducted  at five  leading  medical  centers  in  Israel.
Enrollment  of  patients  undergoing  CS-CPB  in the  trial  is  expected  to be
completed by Q2 2004.

Pharmos is developing synthetic compounds, which preferentially activate the CB2
cannabinoid receptor. Preclinical investigations of these compounds are underway
for treatment of a wide range of neuro-inflammatory disorders, especially pain.
One compound, PRS 211.375 has been selected for advanced preclinical development
including toxicology and Absorption, Distribution, Metabolism, Excretion (ADME)
in preparation for clinical testing.

On October 9, 2001,  Pharmos  sold all of its rights to its  ophthalmic  product
line to Bausch & Lomb for cash and  assumption of certain  ongoing  obligations.
Please refer to the  description of the  transaction  under the heading Bausch &
Lomb.

STRATEGY

Pharmos' business is the discovery and development of new drugs to treat a range
of   neuro-inflammatory   disorders.   We  seek  to  enter  into   collaborative
relationships with established  pharmaceutical companies to complete development
and commercialization of our products.

Pharmos is applying its experience in rational drug design,  novel drug delivery
technology  and drug  development  to  developing  products  directed at several
therapeutic indications, including neuroprotective compounds for traumatic brain
injury  and  stroke  as well as  neurological,  vascular  and  other  conditions
involving inflammatory components such as pain.

PRODUCTS

PLATFORM TECHNOLOGIES

Pharmos is developing two families of compounds based on its scientific
knowledge of the medicinal activities of cannabinoids, a class of compounds with
chemical structures related to the main active component of cannabis. The
company utilizes state-of-the-art technologies to synthesize, evaluate and
develop new cannabinoid molecules that appear to exhibit enhanced therapeutic
benefit. According to Pharmos' research to date, dexanabinol has been shown to
possess minimal psychotropic properties. As part of the filing requirements with
FDA, Pharmos will study the addiction potential of dexanabinol. If the potential
of addiction is found in the animal, then additional regulatory requirements may
be imposed by the FDA and Drug Enforcement Agency (DEA). Pharmos continues to
expand its library of compounds through a hybrid methodology combining the
rational design of compounds based on knowledge of detailed molecular
requirements for drug activity with combinatorial chemistry, a technique that
utilizes randomized chemical reactions to synthesize large numbers of different
molecules. In contrast to the conventional random methods of combinatorial
chemistry, this hybrid approach leads to a larger percentage of synthesized
compounds that demonstrate activity in screening assays and increases the
potential of developing potent and selective drug candidates.

Pharmos'  chemical  library  consists  of two  chemically  distinct  cannabinoid
platforms,  tricyclic  dextrocannabinoids  and  bicyclic  cannabinoids.  The two
classes of synthetic cannabinoids have different



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mechanisms of action,  but there is  considerable  overlap in their  therapeutic
potential for treating neurological, cardiovascular, autoimmune and inflammatory
disorders.

TRICYCLIC DEXTROCANNABINOIDS

The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not
bind  appreciably to either of the two known classes of  cannabinoid  receptors.
Therefore, the tricyclic dextrocanabinoids  demonstrate minimal psychotropic and
other  negative  side  effects  that are  associated  with  naturally  occurring
cannabinoids.  The biological activity of drug candidates in this family derives
from their ability to block the activation of specific NMDA mediated channels in
nerve cells and attenuating several major inflammatory  mechanisms by modulating
the synthesis of pro-inflammatory factors. Both activities may reduce the amount
of sudden and programmed cell death caused by certain disorders.

Dexanabinol is currently undergoing a Phase III clinical study for the treatment
of severe head injury. In addition, it is undergoing a Phase II trial for use as
a  preventive  agent  against  the  cognitive  impairment  (CI) that can  follow
coronary surgery  involving  cardiopulmonary  bypass  (CS-CPB).  Other tricyclic
dextrocannabinoids  are under  evaluation  in  preclinical  models  for  stroke;
neuropathic  pain,  which results from nerve damage or dysfunction;  nociceptive
pain, which is caused by activation of nerve sensors as a result of acute tissue
damage; and autoimmune disorders such as multiple sclerosis.

DEXANABINOL

Dexanabinol - Clinical Development

Pharmos  has  completed  two  Phase  I  studies  in  healthy   volunteers   that
demonstrated  dexanabinol's  safety  and  tolerance  at  doses  higher  than the
expected  therapeutic  dose. A Phase II clinical  trial of dexanabinol in severe
traumatic  brain injury  patients was completed in early 2000.  The objective of
this study was to establish the safety of intravenous  dexanabinol when given to
patients within 6 hours after  sustaining a severe  traumatic brain injury.  The
study was conducted at six neurosurgical  intensive care units in Israel between
October 1996 and March 1998. A total of 100 patients were enrolled in the study;
fifty-one  patients  received   dexanabinol  and  forty-nine  received  matching
placebo.  Patients  were  randomized  to one of three  treatment  arms and where
treated with dexanabinol  48mg, 150mg or 200mg.  Because the study was conducted
in a dose  escalating,  stepwise  fashion  each  treatment  group had a matching
placebo group.

The study  achieved its objective in  establishing  the safety of dexanabinol in
patients suffering from traumatic brain injury. There were no unexpected adverse
experiences  reported  in either  the  drug-treated  or the  placebo  group.  In
addition,  the reported adverse  experiences did not differ between the drug and
placebo  groups in the  nature or  severity  of the  events.  In this  study the
mortality  rate in the placebo  group was 14.3  percent and 11.8  percent in the
dexanabinol group.

Although  the study was not  statistically  powered  to  detect  differences  in
efficacy,  some efficacy parameters were explored as secondary safety parameters
to ascertain if dexanabinol did not negatively effect patient outcome.

Intracranial pressure (ICP) is an important assessment of the brain's reaction
to injury.  An ICP above  20mmHg is  considered  to be  clinically  significant,
necessitating  immediate  treatment.  Dexanabinol  treated  patients had a lower
duration of elevated  ICP (above  20mmHg)  compared  to the placebo  group.  The
Glasgow Outcome Score (GOS) showed a higher  percentage of good outcome in the
dexanabinol-treated  patients.  During the early post-treatment period (1 month)
the effect was  statistically  significant,  whereas the  difference  at 3 and 6
months was not. Similarly,  the dexanabinol-treated  patients scored better than
the placebo patients on the Galveston Orientation and Amnesia Test (GOAT) during
the six month follow-up period.



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The GOAT, which is a neurological test that measures awareness of surroundings
and ability to remember, demonstrated significantly better results in the
dexanabinol treated patients at 1, 3 and 6 months follow-up compared to placebo.
A manuscript describing the analysis of the first two cohorts of patients was
published by Knoller, et al. in, Critical Care Medicine 2002,Vol30:548-554.

INTERNATIONAL PHASE III CLINICAL TRIAL OF DEXANABINOL FOR SEVERE TRAUMATIC BRAIN
INJURY

In January 2001, the  international  Phase III pivotal trial of dexanabinol  for
severe  traumatic  brain injury was initiated in Europe and Israel.  In February
2003, the FDA accepted the Company's IND application,  which allowed the Company
to commence patient  enrollment in the U.S. as part of the international  trial.
Over eighty centers throughout the U. S., Europe, Australia, and Israel enrolled
patients in the trial.  European countries  participating in the study included
Belgium,  Denmark,  Finland,  France, Germany,  Italy, the Netherlands,  Poland,
Spain, Switzerland,  Turkey, and the U.K. Collaborations with the European Brain
Injury  Consortium and the American Brain Injury  Consortium,  which were key to
recruitment efforts with trauma centers,  will continue through trial completion
and data analysis.

In mid-March 2004, the Company  completed  enrollment of U.S. and  international
TBI  patients  in  its  pivotal,   Phase  III  clinical  trial  of  dexanabinol.
Approximately six months after the completion of enrollment, Pharmos anticipates
completing  the  clinical  trial,  as  the  trial  protocol   requires  periodic
examinations  and  testing of  patients  enrolled  in the trials  during the six
months following their initial treatment. Several months after the completion of
the last patient last  follow-up  visit,  Pharmos plans to unblind the study and
announce the main study results.

PHASE II TRIAL OF  DEXANABINOL  TO PREVENT  COGNITIVE  IMPAIRMENT  IN  FOLLOWING
CORONARY SURGERY UNDER CARDIOPULMONARY BYPASS

In March 2003, the Company initiated a double-blinded  placebo  controlled Phase
II trial of dexanabinol as a preventive  agent against the cognitive  impairment
(CI) that can follow coronary surgery involving  cardiopulmonary bypass (CS-CPB)
operations.  This trial is being  conducted at five leading  medical  centers in
Israel.  The  enrollment  of CS-CPB  patients  in this trial is  expected  to be
completed in the second quarter of 2004.

BICYCLIC CANNABINOIDS

Bicyclic  cannabinoids  are synthetic  analogs and  derivatives of the tricyclic
dextrocannabinoids  that have some properties that are similar to those of their
parent tricyclic molecules as well as possessing some additional properties.

As with the tricyclic dextrocannabinoids,  the bicyclic cannabinoids may display
less  of  the  unwanted   psychotropic  side  effects  seen  with  some  natural
cannabinoids. However, the molecular activity of the bicyclics is different from
the tricyclics in that the bicyclic  cannabinoids bind with high affinity to the
cannabinoid  type two (CB2)  receptor  which is located  primarily on immune and
inflammatory  cells and with appreciably  lower affinity to the cannabinoid type
one (CB1) receptor, located in the central nervous system.  Pharmaceuticals that
preferentially  activate the CB2 receptors may be important in treating  various
pain  syndromes  as  well as  autoimmune,  inflammatory  and  neuro-degenerative
disorders.  Several candidates from Pharmos' bicyclic  cannabinoid  library have
demonstrated promise in animal models for autoimmune inflammatory disorders such
as multiple  sclerosis  and  rheumatoid  arthritis.  These  compounds  have also
demonstrated  efficacy in animal models of neuropathic and nociceptive  pain. In
preclinical   models  these  compounds  have  demonstrated   analgesic  activity
equivalent  to morphine  but without the  unwanted  opioid side  effects such as
sedation and  repiratory  depression.  The  anti-inflammatory  activity of these
compounds is equivalent  or superior to  non-steroidal  anti-inflammatory  drugs
(NSAIDS). One compound,  PRS 211.375 is being tested in preclinical  experiments
to assess its analgesic and other therapeutic potentials.



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LOTEPREDNOL ETABONATE

Loteprednol etabonate is a unique steroid that is designed to act in the eye and
alleviate  inflammatory  and  allergic  conditions,  and  that  is  quickly  and
predictably  reduced into inactive  particles before it reaches the inner eye or
systemic  circulation.  This action  results in improved  safety by avoiding the
side effects related to exposure to most ocular  steroids.  In the eye, the most
unwanted  side effect of steroids is the  elevation  of  intra-ocular  pressure,
which can be sight threatening.  While steroids, for lack of an alternative, are
regularly used for severe inflammatory conditions of the eye, milder conditions,
such as allergies,  are preferentially treated with less effective non-steroidal
agents.

On October 9, 2001,  Pharmos  sold all of its rights to its  ophthalmic  product
line to Bausch & Lomb for cash and  assumption of certain  ongoing  obligations.
Please refer to the  description of the  transaction  under the heading Bausch &
Lomb, below.

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 markets 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
crecuiting 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 no  products  on the market or in late stage  trials  which  would be
competitive with dexananbinol. For Bausch & Lomb's ophtahalmic product, LE-T, in
which we have a financial interest of up to $10 million market potential,  there
are competing products currently on the market including Tobradex(R) from Alcon,
which is the largest selling  product in its category,  as well as Vexol(R) from
Alcon and Pred Forte(R) from Allergan.

COLLABORATIVE RELATIONSHIPS

Pharmos'  commercial  strategy is to develop products  independently  and, where
appropriate,  in  collaboration  with established  pharmaceutical  companies and
institutions.  Collaborative partners may provide financial resources,  research
and  manufacturing  capabilities  and  marketing  infrastructure  to  aid in the
commercialization  of Pharmos'  products  in  development  as well as  potential
future  products.  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.

BAUSCH & LOMB

In October 2001, Pharmos sold to Bausch & Lomb all of its rights in the U.S. and
Europe  to  manufacture  and  market  Lotemax(R)  and  Alrex(R)  and  the  third
loteprednol  etabonate-based  product,  LE-T, which was submitted to the FDA for
marketing approval in September 2003.



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Pharmos  received  gross  proceeds  of   approximately   $25  million  in  cash.
Additionally  Pharmos  may  receive  up to an  additional  $12  million in gross
proceeds,  based upon the date of FDA  approval  of the  product  and good faith
negotiations with Bausch & Lomb, and a milestone payment of up to $10 million if
actual  sales  during  the first two years  following  commercialization  exceed
agreed-upon forecasted amounts. Pharmos agreed to pay up to $3.75 million of the
costs of developing LE-T, of which $600,000 was deducted from the purchase price
paid by Bausch & Lomb in October 2001.  In July 2003,  another $1.57 million was
paid to Bausch & Lomb. As of December 31, 2003, Pharmos owes an additional $1.56
million as its share of these  research and  development  related LE-T expenses,
which is included in accounts  payable and  represents  the final amount Pharmos
owes  Bausch & Lomb for their  project  development  under the terms of the 2001
agreement.

Pharmos paid Dr. Nicholas  Bodor,  the  loteprednol  etabonate  patent owner and
licensor, who is also a former director of and consultant to Pharmos, a total of
approximately  $2.7 million from the initial  proceeds of the sale of Lotemax(R)
and  Alrex(R)  in return for his consent to  Pharmos'  assignment  of its rights
under the license  agreement to Bausch & Lomb ($1.5  million paid at closing and
$1.2 million paid in October  2002).  Pharmos will also pay Dr. Bodor 11% of our
LE-T  proceeds due upon FDA approval and 14.3% of the payment we will receive in
the  event  that  certain  sales  levels  are  exceeded  in the  first two years
following commencement of sales in the U.S.

PATENTS, PROPRIETARY RIGHTS AND LICENSES

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.

Some of the technologies underlying Pharmos' potential products were invented by
or are owned by  various  third  parties,  including  the Hebrew  University  of
Jerusalem.  Pharmos is the licensee of these  technologies under patents held by
the applicable  owner,  through licenses that generally remain in effect for the
life of the applicable patent. 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,  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



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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.

Neuroprotective  Agents.  Pharmos has  licensed  from the Hebrew  University  of
------------------------
Jerusalem,  which is the  academic  affiliation  of the  inventor,  Dr.  Raphael
Mechoulam,  patents  covering new cannabinoid  compounds that have  demonstrated
beneficial  activity which may prevent damage or death to nerve cells  resulting
from various  diseases and disorders of the nervous system while appearing to be
devoid of most of the  deleterious  side effects  usually  associated  with this
class of compounds. Several patents have been designed to protect this family of
compounds  and their uses devised by  inventors at Pharmos and the  inventors at
the Hebrew  University.  The earliest  patent  applications  resulted in patents
issued in 1989, and the most recent patents date from 2003.  These patents cover
dexanabinol,  which is  under  development  for the  treatment  of head  trauma,
post-operative  cognitive  impairment  and other  conditions,  and new molecules
discovered by modifying the chemical structure of dexanabinol.

Anti-inflammatory  and  Analgesic  Agents.  Pharmos has also  licensed  from the
------------------------------------------
Hebrew University of Jerusalem, patents for inventions of Dr. Mechoulam covering
new compounds that have demonstrated beneficial activity, which may be effective
in treating not only neurological disorders,  but also inflammatory diseases and
most  importantly  pain.  These  bicyclic  compounds  are expected to cause less
adverse  deleterious side effects usually associated with cannabinoids.  Several
patents have been designed to protect this family of compounds and their uses by
inventors at Pharmos and Hebrew  University.  The earliest  patent  applications
resulted in patents issued in 1995, and the most recent patent dates from 2003.

Selective  Estrogen  Receptor  Modulators  (SERM).   Pharmos  has  filed  patent
--------------------------------------------------
applications in the U.S., Israel,  Australia,  Canada,  Japan, Brazil, Korea and
the European Patent Office to protect certain  derivatives of tamoxifen,  a drug
approved by the FDA, and other  molecules that enhance or improve the actions of
steroid  hormones.  In July 1997, the U.S. Patent and Trademark  Office issued a
patent with claims  covering the  compounds  themselves  and their use. A second
patent  issued  in July  2000  claims  the use of these  compounds  as agents to
inhibit  growth of new blood  vessels,  a potential  method of treating  various
cancers.  The most recent  patents  issued in these  families are dated in 2003.
Pharmos believes that these  derivatives may be superior to the parent compounds
in that they are devoid of central nervous system side effects.



                                       8
<PAGE>


Emulsion-based  Drug  Delivery  Systems.  In the general  category of  SubMicron
----------------------------------------
Emulsion  technology,  Pharmos holds a license to one family of patents from the
Hebrew University of Jerusalem and has filed ten independent  patent families of
applications  including  more  than  ninety  patent  applications  that  are  at
different stages of prosecution. These patents and patent applications have been
devised to protect a group of  formulation  technologies  devised by Pharmos and
the  inventors as they relate to  pharmaceutical  and  medicinal  products.  The
earliest patent filings for SubMicron Emulsion technology date from 1993 and the
most  recent  are  dated  in  2003.  These  patents  cover a broad  range of new
formulations,  which improve the  absorption of drugs that are poorly soluble in
water.

LICENSES

As discussed above, Pharmos has licensed patents covering neuroprotective agents
and certain  emulsion-based  drug delivery systems from the Hebrew University of
Jerusalem.  Pharmos  assigned its rights as licensee of Dr. Bodor's  loteprednol
etabonate-based ophthalmic compounds to Bausch & Lomb in October 2001.

In December 2001,  Pharmos' subsidiary Pharmos Ltd. licensed its patents related
to the oral  delivery of  lipophilic  substances  in the limited field of use of
nutraceuticals to Herbamed, Ltd., a company in Israel controlled by the Chairman
and Chief Executive  Officer of Pharmos.  The terms of the license agreement are
discussed in "Item 13. Certain Relationships and Related Transactions."

Site-Specific  Drugs. In the general  category of  site-specific  drugs that are
---------------------
active  mainly  in the eye and  have  limited  systemic  side  effects,  Pharmos
licensed  several  patents from Dr. Nicholas Bodor. It assigned its rights under
the Bodor license to Bausch & Lomb in October 2001 in  connection  with its sale
of its  ophthalmic  business.  The earliest  patents date from 1984 and the most
recent  from  1996.  Some of these  patents  cover  loteprednol  etabonate-based
products and its formulations.

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.  ss.  321 et  seq.)  and by  FDA  regulations  and by
comparable  agency  regulations in other  countries.  Specifically,  in order to
undertake  clinical tests, 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;

      (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;



                                       9
<PAGE>


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

      (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, then additional regulatory  requirements maybe
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  require  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 has interpreted this language for approval based on a single



                                       10
<PAGE>


persuasive  trial to be  limited  to special  cases  including  life-threatening
diseases where no effective therapy exists. The FDA still maintains a preference
for at least  two  adequate  and  well-controlled  clinical  trials.  Therefore,
despite the design and scale of Pharmos' trial, there are no assurances that the
FDA would approve the NDA based on a single trial. Dexanabinol has been shown to
be devoid of psychotropic properties, and Pharmos believes that the potential of
addictive  properties is remote.  However,  because dexanabinol is a cannabinoid
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 Pharmatech, Inc.), a Nevada corporation
was incorporated  under the laws of the State of Nevada on December 20, 1982. On
October 29, 1992,  Pharmos,  the Nevada  Corporation,  completed a merger with a
privately held New York corporation  known as Pharmos  Corporation,  and in 1992
acquired all of the outstanding  shares of Xenon Vision,  Inc., a privately held
Delaware corporation.

HUMAN RESOURCES

As of March 1, 2004,  Pharmos had 59 employees  (53  full-time and 6 part-time),
including 15 in the U.S. (1 part-time) and 44 in Israel (5 part-time). Of the 59
employees, 20 hold doctorate or medical degrees.

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;   and  (3)  research   relating  to
pilocarpine,  dexamethasone  and  ophthalmic  formulations  for dry eyes.  As of
December 31, 2003,  the total  amounts  received  under such grants  amounted to
$10,905,358.  Aggregated  future royalty  payments  related to sales of products
developed,  if any, as a result of the grants are limited to $9,203,583 based on
grants  received  through  December  31,  2003.  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.  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. See "Conditions in Israel."

Pharmos received funding of $925,780 from the Israel-U.S.  Binational Industrial
Research and Development  Foundation to develop Lotemax(R) and LE-T. Pharmos was
required to pay royalties to this  foundation on product sales, if any, of 2.5%,
through  September  1999,  then  5%  thereafter,  as a  result  of the  research
activities conducted with such funds.  Aggregate royalty payments are limited to
150% of the amount of such funding received,  linked to the exchange rate of the
U.S. dollar and the New Israeli Shekel.  During October 2001, in connection with
the sale of Pharmos's existing ophthalmic business, Pharmos paid



                                       11
<PAGE>


the foundation  royalties of  approximately  $1.0 million for  Lotemax(R)  which
concluded Pharmos' obligation to pay royalties to the foundation with respect to
Lotemax(R).  Pharmos retains the contingent  obligation to repay that portion of
funding it received from the foundation with respect to LE-T of $308,350.

In April 1997, Pharmos signed an agreement with the Consortium Magnet,  operated
by the Office of the Chief Scientist,  for developing  generic  technologies and
for the  design  and  development  of  drug  and  diagnostic  kits.  Under  such
agreement,   Pharmos  was  entitled  to  a  non-refundable  grant  amounting  to
approximately   60%  of  the  actual  research  and  development  and  equipment
expenditures on approved projects.  No royalty  obligations were required within
the  framework.  As of December 31, 2003 Pharmos had  received  grants  totaling
$1,659,549 for this program which was completed and closed.

During 2003, the Company signed an agreement with Consortium Magnet to develop a
supply of  water-soluble  prodrugs of  lipophilic  compounds  that improve their
bioavailability  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.  During 2003, Pharmos
was awarded a grant of $220,000.

CONDITIONS IN ISRAEL

A significant  part of Pharmos'  operations  is conducted in Israel  through its
wholly owned subsidiary, Pharmos Ltd., and we are directly affected by economic,
political and military conditions there.

Since  the  establishment  of the  State of  Israel  in 1948,  a number of armed
conflicts  have taken place between  Israel and its Arab  neighbors,  as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel  have,  in the past,  been the subject of an economic  boycott.  Although
Israel has entered into various  agreements  with certain Arab countries and the
Palestinian  Authority,  there has been an increase in the unrest and  terrorist
activity that began in September  2000 and has continued  with varying levels of
severity into 2004. We do not believe that the political and security  situation
has had any  material  negative  impact on our  business to date;  however,  the
situation  is  volatile  and we  cannot  be sure  that  security  and  political
conditions will have no such effect in the future.

Many of our employees in Israel are obligated to perform  military reserve duty.
In the event of severe unrest or other conflict,  individuals  could be required
to serve in the military for extended  periods of time. Our operations  could be
disrupted  by the  absence  for a  significant  period  of  time  of some of our
employees due to military service.

Since 1997,  Pharmos  Ltd.  has  received  funding  from the Office of the Chief
Scientist  of the Israel  Ministry  of  Industry  and Trade  relating to various
technologies  for the design and development of drugs and diagnostic  kits. This
funding  prohibits  the transfer or license of know-how and the  manufacture  of
resulting  products  outside  of  Israel  without  the  permission  of the Chief
Scientist.  Although we believe that the Chief  Scientist does not  unreasonably
withhold  this  permission if the request is based upon  commercially  justified
circumstances   and  any  royalty   obligations  to  the  Chief   Scientist  are
sufficiently  assured,  the matter is solely within his discretion and we cannot
be  sure  that  such  consent,  if  requested,   would  be  granted  upon  terms
satisfactory to us or granted at all.  Without such consent,  we would be unable
to manufacture any products developed by this research outside of Israel,  which
may greatly restrict any potential revenues from such products.

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 450 Fifth St., N.W., Washington, D.C., 20549. The



                                       12
<PAGE>


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 www.pharmoscorp.com 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 2.  PROPERTIES

Pharmos is  headquartered in Iselin,  New Jersey,  where it leases its executive
offices and  maintains  clinical,  regulatory  and business  development  staff.
Pharmos  also  leases   facilities  used  in  the  operation  of  its  research,
development,  pilot  manufacturing  and  administrative  activities  in Rehovot,
Israel.  These  facilities  have been improved to meet the special  requirements
necessary for the operation of Pharmos' research and development activities.  In
the opinion of the  management,  these  facilities  are  sufficient  to meet the
current and anticipated future requirements of Pharmos. In addition,  management
believes that it has  sufficient  ability to renew its present leases related to
these facilities or obtain suitable  replacement  facilities.  The monthly lease
obligations for our office space in 2004 are $17,433 for Iselin,  New Jersey and
$23,735 for Rehovot,  Israel.  The  approximate  square footage for Iselin,  New
Jersey and Rehovot, Israel are 10,403 and 21,600, respectively.

ITEM 3.  LEGAL PROCEEDINGS

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.






                                       13
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The  Company's  Common Stock is traded on the Nasdaq  SmallCap  Market under the
symbol  "PARS."  The  following  table  sets forth the range of high and low bid
prices per share for the Common Stock as reported on the NASDAQ  National Market
System and the Nasdaq SmallCap Market during the periods indicated.

YEAR ENDED DECEMBER 31, 2003                 HIGH          LOW
----------------------------                -------      -------
1st Quarter...............................   $1.25        $0.76
2nd Quarter...............................    2.65         0.50
3rd Quarter...............................    2.95         1.46
4th Quarter...............................    5.02         2.35

YEAR ENDED DECEMBER 31, 2002                 HIGH          LOW
----------------------------                -------      -------
1st Quarter ..............................   $2.55        $1.68
2nd Quarter ..............................    1.73         0.89
3rd Quarter ..............................    1.55         0.73
4th Quarter ..............................    1.38         1.01

The high and low bid  prices for the Common  Stock  during the first  quarter of
2004 (through  March 12, 2004) were $4.98 and $3.50,  respectively.  The closing
price on March 12, 2004 was $4.21.

The foregoing represents inter-dealer prices, without retail mark-up,  mark-down
or commission, and may not necessarily represent actual transactions.

On February 23, 2004, there were  approximately 489 record holders of the Common
Stock of the Company and  approximately  23,560  beneficial owners of the Common
Stock of the  Company,  based upon the number of shares of Common  Stock held in
"street name".

The Company has paid no dividends on its Common Stock and does not expect to pay
cash  dividends  in  the  foreseeable  future.  The  Company  is not  under  any
contractual  restriction  as to its present or future  ability to pay dividends.
The  Company  currently  intends to retain any future  earnings  to finance  the
growth and development of its business.





                                       14
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                              -------------------------------------------------------------------------------
                                                  2003            2002            2001             2000              1999
                                              ------------    ------------    ------------     ------------      ------------
<S>                                           <C>             <C>             <C>              <C>               <C>
Revenues                                                --              --    $  4,298,441     $  5,098,504      $  3,279,397
Cost of Goods Sold
  (exclusive of depreciation & amortization)            --              --       1,268,589        1,875,955           994,617
Operating expenses                            $(16,034,146)   $(16,858,414)    (13,789,291)      (9,969,879)       (6,999,136)
Other (expense), income, net                 $ ( 2,679,517)   $   (426,409)     15,579,261       (1,236,872)           96,166
Income (Loss) Before Income
  Taxes                                        (18,713,663)    (17,284,823)      4,819,822*      (7,984,202)**     (4,618190)
Net (Loss) Income                              (18,485,865)    (17,069,600)      5,045,855       (7,984,202)       (4,618,190)
Dividend embedded in
  convertible preferred stock                           --              --              --               --                --
Preferred Stock dividends                               --              --              --               --           (22,253)
                                              ------------    ------------    ------------     ------------      ------------
Net income (loss) applicable to
  common shareholders                         $(18,485,865)   $(17,069,600)   $  5,045,855*    $ (7,984,202)**   $ (4,640,443)
                                              ============    ============    ============     ============      ============
Net income (loss) per share applicable
  to common shareholders - basic              $      (0.27)   $      (0.30)   $       0.09     $      (0.15)     $      (0.11)
                                              ============    ============    ============     ============      ============
Net income (loss) per share applicable
  to common shareholders - diluted            $      (0.27)   $      (0.30)   $       0.09     $      (0.15)     $      (0.11)
                                              ============    ============    ============     ============      ============

Total assets                                  $ 69,008,071    $ 24,686,682    $ 44,262,991     $ 30,783,109      $  7,791,294
                                              ============    ============    ============     ============      ============

Long term obligations                         $  4,783,339    $     10,000    $  5,847,951     $  7,680,872      $  1,277,565
                                              ============    ============    ============     ============      ============
Cash dividends declared                                 --              --              --               --                --

Average shares outstanding - basic              67,397,175      56,520,041      54,678,932       52,109,589        42,725,157

Average shares outstanding - diluted            67,397,175      56,520,041      55,298,063       52,109,589        42,725,157
</TABLE>

----------
*    includes a $16.3 million gain on sale of the ophthalmic product line in
     October 2001

**   includes a beneficial conversion charge of $1.8 million.





                                       15
<PAGE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This  discussion  and  analysis  of  our  financial  condition  and  results  of
operations   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  We have based these  forward-looking  statements  on our current
expectations  and  projections of future  events.  Such  statements  reflect our
current  views with respect to future  events and are subject to unknown  risks,
uncertainty  and other factors that may cause results to differ  materially from
those  contemplated  in  such  forward  looking  statements.  In  addition,  the
following discussion should be read in conjunction with the audited consolidated
financial  statements and the related notes thereto  included  elsewhere in this
report.

Through the end of the third  quarter of 2001,  the Company  generated  revenues
from  product  sales but  continues  to be dependent  upon  external  financing,
interest income,  and research and development  contracts to pursue its intended
business activities.  The Company had not been profitable from inception through
2000,  was not  profitable in 2003 and 2002,  and has incurred a cumulative  net
loss of $121.0 million through  December 31, 2003. In 2001, the Company recorded
a profit due the sale of its  ophthalmic  product line to Bausch & Lomb.  Losses
have resulted  principally  from costs incurred in research  activities aimed at
identifying and developing the Company's product  candidates,  clinical research
studies,  the write-off of purchased  research and development,  and general and
administrative expenses. 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.  See  "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Liquidity and Capital Resources."

CRITICAL ACCOUNTING POLICIES

The Company considers certain  accounting  policies related to the tax valuation
allowance and asset  impairments  to be critical  policies due to the estimation
process involved in each.

IMPAIRMENT OF LONG-LIVED ASSETS

We review  long-lived  assets  for  impairment  whenever  events or  changes  in
business  circumstances  indicate that the carrying amount of the assets may not
be fully  recoverable  or that the  useful  lives of these  assets are no longer
appropriate.  Each impairment test is based on a comparison of the  undiscounted
cash flow to the recorded value of the asset.  Subsequent impairment assessments
could result in future impairment charges. Any impairment charge would result in
the reduction in the carrying  value of  long-lived  assets and would reduce our
operating results in the period in which the charge arose.

TAX VALUATION ALLOWANCE

The Company has assessed the future  taxable  income and has  determined  that a
100%  deferred tax  valuation  allowance is deemed  necessary.  In the event the
Company  were to  determine  that it would be able to realize its  deferred  tax
asset,  an  adjustment  to the deferred tax asset would  increase  income in the
period such determination is made.


RESULTS OF OPERATIONS

   Years Ended December 31, 2003 and 2002

Due to the sale of the  Company's  ophthalmic  product  line to Bausch & Lomb in
October  2001,  the Company  recorded no product sales revenue and cost of sales
during 2003 and 2002. Bausch & Lomb was the Company's  marketing partner for its
ophthalmic product line.



                                       16
<PAGE>


Total operating  expenses  decreased by $824,268 or 5%, from $16,858,414 in 2002
to $16,034,146 in 2003. The decrease in operating  expense is primarily due to a
reduction in consulting  and  professional  fees.  During 2002,  the Company was
preparing for the IND application with the FDA, which was ultimately  allowed in
February 2003.  During 2003, the Company increased  expenditures  related to the
development  of dexanabinol  for the treatment of traumatic  brain injury and to
increased activity in the Company's cannabinoid program to treat various central
nervous system and inflammation-based conditions.

The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major product is the  development of dexanabinol  for the treatment of traumatic
brain  injury,  which is  currently  involved  in Phase III testing in the U.S.,
Europe,  Australia and Israel, and the cognitive impairment that can result from
coronary surgery involving  cardiopulmonary bypass operations.  During 2003, the
gross cost of the traumatic brain injury project was $10.6 million.  Total costs
since the traumatic  brain injury  project  entered Phase II development in 1996
through  December 31, 2003 were $35.4  million.  In mid-March  2004, the Company
completed enrollment of U.S. and international TBI patients. The principal costs
of  completing  the  project  include  collection  and  evaluation  of the data,
production  of the drug  substance and drug product,  commercial  scale-up,  and
management of the project.  The primary  uncertainties  in the completion of the
project  are the  results of the study upon its  conclusion,  and the  Company's
ability to produce or secure  production  of finished drug product under current
Good Manufacturing  Practice conditions for sale in countries in which marketing
approval has been obtained,  as well as the resources required to generate sales
in such countries.  Should the uncertainties  delay completion of the project on
the current timetable,  the Company may experience  additional costs that cannot
be accurately estimated. If the Phase III trial of dexanabinol for the treatment
of traumatic  brain injury is successfully  completed,  the Company may begin to
earn  revenues upon  marketing  approval as early as 2006;  however,  should our
product candidate experience setbacks or should a product fail to achieve FDA or
other regulatory approvals or fail to generate commercial sales, it would have a
material adverse affect on our business.

In addition,  during 2003, the Company initiated a Phase II trial of dexanabinol
as a preventive  agent  against the  cognitive  impairment  (CI) that can follow
coronary surgery involving  cardiopulmonary bypass (CS-CPB) that was approved by
Israel's  Ministry of Health.  Enrollment of patients  undergoing  CS-CPB in the
trial are expected to be completed by Q2 2004.  Gross expenses  directly related
to this project were $866,000 for the twelve months ended December 31, 2003.

Gross  expenses for other  research & development  projects in earlier stages of
development  for the  twelve  months  of  2003  and  2002  were  $3,433,498  and
$3,324,882,  respectively. Research and development expenses, net of grants, for
2003 and 2002  were  $11,632,959  and  $12,337,840,  respectively.  The  company
received from the Office of the Chief Scientist of Israel's Ministry of Industry
and  Trade  grant  money of  $3,295,819  and  $2,755,882  during  2003 and 2002,
respectively, which reduced the research and development expenses.

Selling,  general and  administrative  expenses decreased by $82,180 or 2%, from
$3,828,750 in 2002 to $3,746,570 in 2003.  The decrease is due to a reduction in
consultant fees,  investor  relations and professional fees, which offset higher
salaries and benefits, travel and board of director costs.

Depreciation  and  amortization  expenses  decreased  by  $37,207,  or 5%,  from
$691,824 in 2002 to $654,617 in 2003.  The  decrease is due to some fixed assets
becoming fully depreciated.

Other expense, net of interest and other expenses,  increased by $2,253,108 from
$426,409 in 2002 to  $2,679,517 in 2003.  The warrants  issued in the March 2003
private placement  offering are subject to the requirements under EITF 00-19 and
thus are currently being accounted for as a liability. The value of the warrants
are being marked to market each reporting  period until exercised or expiration.
The charge  associated  with  these  warrants  amounted  to  approximately  $1.8
million.  Additionally,  in accordance with Emerging Issues Task Force Issue No.
98-5, Accounting for Convertible Securities with Beneficial



                                       17
<PAGE>


Conversion Features or Contingently  Adjustable  Conversion Ratios ("BCF"),  the
Company  recorded a charge of $1.8 million which was fully amortized at December
31, 2000 in connection  with the issuance of  convertible  debt with a favorable
conversion  feature. In accordance with EITF 00-27, a net credit of $786,000 was
recorded as interest  income during the first quarter of 2003 to reverse the BCF
previously  recorded  which was  associated  with the  remaining  balance of the
September 2000 Convertible Debenture offering with a face amount of $3.5 million
which was not converted.  The lower average cash balance during 2003 resulted in
a decrease  in  interest  income of  $268,987.  Interest  expense  increased  by
$942,358 due to the $21 million financing of Convertible Debentures completed in
September 2003.

During 2003, the Company recognized  royalties of a non-material  amount per the
licensing  agreement with Herbamed,  Ltd, a company controlled by Dr. Haim Aviv,
the Company's CEO.

   Years Ended December 31, 2002 and 2001

There were no product  sales or cost of goods sold for the twelve  months  ended
December 31, 2002.  Revenue  totaled  $4,298,441  and cost of goods sold totaled
$1,268,589  for the twelve months ended  December 31, 2001. The decrease in both
product sales,  license fee income, and cost of goods sold is due to the sale of
the Company's ophthalmic product line to Bausch & Lomb in October 2001. Bausch &
Lomb was the Company's marketing partner for its ophthalmic product line.

Total  operating  expenses  increased by $3,069,123 or 22%, from  $13,789,291 in
2001 to $16,858,414 in 2002. The increase in operating expenses is primarily due
to  increased  research  and  development  expenses  as  the  Company  increased
expenditures  related to the  development  of  dexanabinol  for the treatment of
traumatic  brain injury and to increased  activity in the Company's  cannabinoid
program  to  treat  various  central   nervous  system  and   inflammation-based
conditions.

The Company considers major research & development projects to be those projects
that have reached at least Phase II level of clinical development. The Company's
major product is the  development of dexanabinol  for the treatment of traumatic
brain  injury,  which is  currently  involved  in Phase III testing in the U.S.,
Europe,  Australia  and Israel,  and the  cognitive  impairment  that can follow
coronary surgery under cardiopulmonary bypass operations. During 2002, the gross
cost of the traumatic brain injury project was $10.0 million.  Total costs since
the traumatic  brain injury project entered Phase II development in 1996 through
December 31, 2002 were $24.8 million.

In addition,  during 2002, the Company received  approval from Israel's Ministry
of Health to commence a Phase IIa trial of  dexanabinol  as a  preventive  agent
against the cognitive impairment (CI) that can follow coronary surgery involving
cardiopulmonary bypass (CS-CPB).  Expenses directly related to this project were
not material for the twelve months ended December 31, 2002.

Expenses  for  other  research  &  development  projects  in  earlier  stages of
development  for the  twelve  months  of  2002  and  2001  were  $3,324,882  and
$3,464,781,  respectively. Research and development expenses, net of grants, for
2002 and  2001  were  $12,337,840  and  $9,349,025,  respectively.  The  company
received from the Office of the Chief Scientist of Israel's Ministry of Industry
and  Trade  grant  money of  $2,755,882  and  $1,336,566  during  2002 and 2001,
respectively, which reduced the research and development expenses.

Selling,  general and administrative  expenses increased by $162,457 or 4%, from
$3,666,293  in 2001  to  $3,828,750  in  2002.  The  increase  is due to  higher
professional  fees,  consultants,  and  investor  relations  while  offset  by a
reduction in the overhead allocation.

Depreciation  and  amortization  expenses  decreased  by $82,149,  or 11%,  from
$773,973  in  2001 to  $691,824  in  2002.  The  decrease  is  primarily  due to
amortization  of the  remaining  balance  of  intangible  assets  in 2001.  This
increase  was netted  against an increase  in  depreciation  expense  related to
laboratory equipment purchases.

Other  income  (expense),  net of  interest  and other  expenses,  decreased  by
$16,005,670 from income of



                                       18
<PAGE>


$15,579,261  in 2001 to expense of $426,409 in 2002. The change is primarily due
to a one-time gain of $16.3  million from the sale of the  Company's  ophthalmic
product line to Bausch & Lomb that occurred in October  2001.  The reported gain
includes charges of $3.75 million  representing the Company's  maximum liability
for the  completion  of the  clinical  development  of LE-T,  the final  product
resulting from the ophthalmic marketing  relationship with Bausch & Lomb. Should
LE-T gain FDA approval, the Company will receive additional gross proceeds up to
a maximum of $12  million  depending  on the date of FDA  approval  and up to an
additional $10 million based upon the achievement of certain sales goals.  Also,
the  decrease  was  attributable  to the lower debt payable at December 31, 2002
resulting  from (i) the  conversion  from debt to equity in the first quarter of
2002 of $2.6 million of our Convertible  Debentures issued in 2000, and (ii) the
repayment of $2 million of the  Convertible  Debentures  in the first quarter of
2002. This conversion and repayment resulted in lower interest expense. Interest
income  decreased by $445,005,  which was  primarily due to a lower average cash
balance in 2002 than in 2001 combined with the decrease in interest rates.

LIQUIDITY AND CAPITAL RESOURCES

While the Company  recorded  revenues since 1998 until the third quarter of 2001
from the sale of its approved  products,  it has incurred  cumulative  operating
losses since its inception and had an  accumulated  deficit of $121.0 million at
December 31,  2003.  The Company has  financed  its  operations  with public and
private  offerings  of  securities,  advances  and other  funding  pursuant to a
marketing  agreement  with  Bausch & Lomb,  research  contracts,  license  fees,
royalties and sales, the sale of a portion of our New Jersey State Net Operating
Losses carryforwards, and interest income. Should the Company be unable to raise
adequate financing in the future, long-term projects will need to be scaled back
or discontinued.

The Company  had  working  capital of $42.0  million as of  December  31,  2003.
Included in the  current  assets of $62.8  million is $49.4  million of cash and
cash equivalents, and $11.2 million in restricted cash. As part of the September
2003 financing, the Company received a total of $16.0 million of restricted cash
held in  escrow,  which  will  remain  in  escrow  until  either  the  Company's
convertible  debentures  are converted  into common shares of the Company by the
investor or by the Company,  or such funds are repaid by the Company or are used
to fund acquisition(s) approved by the investors.

In October 2001, Bausch & Lomb purchased all rights to the Company's loteprednol
etabonate  (LE)  ophthalmic  product  line for cash and  assumption  of  certain
ongoing  obligations.  The Company received gross proceeds of approximately  $25
million in cash for its rights to Lotemax(R) and Alrex(R), prescription products
that are made and  marketed  by Bausch & Lomb under a 1995  Marketing  Agreement
with the Company; in addition,  Bausch & Lomb also acquired future extensions of
LE  formulations  including  LE-T, a product  that was  submitted to the FDA for
marketing approval in September 2003. The Company had no product sales beginning
in the fourth  quarter of 2001.  Upon FDA  approval,  Bausch & Lomb will pay the
Company up to an  additional  maximum  gross  proceeds of $12 million,  with the
actual  payment price based on the date of FDA approval of this new  combination
therapy.  An additional  milestone payment of up to $10 million could be paid to
the  Company  to the  extent  sales of the new  product  exceed  an  agreed-upon
forecast in the first two years. The Company has a passive role as a member of a
joint  committee  overseeing  the  development  of LE-T and has an obligation to
Bausch & Lomb to fund up to a maximum of $3.75  million of the LE-T  development
cost, of which  $600,000 was deducted  from the purchase  price paid by Bausch &
Lomb to Pharmos in October  2001. As a result of this  transaction,  the Company
recorded a net gain of $16.3 million  during the fourth quarter of 2001. In July
2003, the Company paid Bausch & Lomb $1.57 million of its liability for the LE-T
development.  As of December 31, 2003,  Pharmos owes an additional $1.56 million
as its share of these  research  and  development  related LE-T  expenses.  This
amount is  included  as part of  accounts  payable at  December  31,  2003,  and
represents the maximum  amount Pharmos owes Bausch & Lomb. The Company  incurred
transaction  and royalty  costs of  approximately  $2 million.  The Company also
compensated  the LE patent owner  approximately  $2.7 million ($1.5 million paid
upon  closing and $1.2  million  paid in October  2002) from the proceeds of the
sale of Lotemax and Alrex in return for his consent to the Company's  assignment
of its rights under the license agreement to



                                       19
<PAGE>


Bausch & Lomb.  Additionally,  the patent owner will receive 11% of the proceeds
payable to the Company  following  FDA approval of LE-T, as well as 14.3% of its
milestone payment, if any.

In September  2000,  the Company  completed a private  placement of  Convertible
Debentures,  common stock and  warrants to purchase  shares of common stock with
institutional   investors,   generating  gross  proceeds  of  $11  million.  The
Convertible  Debentures,  which generated gross proceeds of $8 million, were due
in  February  2002 and  carried a 6% interest  payable  semiannually  in cash or
common stock. In connection with the Convertible  Debenture,  the  institutional
investors also received  warrants for the purchase of 276,259 common shares with
a relative fair value of $725,000.  The Convertible  Debentures were convertible
into common shares of the Company at the conversion price of $3.83 per share (or
2,088,775 common shares) and were convertible  beginning October 31, 2000. Under
certain limited anti-dilutive conditions, the conversion price may change. Until
converted into common stock or the outstanding principal is repaid, the terms of
the  Convertible  Debentures  required  the  Company to deposit $4 million in an
escrow  account.  The  escrowed  capital  is  shown  as  Restricted  Cash on the
Company's  balance sheet at December 31, 2002 and was released to the Company in
proportion to the amount of Convertible  Debentures converted into common shares
or upon the  repayment of the debt.  The issuance  costs  related to the Private
Placement of approximately  $1.4 million were capitalized and amortized over the
life of the debt.

In December  2001,  the holders of the  Convertible  Debentures  and the Company
agreed to modify the repayment and conversion terms. The holders of $5.8 million
convertible debt (book value on December 31, 2001,  including  accrued interest)
extended  the  maturity  date to June 2003 in exchange  for a  reduction  in the
conversion  price from $3.83 to $2.63 for half of the outstanding  balance and $
2.15 for the other half of the outstanding  balance. The convertible debt with a
maturity  date of June 2003 was  convertible  beginning  December 31, 2001.  The
holder of the  remaining  outstanding  debt of $1.9 million  (including  accrued
interest)  changed the maturity  date from February 28, 2002 to January 31, 2002
in exchange for  lowering the  conversion  price for the other  holders.  As the
modification was not significant in accordance with EITF 96-19 the change in the
fair value between the original  convertible  debt and the modified  convertible
debt was  accreted  over  the  remaining  term of the  convertible  debt  with a
corresponding charge into interest expense.

Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities
with  Beneficial  Conversion  Features  or  Contingently  Adjustable  Conversion
Ratios, require the Company to compute the Beneficial Conversion Feature ("BCF")
of the  convertible  debt from the private  placement of September 2000. The BCF
must be capitalized  and amortized from the closing date until the earliest date
that the investors  have the right to convert the debt into common  shares.  The
BCF was computed at approximately  $1.8 million,  all of which was amortized and
included as interest expense in the year ending December 31, 2000. Additionally,
the discount on the Convertible  Debenture of  approximately  $800,000 was fully
amortized by December 31, 2001.

During 2001,  the Company paid $589,819 and issued  182,964 shares of the common
stock of the Company to the investors in the convertible debenture.  The payment
of  cash  and  stock  was  the  option  chosen  by the  Company  and  represents
adjustments  to the pricing  based upon the  Company's  stock  price  during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.

One investor in the September 2000 private  placement had an option, in the form
of a warrant, to purchase an additional $2 million of common shares for a period
of one year provided that the future  purchase price is greater than the initial
closing price of $3.65 per share. During the third quarter of 2001, the investor
exercised this option and, accordingly, the Company issued 542,299 shares to the
investor.  The Private  Placement  provided  certain  conditions under which the
number of shares issued for this option could be adjusted and, accordingly,  the
Company  issued  281,659 shares to the investor in the fourth quarter of 2001 as
an adjustment to the warrant.

On March 4, 2003,  the Company  raised $4.3 million from the placement of common
stock and  warrants.  The private  placement  offering was  completed by issuing
5,058,827 shares of common stock at a price of



                                       20
<PAGE>


$0.85 per share and  approximately  1.1 million warrants at an exercise price of
$1.25 per share.  Additionally,  the  remaining  balance of the  September  2000
Convertible  Debenture  offering was redeemed for cash. The original face amount
of $3.5 million was redeemed for  approximately  $4.0  million,  which  included
accrued and unpaid  interest.  According to EITF 00-19, the issued warrants meet
the  requirements of and are being accounted for as a liability since registered
shares must be delivered  upon  settlement.  The Company  calculated the initial
value  of  the  warrants,   including  the  placement  agent   warrants,   being
approximately   $394,000   under   the   Black-Scholes   option-pricing   method
(assumption:  volatility 75%, risk free rate 2.88% and zero dividend yield). The
value of the  warrants  is being  marked to market  each  reporting  period as a
derivative  loss until  exercised  or  expiration  and  amounted  to $823,029 at
December 31, 2003. Upon exercise of each of the warrants,  the related liability
is removed by recording an adjustment to additional paid-in-capital.  A total of
$936,156 was  recorded as a credit to  additional  paid-in-capital  in 2003 as a
result of exercises and the recording of the initial value of the warrants.

On May 30, 2003, the Company completed a private placement to sell common shares
and warrants to ten investors,  generating total gross proceeds of $8.0 million.
The Company filed a  registration  statement  with the  Securities  and Exchange
Commission to permit resales of the common stock issued.  The private  placement
offering was completed by issuing 9,411,765 shares of common stock at a price of
$0.85 per share  (representing an approximate 20% discount to a ten-day trailing
average of the closing  price of the stock  ending May 28,  2003) and  3,573,529
warrants  at an  exercise  price of $1.40  per  share,  which  includes  441,177
placement agent warrants.  Issuance costs of approximately  $525,000 in cash and
$240,000 for the value of the placement  agent warrants were recorded as a debit
to additional paid in capital.

On September 26, 2003, the Company  completed a private placement of convertible
debentures and warrants to six institutional  investors,  generating total gross
proceeds of $21.0 million. Five million dollars of the proceeds will be used for
working  capital  purposes,   and  $16.0  million  will  be  available  to  fund
acquisitions upon the approval of the investors.  The convertible debentures are
convertible  into common  stock of the  Company at a fixed price of $4.04,  205%
above the closing bid price of the stock for the five days preceding the closing
date. The debentures,  which bear an interest rate of 4%, will be redeemed in 13
substantially  equal  monthly  increments  beginning  March  31,  2004.  Amounts
converted into shares of Pharmos common stock will reduce the monthly redemption
amount in inverse order of maturity. The $16.0 million earmarked for acquisition
activity  will be held in escrow until used or repaid.  In  connection  with the
financing,  the Company also issued  5,514,705  three-year  warrants  (including
514,705  placement agent warrants) to purchase  5,514,705 shares of common stock
at an  exercise  price of $2.04 per share.  The  issuance  costs  related to the
convertible debentures of approximately  $1,229,000 in cash and $434,000 for the
value of the placement  agent warrants were  capitalized and are being amortized
over the life of the debt.  The Company  calculated the value of the warrants at
the date of the  transaction,  including the  placement  agent  warrants,  being
approximately   $4,652,877  under  the   Black-Scholes   option-pricing   method
(assumption:  volatility 75%, risk free rate 1.59% and zero dividend yield). The
Company  allocated the $21.0 million in gross proceeds  between the  convertible
debentures and the warrants based on their fair values. The Company is reporting
the debt  discount  as a direct  reduction  to the  face  amount  of the debt in
accordance  with  APB  21.  The  discount  will  accrete  over  the  life of the
outstanding  debentures.   The  issuance  costs  allocated  to  the  convertible
debentures are being deferred and amortized to interest expense over the life of
the debt. APB 21 also requires the Company to allocate the warrant costs between
the  convertible  debentures and the  transaction  warrants.  The issuance costs
allocated  to the  warrants  were  recorded  as a debit  to  additional  paid in
capital.  During  the  first  quarter  of 2004,  one of the  investors  from the
September 2003 Convertible  Debentures private placement converted a total of $2
million plus interest.  The Company  issued  497,662 shares of common stock.  As
part of the escrow  agreement,  approximately  $1,524,000 of restricted  cash is
available to be released to the Company.

The  financing  also  addressed  a possible  concern  Nasdaq  raised  informally
relating to a possible violation of one of Nasdaq's corporate  governance rules.
Specifically,  Nasdaq  expressed a concern that the May 2003 private  placement,
when  aggregated with Pharmos' March 2003 registered  private  placement,  would
have resulted in the possible issuance of more than 20% of Pharmos'  outstanding
securities  at a price  less  than the  applicable  fair  market  value for such
shares. Completion of the $21.0 million convertible debt financing



                                       21
<PAGE>


had the effect of resolving any such Nasdaq concerns.

In  December  2003,  the  Company  completed  a public  offering.  Pharmos  sold
10,500,000  common  shares  at a  purchase  price of $2.75  per  share for gross
proceeds of $28,875,000. The stock was offered in a firm commitment underwriting
pursuant to an existing shelf registration  statement.  The net proceeds of this
offering to Pharmos were approximately  $26.9 million.  During January 2004, the
underwriters  exercised  their  over-allotment  option  in full to  purchase  an
aggregate of 1,575,000  shares of Pharmos'  common stock at a purchase  price of
$2.75 per share,  less the  underwriting  discount.  Total net proceeds from the
offering,  including  $4.07  million  from the  exercise  of the  over-allotment
option, were approximately $31.0 million.

In 2003, and 2002, the Company sold $2,096,487, and $5,561,838, respectively, of
our 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 2003 and
2002 were $227,798 and $215,223,  respectively and such amounts were recorded as
a tax benefit in the  statements  of  operations.  The State  renews the Program
annually and limits the aggregate proceeds to $10,000,000.  We cannot be certain
if we will be able to sell any of our  remaining or future  carryforwards  under
the Program.

COMMITMENTS AND LONG TERM OBLIGATIONS

As of December 31, 2003, we had the following  contractual  commitments and long
term obligations:

<TABLE>
<CAPTION>
                         2004          2005         2006        2007     THEREAFTER     TOTAL
                     -----------   -----------   ---------   ---------   ---------   -----------
<S>                  <C>           <C>           <C>         <C>         <C>         <C>
Operating Lease
  Obligations        $   377,736   $    81,375   $  57,978   $  12,212   $      --   $   529,301
Other Long-Term
  Obligations         16,153,846     4,846,154          --          --          --    21,000,000
R&D commitments          928,130            --          --          --          --       928,130
                     -----------   -----------   ---------   ---------   ---------   -----------
   Grand total       $17,459,712   $ 4,927,529   $  57,978   $  12,212   $      --   $22,457,431
</TABLE>

On September 26, 2003, the Company  completed a private placement of convertible
debentures and warrants with six institutional investors, generating total gross
proceeds of $21.0  million.  The  convertible  debentures are  convertible  into
common  stock of the Company at a fixed  price of $4.04,  205% above the closing
bid price of the  stock  for the five  days  preceding  the  closing  date.  The
debentures,  which bear an  interest  rate of 4%,  will be  redeemed in 13 equal
monthly increments beginning March 31, 2004.

The R&D commitments  represent scheduled  professional fee payments for clinical
services  relating to the Phase III  clinical  study of  dexanabinol  for severe
traumatic brain injury.  One of the clinical service based agreements,  if fully
executed,  currently  totals  $10.9  million and is not  committed  beyond 2004.
Through December 31, 2003, the Company has recorded $9.0 million as an expense.

The Company has entered into various employment  agreements.  The terms of these
employment agreements include one-year renewable terms and do not represent long
term commitments of the Company.

Management  believes  that  cash and cash  equivalents  of $49.4  million  as of
December  31,  2003,  will be  sufficient  to support the  Company's  continuing
operations  beyond  December 2004. 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.



                                       22
<PAGE>


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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,  restricted cash, and convertible debentures. Due to the short-term
nature of the cash and cash  equivalent  investments,  restricted  cash, and the
fixed interest rate on the  convertible  debt, 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
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.

ITEM 9A. 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 Rules
13a-14(c) and 15d-14(c)  under the Securities  Exchange Act of 1934, as amended)
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  are  effective  and
designed to ensure that the information  required to be disclosed in our reports
filed or  submitted  under  the  Securities  Exchange  Act of 1934 is  recorded,
processed, summarized and reported within the requisite time periods.

Our  management,  including  our Chief  Executive  Officer  and Chief  Financial
Officer, does not expect that our disclosure controls and procedures or internal
control  over  financial  reporting  will  prevent  all errors and all fraud.  A
control  system,  no matter how well  conceived and  operated,  can provide only
reasonable,  not absolute,  assurance  that the objectives of the system are met
and cannot detect all  deviations.  Because of the inherent  limitations  in all
control systems,  no evaluation of controls can provide absolute  assurance that
all  control  issues and  instances  of fraud or  deviations,  if any within the
company have been detected.  While we believe that our  disclosure  controls and
procedures have been effective, in light of the foregoing, we intend to continue
to examine and refine our disclosure  control and procedures to monitor  ongoing
developments in this area.

CHANGES IN INTERNAL CONTROLS

There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f)  under the Securities  Exchange Act of 1934, as
amended)  identified in connection  with the evaluation of our internal  control
performed  during our last fiscal  quarter that has materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.




                                       23
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

NAME                                   AGE    POSITION
----                                   ---    --------
Haim Aviv, Ph.D                         64    Chairman, Chief Executive Officer,
                                                 Chief Scientist and Director
Gad Riesenfeld, Ph.D                    60    President, Chief Operating Officer
Robert W. Cook                          48    Executive Vice President and
                                                 Chief Financial Officer
David Schlachet **                      58    Director
Mony Ben Dor                            58    Director
Georges Anthony Marcel, M.D., Ph.D **   63    Director
Elkan R. Gamzu, Ph.D **                 61    Director
Lawrence F. Marshall, M.D.              60    Director

** Members of the Audit Committee

Haim Aviv, Ph.D., is Chairman,  Chief Executive  Officer,  Chief Scientist and a
Director of the Company. In 1990, he co-founded Pharmos Corporation,  a New York
corporation ("Old Pharmos"),  which merged into the Company in October 1992 (the
"Merger").  Dr. Aviv also served as Chairman,  Chief  Executive  Officer,  Chief
Scientist  and a Director of Old Pharmos  prior to the Merger.  Dr. Aviv was the
co-founder in 1980 of Bio-Technology  General Corp.  ("BTG"),  a publicly-traded
company  engaged in the  development  of products  using  recombinant  DNA,  its
General Manager and Chief Scientist from 1980 to 1985, and a Director and Senior
Scientific  Consultant  until  August 1993.  Prior to that time,  Dr. Aviv was a
professor of molecular biology at the Weizmann Institute of Science. Dr. Aviv is
the  principal  stockholder  of Avitek Ltd.  Dr. Aviv is also an officer  and/or
significant stockholder of several privately held Israeli  biopharmaceutical and
venture capital companies. Dr. Aviv is a member of the Board of Directors of Ben
Gurion University at Beer-Sheva,  Israel and Yeda Ltd. the commercial arm of the
Weizmann  Institute,  Rehovot,  Israel.  Dr. Aviv holds a Ph.D.  degree from the
Weizmann Institute of Science.

Gad Riesenfeld,  Ph.D.,  was named President and Secretary in February 1997, and
has served as Chief  Operating  Officer since March 1995. He served as Executive
Vice President from December 1994 to February 1997,  Vice President of Corporate
Development  and General  Manager of Florida  Operations  from  October  1992 to
December  1994,  and was  employed by Pharmos  from March 1992 until the Merger.
Prior thereto,  he was engaged in a variety of Pharmaceutical  and Biotechnology
business  activities  relating  to  the  development  and  commercialization  of
intellectual property,  primarily in the pharmaceutical and medical fields. From
March 1990 through May 1991 Dr.  Riesenfeld was a Managing Director of Kamapharm
Ltd., a private company  specializing  in human blood  products.  Prior thereto,
from May 1986,  he was  Managing  Director  of Galisar  Ltd.,  a  pharmaceutical
company involved in extracorporeal  blood therapy.  Dr. Riesenfeld holds a Ph.D.
degree from the Hebrew University of Jerusalem and held a scientist position, as
a post doctorate, at the Cedars Sinai Medical Center in Los Angeles, California.

Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became  Executive  Vice  President in February 2001.
From May 1995 until his appointment as the Company's Chief Financial Officer, he
was a vice president in GE Capital's commercial finance subsidiary, based in New
York.  From 1977 until 1995,  Mr. Cook held a variety of  corporate  finance and
capital  markets  positions at The Chase Manhattan Bank, both in the U.S. and in
several overseas locations. He was named a managing director of Chase in January
1986.  Mr.  Cook  holds a degree  in  international  finance  from The  American
University, Washington, D.C.



                                       24
<PAGE>


David  Schlachet,  a Director of the Company from December  1994,  served as the
Chairman of Elite  Industries  Ltd. from July 1997 until June 2000. From January
1996 to June 1997,  Mr.  Schlachet  served as the Vice  President of the Strauss
Group and Chief  Executive  Officer of Strauss  Holdings  Ltd,  one of  Israel's
largest privately owned food manufacturers. He was Vice President of Finance and
Administration at the Weizmann Institute of Science in Rehovot, Israel from 1990
to December 1995, and was  responsible for the  Institute's  administration  and
financial  activities,   including  personnel,   budget  and  finance,  funding,
investments,  acquisitions  and  collaboration  with the industrial and business
communities.  From 1989 to 1990, Mr. Schlachet was President and Chief Executive
Officer of YEDA  Research and  Development  Co. Ltd., a marketing  and licensing
company at the Weizmann  Institute of Science.  Mr. Schlachet is a member of the
Board of Directors of Harel Capital  Markets  (Israeli  broker,  underwriter and
asset management firm), Israel Discount Bank Ltd., Hapoalim Capital Markets Ltd,
Teldor Ltd.  (software and computer  company),  Proseed Ltd., a Venture  Capital
investment company, Compugen Ltd. and Taya Investment Company Ltd. Mr. Schlachet
also serves as the Managing  Partner in Biocom, a V.C. Fund in the field of Life
Science.

Mony Ben Dor, a director of the Company since  September 1997, has been managing
partner of Biocom,  a V.C Fund in the field of Life  Science  since  April 2000.
Prior to that he was Vice  President  of the Israel  Corporation  Ltd.  from May
1997, and Chairman of two publicly traded subsidiaries: H.L. Finance and Leasing
and Albany  Bonded  International  Trade.  He was also a Director of a number of
subsidiary  companies such as Israel  Chemicals  Ltd., Zim Shipping  Lines,  and
Tower Semi Conductors. From 1992-1997 Mr. Ben Dor was Vice President of Business
Development for Clal Industries Limited,  which is one of the leading investment
groups in Israel.  He was  actively  involved in the  acquisition  of  companies
including a portfolio  of  pharmaceutical  companies,  Pharmaceutical  Resources
Inc.,  Finetech  Ltd.,  BioDar  Ltd.,  to name a few.  He served  as a  director
representing  Clal Industries in all of the acquired  companies as well as other
companies of Clal Industries.  Prior to his position at Clal Industries, Mr. Ben
Dor served as Business Executive at the Eisenberg Group of companies.

Georges Anthony Marcel,  M.D.,  Ph.D., a Director of the Company since September
1998, is President  and Chairman of TMC  Development  S.A., a  biopharmaceutical
consulting  firm based in Paris,  France.  Prior to founding TMC  Development in
1992,  Dr.  Marcel  held  a  number  of  senior   executive   positions  in  the
pharmaceutical  industry,  including Chief  Executive  Officer of Amgen's French
subsidiary,  Vice President of Marketing for Rhone-Poulenc Sante and Director of
Development for Roussel-Uclaf.  Dr. Marcel is a member of the Board of Directors
of Hybridon, Inc., and of the Scientific Advisory Board of the Swiss Corporation
TECAN Ltd.  Dr.  Marcel  teaches  biotechnology  industrial  issues and European
regulatory affairs at the Faculties of Pharmacy of Paris and Lille as well as at
Versailles Law School.  Dr. Marcel is also a member of the Gene Therapy Advisory
Committee at the French Medicines Agency.

Elkan R. Gamzu,  Ph.D.,  a Director of the Company  since  February  2000,  is a
consultant to the biotechnology and pharmaceutical industries and a Principal of
the  due  diligence  company   BioPharmAnanlysis,   LLC.  Prior  to  becoming  a
consultant,  Dr.  Gamzu  held a number  of  senior  executive  positions  in the
biotechnology  and  pharmaceutical  industries,  including  President  and Chief
Executive  Officer of Cambridge  Neuroscience,  Inc.  from 1994 until 1998.  Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience,  Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior  positions with  Warner-Lambert  and  Hoffmann-La
Roche,  Inc. In 2001 and 2002, Dr. Gamzu was part-time  Interim VP,  Development
Product Leadership for Millennium Pharmaceuticals, Inc. Dr. Gamzu is a member of
the Board of  Directors  of three other  biotechnology  companies:  the publicly
traded  XTL  Biopharmaceuticals   Ltd.  and  the  privately  held  biotechnology
companies  Neurotech S.A. of Paris, France and Hypnion,  Inc. of Worcester,  MA.
Dr.  Gamzu  recently  was  appointed  the  Chairman of the Board of Directors of
NeuroHealing Pharmaceuticals Incorporated.

Lawrence  F.  Marshall,  M.D.,  a Director of the  Company  since June 2002,  an
internationally  recognized  neurosurgeon  and opinion  leader in the field,  is
currently  Professor  and Chair of the Division of  Neurological  Surgery at the
University of  California,  San Diego Medical  Center.  Dr.  Marshall's  30-year
career as a scientist and  neurosurgeon  has been at the forefront in the search
for new and better treatment



                                       25
<PAGE>


measures to improve  patient  outcome.  He has been  principal  investigator  or
co-investigator  in over two dozen  preclinical  and clinical  trials  primarily
relating  to head and  spinal  cord  injury,  including  projects  funded by the
National  Institutes of Health, the Insurance  Institute for Highway Safety, and
several large  pharmaceutical  companies.  Results of research undertaken by Dr.
Marshall, which cover a wide range of issues related to TBI and other conditions
of the brain,  have been published in dozens of scientific  journals.  Among the
numerous board,  committee,  editorial and other positions Dr. Marshall has held
or holds are board and  committee  memberships  with the  American  Brain Injury
Consortium,  the National Head Injury  Foundation,  the American  Association of
Neurological Surgeons and the Congress of Neurological Surgeons. Dr. Marshall is
the recipient of many distinguished medical prizes and awards.

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 Corporate Governance Code of Conduct
filed as an exhibit to this annual report on Form 10-K and are also available on
the Company's website at www.pharmoscorp.com/investors.

BOARD COMMITTEES

The Board has a  standing  Compensation  Committee,  Governance  and  Nominating
Committee and Audit Committee.

The   Compensation   Committee  is  primarily   responsible  for  reviewing  the
compensation  arrangements for the Company's executive  officers,  including the
Chief Executive Officer, and for administering the Company's stock option plans.
Members of the Compensation Committee are Messrs. Ben Dor, Gamzu and Marshall.

The Governance and Nominating Committee,  created by the Board in February 2004,
assists the Board in  identifying  qualified  individuals  to become  directors,
determines the composition of the Board and its committees, monitors the process
to assess Board  effectiveness  and helps  develop and  implement  the Company's
corporate  governance  guidelines.  Members  of the  Governance  and  Nominating
Committee are Messrs. Ben Dor, Marcel and Schlachet.

The Audit  Committee  is  primarily  responsible  for  overseeing  the  services
performed by the Company's  independent  auditors and  evaluating  the Company's
accounting  policies and its system of internal  controls.  Consistent  with the
Nasdaq  audit  committee  structure  and  membership  requirements,   the  Audit
Committee is comprised of three members:  Messrs.  Gamzu,  Marcel and Schlachet,
all of whom  are  independent  directors.  While  more  than one  member  of the
Company's Audit Committee  qualifies as an "audit  committee  financial  expert"
under  Item  401(h) of  Regulation  S-K,  Mr.  David  Schlachet,  the  Committee
chairperson,  is the designated audit committee  financial expert. Mr. Schlachet
is considered  "independent" as the term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.

The Audit  Committee,  Compensation  Committee  and  Governance  and  Nominating
Committee  each  operate  under  written  charters  adopted by the Board.  These
charters  are filed as exhibits to this annual  report on Form 10-K and are also
available on the Company's website at www.pharmoscorp.com/investors.



                                       26
<PAGE>


CODE OF ETHICS

As part of our  system  of  corporate  governance,  our Board of  Directors  has
adopted  a Code  of  Ethics  and  Business  Conduct  that is  applicable  to all
employees and specifically applicable to our chief executive officer, president,
chief  financial  officer  and  controllers.  The Code of  Ethics  and  Business
Guidelines  are filed as exhibits to this Annual Report on Form 10-K and is also
available on our website at www.pharmoscorp.com/investors. We intend to disclose
any changes in or waivers from our Code of Ethics and Business Conduct by filing
a Form 8-K or by posting such information on our website.

SECTION 16 FILINGS

No person who,  during the fiscal year ended  December 31, 2003, was a director,
officer or  beneficial  owner of more than ten percent of the  Company's  Common
Stock  which is the only class of  securities  of the Company  registered  under
Section 12 of the  Securities  Exchange  Act of 1934 (the  "Act"),  a "Reporting
Person" failed to file on a timely basis,  reports required by Section 16 of the
Act during the most recent  fiscal  year.  The  foregoing is based solely upon a
review by the  Company of Forms 3 and 4 during the most  recent  fiscal  year as
furnished  to the Company  under Rule  16a-3(d)  under the Act,  and Forms 5 and
amendments  thereto  furnished  to the Company  with  respect to its most recent
fiscal year, and any  representation  received by the Company from any reporting
person that no Form 5 is required.

ITEM 11.  EXECUTIVE COMPENSATION

The following  table  summarizes the total  compensation  of the Chief Executive
Officer of the Company in 2003 and the two previous  years, as well as all other
executive  officers  of the  Company  who  received  compensation  in  excess of
$100,000 for 2003.

<TABLE>
<CAPTION>
                                   ANNUAL COMPENSATION                      LONG TERM COMPENSATION
                               --------------------------                   ----------------------
                                                                                          STOCK
NAME/                                                                       RESTRICTED  UNDERLYING
PRINCIPAL POSITION             YEAR    SALARY      BONUS         OTHER        STOCK      OPTIONS
------------------             ----   --------   --------     -----------   ----------  ----------
<S>                            <C>    <C>        <C>          <C>                        <C>
Haim Aviv, Ph.D
Chairman, Chief                2003   $281,400   $ 50,000     $ 21,928(1)                200,000
Executive Officer, and         2002   $289,459   $100,000     $ 19,833(1)                150,000
Chief Scientist                2001   $268,000   $ 80,000     $  2,844                   100,000


Gad Riesenfeld, Ph.D
President and                  2003   $234,965   $ 40,000     $ 60,743(2)                135,000
Chief Operating Officer        2002   $255,157   $ 80,000     $ 74,924(2)                100,000
                               2001   $209,790   $ 42,000     $ 56,556(2)                 50,000


Robert W. Cook
Executive Vice President       2003   $222,264   $ 37,500     $ 24,608(1)                115,000
and Chief Financial Officer    2002   $222,264   $ 75,000     $ 15,338(1)                 80,000
                               2001   $198,450   $ 40,000     $ 15,338(1)                 40,000
</TABLE>

----------
(1)   Consists of contributions to insurance premiums and car allowance.

(2)   Consists of housing allowance,  contributions to insurance  premiums,  car
      allowance and car expense.


The following  tables set forth  information with respect to the named executive
officers  concerning  the grant and  exercise of options  during the last fiscal
year and unexercised options held as of the end of the fiscal year.



                                       27
<PAGE>


OPTION GRANTS FOR THE YEAR ENDED DECEMBER 31, 2003

                          COMMON
                           STOCK     % OF TOTAL
                        UNDERLYING     OPTIONS     EXERCISE
                         OPTIONS      GRANTED TO   PRICE PER
                         GRANTED      EMPLOYEES      SHARE      EXPIRATION DATE
                        ----------   -----------   ---------    ---------------
Haim Aviv, Ph.D          187,500        24.4%      $   1.02      Feb 18, 2013
Gad Riesenfeld, Ph.D     125,000        16.3%      $   1.02      Feb 18, 2013
Robert W. Cook           100,000        13.0%      $   1.02      Feb 18, 2013


AGGREGATED  OPTION  EXERCISES  FOR THE YEAR ENDED  DECEMBER  31, 2003 AND OPTION
VALUES AS OF DECEMBER 31, 2003:

<TABLE>
<CAPTION>
                                                                               VALUE OF UNEXERCISED
                         NUMBER OF                  NUMBER OF UNEXERCISED     IN-THE-MONEY OPTIONS AT
                          SHARES                OPTIONS AT DECEMBER 31, 2003     DECEMBER 31, 2003
                        ACQUIRED ON    VALUE    ---------------------------- -------------------------
NAME                     EXERCISE    REALIZED    EXERCISABLE UNEXERCISABLE   EXERCISABLE UNEXERCISABLE
--------------------    -----------  --------    ----------- -------------   ----------- -------------
<S>                       <C>         <C>          <C>          <C>           <C>          <C>
Haim Aviv, Ph.D               --           --      555,001      346,875       $635,276     $681,250
Gad Riesenfeld, Ph.D      50,000      $62,500      273,083      221,250       $269,978     $440,625
Robert W. Cook            40,000      $50,000      188,750      176,250       $199,450     $352,500
</TABLE>

STOCK OPTION PLANS

It is  currently  the  Company's  policy  that all full time key  employees  are
considered  annually for the possible  grant of stock  options,  depending  upon
employee performance. The criteria for the awards are experience,  uniqueness of
contribution  to the Company  and level of  performance  shown  during the year.
Stock options are intended to generate  greater  loyalty to the Company and help
make each  employee  aware of the  importance  of the  business  success  of the
Company.

As of December 31, 2003,  3,791,449  options to purchase shares of the Company's
Common Stock were outstanding  under various option plans,  723,942 of which are
non-qualified  options.  During 2003,  the Company  granted  967,500  options to
purchase shares of its Common Stock to employees and directors, of which 200,000
are non-qualified options.

A summary of the various established stock option plans is as follows:

1992 PLAN. The maximum number of shares of the Company's  Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits,  stock dividends,  mergers,  consolidations and the like.
Common  Stock  subject to  options  granted  under the 1992 Plan that  expire or
terminate would again be available for options to be issued under the 1992 Plan.
As of December 31, 2003, there were 277,086 options  outstanding to purchase the
Company's Common Stock under this plan. Each option granted which is outstanding
under the 1992 plan as of December 31, 2003 expires on October 31, 2005.

1997 PLAN AND 2000 PLAN.  The 1997 Plan and the 2000 Plan are each  administered
by  a  committee   appointed  by  the  Board  of  Directors  (the  "Compensation
Committee").  The  Compensation  Committee will designate the persons to receive
options,  the  number  of shares  subject  to the  options  and the terms of the
options,  including the option price and the duration of each option, subject to
certain limitations.

The maximum  number of shares of Common Stock  available for issuance  under the
1997 Plan is 1,500,000 shares, as amended,  and under the 2000 Plan is 3,500,000
shares.  Each plan is subject to adjustment in the event of stock splits,  stock
dividends, mergers, consolidations and the like. Common Stock subject to



                                       28
<PAGE>


options  granted  under the 1997 Plan and the 2000 Plan that expire or terminate
will again be available for options to be issued under each Plan.

The price at which shares of Common Stock may be purchased  upon  exercise of an
incentive  stock option must be at least 100% of the fair market value of Common
Stock on the date the option is granted (or at least 110% of fair  market  value
in the case of a person  holding  more  than 10% of the  outstanding  shares  of
Common Stock (a "10% Stockholder")).

The aggregate  fair market value  (determined at the time the option is granted)
of Common Stock with respect to which  incentive  stock options are  exercisable
for the first time in any calendar year by an optionee  under the 1997 Plan, the
2000 Plan or any other  plan of the  Company or a  subsidiary,  shall not exceed
$100,000.  The  Compensation  Committee will fix the time or times when, and the
extent to  which,  an option is  exercisable,  provided  that no option  will be
exercisable  earlier  than one year or later  than ten  years  after the date of
grant (or five  years in the case of a 10%  Stockholder).  The  option  price is
payable in cash or by check. However, the Board of Directors may grant a loan to
an employee,  pursuant to the loan  provision of the 1997 Plan or the 2000 Plan,
for the  purpose of  exercising  an option or may permit the option  price to be
paid in shares of Common Stock at the then current fair market value, as defined
in the 1997 Plan or the 2000 Plan.

Under  the  1997  Plan,  upon   termination  of  an  optionee's   employment  or
consultancy,  all options held by such optionee will terminate,  except that any
option that was  exercisable on the date  employment or  consultancy  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
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such  three-month  period,  the option 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. The
2000  Plan  provides  that  the  Compensation  Committee  may in its  discretion
determine  when  any  particular  stock  option  shall  expire.  A stock  option
agreement may provide for  expiration  prior to the end of its term in the event
of the  termination  of the  optionee's  service to the  Company or death or any
other circumstances.

The 1997 Plan and the 2000 Plan each  provides  that  outstanding  options shall
vest and become immediately exercisable in the event of a "sale" of the Company,
including  (i) the sale of more than 75% of the voting power of the Company in a
single  transaction or a series of transactions,  (ii) the sale of substantially
all  assets  of  the  Company,   (iii)  approval  by  the   stockholders   of  a
reorganization,  merger or consolidation,  as a result of which the stockholders
of the Company  will own less than 50% of the voting  power of the  reorganized,
merged or consolidated company.

The Board of Directors may amend,  suspend or discontinue  the 1997 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 1997 Plan, (ii) change the  designation of the class of persons  eligible to
receive  options,  (iii)  decrease  the price at which  options  may be granted,
except that the Board may, without stockholder  approval accept the surrender of
outstanding  options and authorize  the granting of new options in  substitution
therefore  specifying  a lower  exercise  price  that is not less  than the fair
market value of Common Stock on the date the new option is granted,  (iv) remove
the administration of the 1997 Plan from the Compensation Committee,  (v) render
any member of the Compensation Committee eligible to receive an option under the
1997 Plan while  serving  thereon,  or (vi) amend the 1997 Plan in such a manner
that options issued under it intend to be incentive stock options,  fail to meet
the  requirements  of Incentive  Stock  Options as defined in Section 422 of the
Code.

The Board of Directors may amend,  suspend or discontinue  the 2000 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 2000 Plan or (ii) change the designation of the class of persons eligible to
receive options.



                                       29
<PAGE>


In February 2003, the 2000 Plan was amended by the Board of Directors to provide
that  options  to be  granted to those  employees  of Pharmos or its  subsidiary
Pharmos Ltd.  who are  residents of Israel will be issued to a trustee for their
benefit instead of to them directly. This amendment is to afford recipients more
favorable tax treatment under the laws of the State of Israel. Since this change
is not material to the Plan, stockholder approval is not required.

Under current federal income tax law, the grant of incentive stock options under
the 1997  Plan or the 2000 Plan will not  result  in any  taxable  income to the
optionee or any  deduction  for the Company at the time the options are granted.
The  optionee  recognizes  no gain upon the  exercise of an option.  However the
amount by which the fair market  value of Common Stock at the time the option is
exercised  exceeds  the  option  price  is an "item  of tax  preference"  of the
optionee,  which may cause the optionee to be subject to the alternative minimum
tax. If the optionee  holds the shares of Common  Stock  received on exercise of
the  option at least one year from the date of  exercise  and two years from the
date of grant,  he will be taxed at the time of sale at long-term  capital gains
rates, if any, on the amount by which the proceeds of the sale exceed the option
price. If the optionee  disposes of the Common Stock before the required holding
period is satisfied,  ordinary  income will generally be recognized in an amount
equal to the excess of the fair  market  value of the shares of Common  Stock at
the date of exercise over the option price,  or, if the disposition is a taxable
sale or exchange,  the amount of gain  realized on such sale or exchange if that
is less.  If,  as  permitted  by the 1997  Plan or the 2000  Plan,  the Board of
Directors permits an optionee to exercise an option by delivering  already owned
shares of Common  Stock  valued at fair  market  value)  the  optionee  will not
recognize  gain as a result of the payment of the option price with such already
owned shares.  However,  if such shares were  acquired  pursuant to the previous
exercise  of an option,  and were held less than one year after  acquisition  or
less than two years  from the date of grant,  the  exchange  will  constitute  a
disqualifying  disposition  resulting in  immediate  taxation of the gain on the
already  owned shares as ordinary  income.  It is not clear how the gain will be
computed on the  disposition  of shares  acquired by payment with already  owned
shares.

2001 EMPLOYEE  STOCK  PURCHASE  PLAN. The 2001 Plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Code. All employees of the
Company,  its Pharmos Ltd.  subsidiary or any other  subsidiaries  or affiliated
entities  who  have  completed  180  consecutive  days  of  employment  and  who
customarily  work at least 20 hours per week will be eligible to  participate in
the 2001 Plan,  except  for any  employee  who owns five  percent or more of the
total  combined  voting power or value of all classes of stock of the Company or
any subsidiary on the date a grant of a right to purchase  shares under the 2001
Plan (Right) is made.  There  currently  are no such  employees  with such large
holdings.  Participation  by officers in the 2001 Plan will be on the same basis
as that of any other employee. No employee will be granted a Right which permits
such  employee to purchase  shares  under the 2001 Plan at a rate which  exceeds
$25,000 of fair market value of such shares  (determined  at the time such Right
is granted)  for each  calendar  year in which such Right is  outstanding.  Each
Right will expire if not  exercised by the date  specified  in the grant,  which
date will not exceed 27 months  from the date of the grant.  Rights  will not be
assignable or transferable by a participating employee, other than in accordance
with certain qualified  domestic relations orders, as defined in the Code, or by
will or the laws of descent and distribution.

The total number of shares  reserved for issuance under the 2001 Plan is 500,000
shares.  Under the 2001  Plan,  for any given  calendar  year,  a  participating
employee  can only be granted  Rights to purchase  that number of shares  which,
when  multiplied by the exercise price of the Rights,  does not exceed more than
10% of the employee's base pay. The Company contemplates that payroll deductions
generally will be used by participating  employees to acquire the shares covered
by their Rights.  From inception to December 31, 2003, the Company issued 53,303
shares of its common  stock  through  the 2001 Plan.  During  2003,  the Company
issued 29,919 shares of its common stock through the 2001 Plan.

From time to time, the Board of Directors may fix a date or a series of dates on
which the Company will grant Rights to purchase shares of Common Stock under the
2001 Plan at prices not less than 85% of the lesser of (i) the fair market value
of the shares on the date of grant of such Right or (ii) the fair  market  value
of the shares on the date such Right is exercised.



                                       30
<PAGE>


The 2001 Plan also provides that any shares of Common Stock  purchased  upon the
exercise of Rights cannot be sold for at least six months following exercise, to
avoid potential violations of the "short swing" trading provisions of Section 16
of the Securities Exchange Act of 1934, as amended.

The Board of Directors or a committee to which it delegates its authority  under
the 2001 Plan will  administer,  interpret and apply all  provisions of the 2001
Plan.  The Board has  delegated  such  authority to the  Compensation  and Stock
Option Committee.

The Board of Directors may amend,  modify or terminate the 2001 Plan at any time
without notice, provided that no such amendment, modification or termination may
adversely affect any existing Rights of any participating employee,  except that
in the case of a participating  employee of a foreign subsidiary of the Company,
the 2001 Plan may be varied to conform with local laws. In addition,  subject to
certain  appropriate  adjustments  to give  effect to  relevant  changes  in the
Company's  capital  stock,  no  amendments  to the 2001 Plan may be made without
stockholder approval if such amendment would increase the total number of shares
offered under the 2001 Plan or would render Rights "unqualified" for special tax
treatment under the Code.

No taxable income will be recognized by a participant either at the time a Right
is granted under the 2001 Plan or at the time the shares are purchased. Instead,
tax  consequences  are generally  deferred  until a participant  disposes of the
shares (e.g., by sale or gift). The federal income tax consequences of a sale of
shares  purchased  under  the 2001 Plan  will  depend on the  length of time the
shares  are held  after  the  relevant  date of grant and date of  exercise,  as
described below.

If shares  purchased  under the 2001 Plan are held for more than one year  after
the  date of  purchase  and more  than two  years  from the date of  grant,  the
participant generally will have taxable ordinary income on a sale or gift of the
shares to the extent of the lesser of: (i) the amount (if any) by which the fair
market value of the stock at the date of grant  exceeds the exercise  price paid
by the  participant;  or (ii) the amount by which the fair  market  value of the
shares  on the  date of sale or gift  exceeds  the  exercise  price  paid by the
participant  for the shares.  In the case of a sale, any additional gain will be
treated  as  long-term  capital  gain.  If the shares are sold for less than the
purchase price,  there will be no ordinary income, and the participant will have
a long-term  capital loss for the difference  between the purchase price and the
sale price.

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.

1997 EMPLOYEES AND DIRECTORS WARRANTS PLAN

The 1997 Employees and Directors  Warrants Plan was approved by the Stock Option
Committee  as of February  12, 1997 and March 19,  1997.  1,030,000  Warrants to
purchase  1,030,000 shares of Common Stock were granted to certain  employees of
the Company.  Of such  warrants,  955,000  were granted at an exercise  price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together,  the "1997 Employees  Warrants").  The 1997 Employees Warrants become
exercisable in increments of 25% each on their first,  second,  third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase  100,000  shares of Common  Stock were  granted to  directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors  Warrants")
on  February  12,  1997.  The 1997  Directors  Warrants  become  exercisable  in
increments of 25% each on the



                                       31
<PAGE>


first,  second,  third and fourth  anniversaries  of February 12, 1997 and shall
expire on February  12,  2007.  At December  31,  2003,  there were 486,500 1997
Employees  Warrants at $1.59, no 1997 Employees Warrants at $1.66 and 5,000 1997
Directors Warrants at $1.59 outstanding.

Upon  termination of a Warrant Holder's  employment,  consultancy or affiliation
with 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 disability 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.

EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION

Haim Aviv,  Ph.D. In April 2001, the  Compensation and Stock Option Committee of
the  Board  of  Directors  recommended,  and  the  Board  approved,  a  one-year
employment/consulting agreement for Dr. Aviv, as Chairman of the Board and Chief
Executive  Officer of the  Company.  Dr. Aviv has agreed to devote a majority of
his business time to the Company and to Pharmos Ltd. The agreement  provides for
automatic one year renewals  unless either the Company  terminates the agreement
at least 180 days prior to the scheduled  expiration date during the initial one
year  term  (and 90 days  for  subsequent  terms)  or Dr.  Aviv  terminates  the
agreement at least 60 days prior to the scheduled  expiration  date.  Dr. Aviv's
base compensation for 2003 was $281,400, to be allocated between the Company and
Pharmos Ltd., and his base salary for 2004, effective January 1, is $298,284, to
be  allocated  between the Company and Pharmos  Ltd.  The Company also agreed to
make  available  for Dr. Aviv's  benefit  following  his death,  termination  of
employment  for  disability  or  retirement  at the age of at least 62 an amount
equal to the  cost of  insurance  premiums  the  Company  would  otherwise  have
incurred to obtain and maintain a  "split-dollar"  life insurance  policy on his
life  (approximately  $10,000 per year,  accruing  interest at 8% per year).  In
addition,  the Company agreed to pay, in lieu of  contributing to other benefits
plans on his behalf, an amount equal to an aggregate of approximately 21% of his
base  compensation  toward  the  "Management  Insurance  Scheme"  managed by the
government of Israel for members of management of Israeli companies.

Dr.  Aviv's  employment  agreement  also  provides  that  if his  employment  is
terminated  within one year  following a "change of  control,"  he will  receive
severance pay of 18 months of base salary for the then-current year, accelerated
vesting of all unvested stock options and extended  exercisability  of all stock
options until their respective  expiration dates. A "change of control" involves
an acquisition of at least 50% of the voting power of the Company's  securities,
a change in at least 51% of the  composition  of the current Board of Directors,
or  approval  by the Board of  Directors  or  stockholders  of the  Company of a
transaction  where such  change of voting  control or  composition  of the Board
would occur, where the Company would be liquidated or where all or substantially
all of its assets would be sold.

If Dr. Aviv's employment is terminated by the Company,  after notice, other than
for a change in control,  death,  disability  or for  "cause," as defined in his
employment  agreement,  or if he terminates his employment  within one year of a
change in control or otherwise for "good  reason," as defined in his  employment
agreement,  he will  receive  severance  pay of 12 months of base salary for the
then-current  year,  accelerated  vesting  of all  unvested  stock  options  and
extended  exercisability of all stock options until their respective  expiration
dates.

The  employment   agreement   also  contains   customary   confidentiality   and
non-competition undertakings by Dr. Aviv.

Gad Riesenfeld, Ph.D. In April 2001, the Compensation and Stock Option Committee
of the  Board of  Directors  recommended,  and the  Board  approved,  a one year
employment  agreement  for Dr.  Riesenfeld,  as  full-time  President  and Chief
Operating Officer of the Company.  Dr.  Riessenfeld's base compensation for 2003
was $234,965, and his base salary for 2004, effective January 1, is 249,063.



                                       32
<PAGE>


The other  provisions  of Dr.  Riesenfeld's  employment  agreement  relating  to
benefits,  severance  arrangements,  automatic renewal and  confidentiality  and
non-competition  obligations are substantially  similar to those included in Dr.
Aviv's  employment  agreement,  as described  above,  except that the  Company's
contribution to the "Management  Insurance Scheme" on Dr. Riesenfeld's behalf is
approximately  16%. In addition,  the  Compensation  Committee  and the Board of
Directors  in April  2001  also  authorized  an  amendment  to Dr.  Riesenfeld's
employment  agreement to provide that if the Company hires a new Chief Executive
Officer,  Dr.  Riesenfeld  will  be  awarded,  at the  time of  commencement  of
employment, a one-time stock option grant equal to the highest grant he received
during the previous three years,  in addition to his annual stock option awards.
In  addition,  any  termination  by the  Company  within  12 months  after  such
commencement  of employment  will require 180 days' prior written  notice to Dr.
Riesenfeld  and will  entitle  him to  severance  pay equal to 12 months of base
salary.  In such  circumstances,  any  resignation by Dr.  Riesenfeld  within 12
months  thereafter  other than for "good  reason" (as defined in his  employment
agreement) will require 90 days' prior written notice by Dr. Riesenfeld and will
entitle  him to 12  months  of base  salary.  The  amendment  to his  employment
agreement also provides that Dr.  Riesenfeld will act as an unpaid consultant to
the Company for a one year period following any such termination or resignation.

Robert W. Cook. In April 2001, the  Compensation  and Stock Option  Committee of
the  Board  of  Directors  recommended,  and  the  Board  approved,  a one  year
employment agreement for Mr. Cook, as full-time Vice President Finance and Chief
Operating  Officer of the Company.  Mr.  Cook's base  compensation  for 2003 was
$222,264,  and his base salary for 2004,  effective January 1, is $235,600.  The
other  provisions  of Mr.  Cook's  employment  agreement  relating to  benefits,
severance    arrangements,    automatic   renewal   and    confidentiality   and
non-competition  obligations are substantially  similar to the those included in
Dr. Aviv's employment  agreement,  as described above, except that Mr. Cook does
not participate in the "Management  Insurance  Scheme" of the Company's  Israeli
subsidiary.  In October  2003 the Company and Mr. Cook agreed to an amendment of
his employment  agreement that terminated a related Split Dollar Agreement dated
September 20, 2000.  The Company  forgave the loans made to Mr. Cook used to pay
"whole  life"  insurance  premiums  for his benefit  covered by such  Agreement,
granted him a one-time  cash bonus of $8,500 to partially  offset the income tax
effects of such  forgiveness,  and agreed to pay or reimburse  future  insurance
premium  payments  and the income tax effects  thereof  via an annual  executive
bonus,  provided  that each such  executive  bonus  payment shall not exceed the
annual  payment of $10,538  previously  made by the Company on Mr. Cook's behalf
under the Split Dollar Agreement.

Elkan R. Gamzu,  Ph.D.  In January 2000,  the Company  entered into a consulting
agreement  with Dr.  Gamzu  with a term of one year  (subject  to  extension  by
written agreement of the Company and Dr. Gamzu), pursuant to which Dr. Gamzu may
provide  certain  assistance and consulting  services to the Company as and when
needed.  The  agreement  provides  for  compensation  on a  per  diem  basis  in
connection with the provision of such assistance and consulting  services at the
rate of $3,000 per day. In 2003,  the Company paid $7,500 to Dr. Gamzu  pursuant
to the consulting agreement.

The  Company  also  entered  into a  consulting  agreement  with  another of our
Directors,  Dr. Georges Anthony Marcel, pursuant to which Dr. Marcel may provide
certain assistance and consulting services to the Company as and when needed. In
2003,  the  Company  paid  $15,844  to Dr.  Marcel  pursuant  to the  consulting
agreement.

Drs. Gamzu and Marcel are not currently providing any consulting services to the
Company and are not receiving  any  remuneration  other than the customary  fees
received by all Directors of the Company.

Directors' Compensation. In 2001, Directors did not receive any compensation for
service on the Board or for attending Board  meetings.  In March 2002, the Board
of  Directors  of the Company  adopted a  compensation  policy  with  respect to
outside members of the Board. Specifically, the board approved:

CASH COMPENSATION

      1)    Two  payments of $2,500 each per annum,  the first due on January 1,
            and the  second  immediately  after the  earlier  of the  director's
            initial  appointment  to the board or election by the  shareholders;
            and



                                       33
<PAGE>


      2)    $1,000 per each board or committee  meeting attended in person or by
            conference call; no payment for a committee  meeting if it occurs on
            the same day as the board meeting.

STOCK COMPENSATION

      1)    An initial grant of 30,000 options,  awardable on the earlier of the
            director's  initial  appointment  to the  board or  election  by the
            shareholders; and

      2)    20,000 options annually thereafter,  awardable on the earlier of the
            date of the director's  re-election by the  shareholders or the date
            on which a general  option  grant is made by the Company for its key
            employees and directors; and

      3)    Special,  one-time  awards  may be  granted  for  attaining  certain
            corporate achievements at the recommendation of the Chairman.

In February  2004,  the Board of  Directors  adopted the  recommendation  of the
Compensation  Committee to increase Board compensation to two payments of $4,000
each per annum (a total of $8,000), to increase  attendance at board,  committee
or  shareholder  meetings  to $1,500  per  meeting  (only one  payment  per day,
regardless  of the  number  of  meetings  attended),  to  provide  for  separate
additional  payments to members of the Audit  Committee  of $2,000 per  meeting,
even if other  meetings are held on the same day, to increase the initial  stock
option grants for new  independent  directors to 35,000  options and to increase
the annual option grant to such directors to 25,000.






                                       34
<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  sets  forth  certain  information  with  respect  to  the
beneficial  ownership of the Company's  Common Stock as of February 23, 2004, by
(i) each person who was known by the Company to own beneficially more than 5% of
any class of the Company's Common Stock,  (ii) each of the Company's  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.

                                                   AMOUNT OF
NAME AND ADDRESS OF                               BENEFICIAL      PERCENTAGE OF
BENEFICIAL OWNERSHIP                               OWNERSHIP        TOTAL (1)
--------------------                              ----------      -------------
Haim Aviv, Ph.D. (2)                               1,601,008          1.8%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot 76326, Israel

David Schlachet (3)                                   61,250             *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel

Mony Ben Dor (3)                                      60,000*            *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel

Georges Anthony Marcel M.D., Ph.D.(3)                 53,750*            *
TMC Development
9, rue de Mesnil
75116 Paris, France

Elkan R. Gamzu, Ph.D. (3)                             50,000*            *
enERGetics
199 Wells Avenue, Suite 302
Newton, MA 02459

Lawrence F. Marshall, M.D. (3)                        18,125             *
University of California, San Diego
Regents Court Bldg., Suite 200
4130 LaJolla Village Drive
LaJolla, CA 92037-1480

All Directors and                                  2,425,216          2.8%
Executive Officers as a group
(8 persons)(4)

----------
* Indicates ownership of less than 1%.

(1)  Based  on  87,913,692  shares  of  Common  Stock  outstanding,   plus  each
     individual's  currently  exercisable  warrants or options.  Assumes that no
     other individual will exercise any warrants and/or options.

(2)  Includes of currently  exercisable options and warrants to purchase 710,626
     shares of Common Stock, plus 276,153 shares of Common Stock

(3)  Consists of currently  exercisable  options and warrants to purchase Common
     Stock.



                                       35
<PAGE>


(4)  Based on the number of shares of Common Stock outstanding,  plus 1,6657,084
     currently  exercisable  warrants  and  options  held by the  Directors  and
     executive officers.


Drs. Gamzu and Marcel are not currently providing any consulting services to the
Company and are not receiving  any  remuneration  other than the customary  fees
received by all Directors of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In January 2000, the Company entered into a consulting agreement with one of our
Directors,  Dr.  Elkan  Gamzu,  for a term of one year  (subject to extension by
written agreement of the Company and Dr. Gamzu), pursuant to which Dr. Gamzu may
provide  certain  assistance and consulting  services to the Company as and when
needed.  The  agreement  provides  for  compensation  on a  per  diem  basis  in
connection with the provision of such assistance and consulting  services at the
rate of $3,000 per day. In 2003,  the Company paid $7,500 to Dr. Gamzu  pursuant
to the consulting agreement.

The  Company  also  entered  into a  consulting  agreement  with  another of our
Directors,  Dr. Georges Anthony Marcel, pursuant to which Dr. Marcel may provide
certain assistance and consulting services to the Company as and when needed. In
2003,  the  Company  paid  $15,844  to Dr.  Marcel  pursuant  to the  consulting
agreement.

In December  2001,  the  Company's  Pharmos  Ltd.  subsidiary  renewed a License
Agreement  with  Herbamed,  Ltd.,  a company  controlled  by Dr. Haim Aviv,  the
Company's  Chairman  and  Chief  Executive   Officer.   The  License  Agreement,
originally  entered into in May 1997,  licenses to Herbamed the Company's patent
rights for the oral  delivery of  lipophilic  substances in the limited field of
nutraceuticals,  which  include food and dietary  supplements,  food  additives,
vitamins and herbs. Under the terms of the revised License  Agreement,  Herbamed
will pay to Pharmos Ltd.  royalties of 6% on net sales of up to $20 million,  5%
on net sales  between  $20 million and $50 million and 4% on net sales in excess
of $50 million.  During 2003, the Company recognized royalties of a non-material
amount per the licensing agreement with Herbamed.

Neither the Company nor its Pharmos Ltd.  subsidiary is involved in the field of
nutraceuticals  generally, and specifically in developing improved oral delivery
of  nutraceuticals.  Pharmos Ltd.,  therefore,  licensed its  technology in this
narrow non-pharmaceutical field of use to Dr. Aviv's company as a way of seeking
to benefit from a potential  stream of royalty payments without having to devote
any resources to the  development of an application it otherwise  would not have
pursued. In addition, if the technology proves to be successful for the delivery
of  nutraceuticals,  Pharmos  hopes that it could be able to interest  potential
strategic partners in licensing the technology for pharmaceuticals applications.

Dr. Aviv was not  involved  with either  party in  negotiating  the terms of the
License Agreement with Herbamed.  Pharmos Ltd.  concluded that the royalty rates
and other terms of the License Agreement are commercially  reasonable to it, and
the Board of the Company ratified the License Agreement.

In  October  2003  and in  accordance  with  provisions  of  the  Sarbanes-Oxley
legislation  circumscribing the practice of company loans to executive officers,
Pharmos entered into an agreement with Robert W. Cook,  Executive Vice President
and Chief Financial Officer,  forgiving the loans made to him since 2001 used to
pay "whole  life"  insurance  premiums  for his benefit and  granting Mr. Cook a
special  one-time cash bonus of no more than $8,500 in  recognition  of the fact
that such loan forgiveness resulted in Mr. Cook recognizing  additional non-cash
taxable income in 2003 of approximately  $21,000. The Company also agreed either
to pay  directly  or  reimburse  Mr.  Cook for future  premium  payments  on his
existing "whole life"  insurance  policy acquired in 2001 for his benefit by the
Corporation and to grant to him an annual special cash bonus, in addition to his
regular  annual bonus,  sufficient to account for the tax effects to him of such
reimbursement  or direct  payment by the  Corporation;  provided that the sum of
such  premium  payments  and special cash bonus in each year does not exceed the
aggregate  annual  payments  previously made by the Company on Mr. Cook's behalf
for his split-dollar insurance policy.



                                       36
<PAGE>


The Herbamed  License  Agreement was approved by Pharmos' Board of Directors and
the Cook loan  forgiveness  agreement  were  approved by  Pharmos'  Compensation
Committee.  Both  agreements  also  were  subsequently  ratified  by  the  Audit
Committee.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

The    Audit     Committee    has    selected     PricewaterhouseCoopers     LLP
("PricewaterhouseCoopers")  as the Company's independent auditors for the fiscal
year ending  December 31, 2003,  and our Board of  Directors  has directed  that
management submit the selection of independent  auditors for ratification by the
stockholders  at the Meeting.  PricewaterhouseCoopers  has audited the financial
statements of the Company and its  predecessors  for more than ten years and has
advised the Company that it does not have any material  financial  interests in,
or any  connection  with (other than as independent  auditors,  tax advisors and
management consultants), the Company.

AUDIT FEES

Aggregate fees for professional services rendered by  PricewaterhouseCoopers  in
connection with its audit of the Company's  consolidated financial statements as
of and for the years  ended  December  31,  2003 and 2002,  its  reviews  of the
Company's unaudited condensed consolidated interim financial statements, and for
SEC consultations and filings were $353,000 and $240,000, respectively.

TAX FEES

Aggregate fees for professional services rendered by  PricewaterhouseCoopers  in
connection with its income tax compliance and related tax services for the years
ended December 31, 2003, and 2002 were $80,000 and $15,000, respectively.

ALL OTHER FEES

There were no other professional services rendered by PricewaterhouseCoopers.

Stockholder  ratification  of the  selection  of  PricewaterhouseCoopers  as the
Company's  independent  auditors  is not  required  by the Bylaws or  otherwise.
However, the Board is submitting the selection of  PriceWaterhouseCoopers to the
stockholders  for  ratification  as a  matter  of  corporate  practice.  If  the
stockholders fail to ratify the selection, the Audit Committee or the Board will
reconsider  whether  or not to  retain  that  firm.  Even  if the  selection  is
ratified,  the Audit  Committee  or the Board in its  discretion  may direct the
appointment of a different  independent  accounting  firm at any time during the
year if the Audit Committee or the Board  determines that such a change would be
in the best interests of the Company and its stockholders.





                                       37
<PAGE>


                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Financial Statements and Exhibits

(1) FINANCIAL STATEMENTS

         Report of Independent Auditors

         Consolidated Balance Sheets at December 31, 2003 and 2002

         Consolidated Statements of Operations for the years ended December 31,
         2003, 2002 and 2001

         Consolidated  Statements  of  Changes in  Shareholders'  Equity for the
         years ended December 31, 2003, 2002 and 2001

         Consolidated Statements of Cash Flows for the years ended December 31,
         2003, 2002 and 2001

         Notes to Consolidated Financial Statements

(2) FINANCIAL STATEMENT SCHEDULES

         All  financial  statement  schedules  are omitted  because they are not
         applicable  or the  required  information  is  shown  in the  financial
         statements or notes thereto.

(3)  EXHIBITS

3    Articles of Incorporation and By-Laws

     3(a)         Restated Articles of Incorporation  (Incorporated by reference
                  to Appendix E to the Joint Proxy Statement/Prospectus included
                  in the Form S-4  Registration  Statement of the Company  dated
                  September   28,  1992  (No.   33-52398)   (the  "Joint   Proxy
                  Statement/Prospectus").

     3(b)         Certificate of Amendment of Restated Articles of Incorporation
                  dated  January 30, 1995  (Incorporated  by reference to Annual
                  Report on Form 10-K for the year ended December 31, 1994).

     3(c)         Certificate of Amendment of Restated Articles of Incorporation
                  dated  January  16, 1998  (Incorporated  by  reference  to the
                  Company's Current Report on Form 8-K, dated February 6, 1998).

     3(d)         Certificate of Amendment of Restated Articles of Incorporation
                  dated October 21, 1999  (Incorporated by reference to Form S-3
                  Registration Statement of the Company dated September 28, 2000
                  (No. 333-46818).

     3(e)         Certificate of Amendment of Restated Articles of Incorporation
                  dated July 12, 2002 (Incorporated by reference to Exhibit 3 to
                  the  Company's  Report on Form 10-Q for the quarter ended June
                  30, 2002)

     3(f)         Amended and  Restated  By-Laws  (Incorporated  by reference to
                  Exhibit 99.4 to the Company's Current Report on Form 8-K filed
                  on October 24, 2002.




                                       38
<PAGE>

4    Instruments defining the rights of security holders, including indentures

     4(a)         Form of Employee  Warrant  Agreement,  dated  April 11,  1995,
                  between the Company and Oculon  Corporation  (Incorporated  by
                  reference to the Company's  Current  Report on Form 8-K, dated
                  April 11, 1995, as amended).

     4(b)         Form of Warrant  Agreement  dated as of April 30, 1995 between
                  the Company and Charles Stolper  (Incorporated by reference to
                  Form S-3 Registration  Statement of the Company dated November
                  14, 1995, as amended [No. 33-64289]).

     4            (c) Form of Stock Purchase  Warrant dated as of March 31, 1997
                  between  the  Company  and  the  Investor   (Incorporated   by
                  reference  to Form S-3  Registration  Statement of the Company
                  dated March 5, 1998 [No. 333-47359]).

     4(d)         Form  of  Common  Stock  Purchase  Warrant  exercisable  until
                  September 1, 2005 (Incorporated by reference to Exhibit 4.4 to
                  the  Company's  Current  Report on Form 8-K filed on September
                  11, 2000).

     4(e)         Form of placement agent warrant with Ladenburg  Thalmann & Co.
                  Inc.  (Incorporated  by  reference  to Form  S-3  Registration
                  Statement  of  the  Company  dated  September  28,  2000  (No.
                  333-46818).

     4(f)         Form of  placement  agent  warrant with  SmallCaps  OnLine LLC
                  (Incorporated by reference to Form S-3 Registration  Statement
                  of the Company dated September 28, 2000 (No. 333-46818).

     4(g)         Form  of  consulting   warrant  with   SmallCaps   OnLine  LLC
                  (Incorporated by reference to Form S-3 Registration  Statement
                  of the Company dated September 28, 2000 (No. 333-46818).

     4(h)         Certificate of Designation,  Rights Preferences and Privileges
                  of Series D Preferred  Stock of the Company  (Incorporated  by
                  reference to Exhibit 99.3 to the Company's  Current  Report on
                  Form 8-K filed on October 24, 2002).

     4(i)         Rights  Agreement  dated as of October  23,  2002  between the
                  Company and American Stock Transfer & Trust Company, as Rights
                  Agent  (Incorporated  by  reference  to  Exhibit  99.2  to the
                  Company's  Current  Report  on Form 8-K filed on  October  24,
                  2002).

     4(j)         Form of Investor Warrant dated March 4, 2003  (Incorporated by
                  reference to Exhibit 99.2 to the Company's  Current  Report on
                  Form 8-K filed on March 4, 2003).

     4(k)         Form  of  Placement   Agent's  Warrant  dated  March  4,  2003
                  (Incorporated  by reference  to Exhibit 99.1 to the  Company's
                  Current Report on Form 8-K filed on March 4, 2003).

     4(l)         Registration Rights Agreement dated as of May 30, 2003 between
                  the Company and the purchasers.  (Incorporated by reference to
                  Exhibit 4.2 to the Company's  Current Report on Form 8-K filed
                  on June 3, 2003).

     4(m)         Form of Investor  Warrant dated June 2, 2003  (Incorporated by
                  reference to Exhibit 4.3 to the  Company's  Current  Report on
                  Form 8-K filed on June 3, 2003).

     4(n)         Securities  Purchase  Agreement dated as of September 26, 2003
                  between  the  Company  and the  purchasers  identified  on the
                  signature  pages  thereto 2003  (Incorporated  by reference to
                  Exhibit 4.1 to the Company's  Current Report on Form 8-K filed
                  on September 30, 2003).

     4(o)         Form  of  4%   convertible   debenture   due  March  31,  2005
                  (Incorporated  by  reference  to Exhibit 4.2 to the  Company's
                  Current Report on Form 8-K filed on September 30, 2003).

     4(p)         Registration  Rights  Agreement dated as of September 26, 2003
                  between  the  Company  and the  purchasers  signatory  thereto
                  (Incorporated  by  reference  to Exhibit 4.3 to the  Company's
                  Current Report on Form 8-K filed on September 30, 2003).



                                       39
<PAGE>


     4(q)         Form  of  Common  Stock  Purchase  Warrant   (Incorporated  by
                  reference to Exhibit 4.4 to the  Company's  Current  Report on
                  Form 8-K filed on September 30, 2003).

     4(r)         Escrow  Agreement  dated as of September  26, 2003 between the
                  Company,   the  purchasers   signatory   thereto  and  Feldman
                  Weinstein LLP (Incorporated by reference to Exhibit 4.5 to the
                  Company's  Current  Report on Form 8-K filed on September  30,
                  2003).

     4(s)         Form  of  Placement   Agent  Common  Stock  Purchase   Warrant
                  (Incorporated  by  reference  to Exhibit 4.6 to the  Company's
                  Current Report on Form 8-K filed on September 30, 2003).


10   Material Contracts

     10(a)        Agreement  between Avitek Ltd.  ("Avitek") and Yissum Research
                  Development  Company of the  Hebrew  University  of  Jerusalem
                  ("Yissum") dated November 20, 1986  (Incorporated by reference
                  to Annual Report on Form 10-K, as amended by  Form10-K/A,  for
                  year ended December 31, 1992). (1)

     10(a)(1)     Supplement to Agreement  (Incorporated  by reference to Annual
                  Report on Form 10-K, as amended by Form 10-K/A, for year ended
                  December 31, 1992). (1)

     10(a)(2)     Hebrew  language   original   executed  version  of  Agreement
                  (Incorporated  by reference to Annual  Report on Form 10-K, as
                  amended by Form 10-K/A, for year ended December 31, 1992). (1)

     10(b)        Agreement  between  Avitek and Yissum  dated  January 25, 1987
                  (Incorporated  by reference to Annual  Report on Form 10-K, as
                  amended by Form 10-K/A, for year ended December 31, 1992). (1)

     10(b)(1)     Schedules  and  Appendixes  to  Agreement   (Incorporated   by
                  reference  to Annual  Report on Form 10-K,  as amended by Form
                  10-K/A, for year ended December 31, 1992). (1)

     10(b)(2)     Hebrew  language   original   executed  version  of  Agreement
                  (Incorporated  by reference to Annual  Report on Form 10-K, as
                  amended by Form 10-K/A, for year ended December 31, 1992). (1)

     10(c)        Research,  Development and License  Agreement  between Pharmos
                  Ltd.,  Pharmos  Corporation  ("Old  Pharmos") and Yissum dated
                  February 5, 1991  (Incorporated  by reference to Annual Report
                  on Form  10-K,  as  amended  by Form  10-K/A,  for year  ended
                  December 31, 1992). (1)

     10(c)(1)     Schedules  and  Appendixes  to  Agreement   (Incorporated   by
                  reference  to Annual  Report on Form 10-K,  as amended by Form
                  10-K/A, for year ended December 31, 1992). (1)

     10(d)        1992 Incentive and Non-Qualified Stock Option Plan (Annexed as
                  Appendix F to the Joint Proxy Statement/Prospectus). **

     10(e)        1997 Incentive and Non-Qualified Stock Option Plan (Annexed as
                  Appendix B to the Proxy  Statement on Form 14A filed  November
                  5, 1997). **

     10(f)        Employment  Agreement  dated  as of  April  2,  2001,  between
                  Pharmos Corporation and Haim Aviv.**

     10(g)        Employment  Agreement  dated  as of  April  2,  2001,  between
                  Pharmos Corporation and Gad Riesenfeld.**

     10(h)        Amendment of Employment  Agreement dated as of April 23, 2001,
                  between Pharmos Corporation and Gad Riesenfeld.**

     10(i)        Employment  Agreement  dated  as of  April  2,  2001,  between
                  Pharmos Corporation and Robert W. Cook.**

     10(j)        2001 Employee Stock Purchase Plan  (Incorporated  by reference
                  to Exhibit B to the Company's  Definitive  Proxy  Statement on
                  Form 14A filed on June 6, 2001).**



                                       40
<PAGE>


     10(k)        Asset Purchase  Agreement  between Bausch & Lomb  Incorporated
                  and Pharmos Corporation dated October 9, 2001 (Incorporated by
                  reference to Exhibit 2.1 to the  Company's  Current  Report on
                  Form 8-K filed on October 16, 2001).

     10(l)        License Assignment and Amendment Agreement dated as of October
                  9,  2001  by  and  among  Dr.   Nicholas  S.  Bodor,   Pharmos
                  Corporation and Bausch & Lomb  Incorporated  (Incorporated  by
                  reference to Exhibit 2.2 to the  Company's  Current  Report on
                  Form 8-K filed on October 16, 2001).

     10(m)        Amendment  No.  1 to  Asset  Purchase  Agreement  dated  as of
                  December  28,  2001  between  Bausch & Lomb  Incorporated  and
                  Pharmos Corporation

     10(n)***     License  Agreement  dated  as of  December  18,  2001  between
                  Pharmos Ltd. and Herbamed Ltd.  (Incorporated  by reference to
                  Exhibit 10(p) to the Annual Report on Form 10-K for year ended
                  December 31, 2002).

     10(o)***     Amended and Restated 2000  Incentive and  Non-Qualified  Stock
                  Option Plan (Incorporated by reference to Exhibit 10(q) to the
                  Annual  Report  on Form  10-K  for  year  ended  December  31,
                  2002).**

     10(p)        Underwriting  Agreement  dated as of December 16, 2003 between
                  the  Company  and C.E.  Unterberg,  Towbin and Harris  Nesbitt
                  Corp.  LLP  (Incorporated  by  reference to Exhibit 1.1 to the
                  Company's  Current  Report on Form 8-K filed on  December  19,
                  2003).

14  Code of Ethics

     14(a)***     Pharmos Corporation Code of Ethics and Business Conduct


21   Subsidiaries of the Registrant

     21(a)        Subsidiaries of the Registrant  (Incorporated  by reference to
                  Annual  Report on Form 10-K,  as amended by Form  10-K/A,  for
                  year ended December 31, 1992).

23   Consents of Experts and Counsel

     23(a) ***    Consent of PricewaterhouseCoopers LLP

31  Rule 13a-14(a)/15d-14(a) Certifications
     31(a)***     Certification of Chief Executive Officer
     31(b)***     Certification of Chief Financial Officer

32  Section 1350  Certifications
     32(a)***     Section  1350  Certification  of Chief  Executive  Officer and
                  Chief Financial Officer

99  Additional Exhibits
     99(a)***     Pharmos Corporation Corporate Governance Guidelines
     99(b)***     Amended and Restated Charter, Audit Committee
     99(c)***     Charter, Compensation and Stock Option Committee
     99(d)***     Charter, Governance and Nominating Committee

----------
(1)  Confidential  information  is  omitted  and  identified  by a *  and  filed
     separately with the SEC.

(**) This document is a management contract or compensatory plan or arrangement.

(***) Filed herewith.



                                       41
<PAGE>


(b) Reports on Form 8-K

     1.  Current Report filed on December 16, 2003; Item 5 was reported.

     2.  Current Report filed on December 19, 2003; Item 5 was reported.

     3.  Current Report filed on January 5, 2004; Item 5 was reported.









                                       42
<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

             PHARMOS CORPORATION

             By: /s/ Haim Aviv
             ----------------------------------------------
             Dr. Haim Aviv, Chairman of the Board and Chief
             Executive Officer (Principal Executive Officer)

     Date: March 15, 2004

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                              DATE
---------                                   -----                              ----
<S>                                   <C>                                   <C>
/s/ Robert W. Cook                    Chief Financial Officer (Principal    March 15, 2004
-------------------------             Financial and Accounting Officer),
Robert W. Cook                        and Secretary

/s/ David Schlachet                   Director                              March 15, 2004
-------------------------
David Schlachet

/s/ Mony Ben Dor                      Director                              March 15, 2004
-------------------------
Mony Ben Dor

/s/ Georges Anthony Marcel            Director                              March 15, 2004
-------------------------
Georges Anthony Marcel, M.D., Ph.D.

/s/ Elkan R. Gamzu                    Director                              March 15, 2004
-------------------------
Elkan R. Gamzu, Ph.D.

/s/ Lawrence F. Marshall              Director                              March 15, 2004
-------------------------
Lawrence F. Marshall, M.D.
</TABLE>






                                       43
<PAGE>


                               PHARMOS CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Auditors                                               F-2
Consolidated balance sheets as of December 31, 2003 and 2002                 F-3
Consolidated statements of operations for the years ended
       December 31, 2003, 2002 and 2001                                      F-4
Consolidated statements of changes in shareholders' equity
       for the years ended December 31, 2003, 2002 and 2001                  F-5
Consolidated statements of cash flows for the years ended
       December 31, 2003, 2002 and 2001                                      F-6
Notes to consolidated financial statements                                   F-7






                                       F-1
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and
Shareholders of Pharmos Corporation:

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  shareholders'  equity and of cash flows
present  fairly in all  material  respects,  the  financial  position of Pharmos
Corporation and its subsidiary at December 31, 2003 and 2002, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2003 in  conformity  with  accounting  principles  generally
accepted in the United States of America.  These  financial  statements  are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United  States of America which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management and  evaluating  the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP
New York, New York
February 6, 2004,  except for the last paragraph of Note 19 which is dated March
3, 2004.







                                      F-2
<PAGE>


PHARMOS CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                    ------------------------------
                                                                         2003             2002
                                                                    -------------    -------------
<S>                                                                 <C>              <C>
Assets
Current assets
    Cash and cash equivalents                                       $  49,369,250    $  19,579,287
    Restricted cash                                                    11,192,312        2,199,999
    Other receivables                                                     681,245          698,800
    Debt issuance costs                                                   967,402               --
    Prepaid expenses and other current assets                             585,020          323,991
                                                                    -------------    -------------
        Total current assets                                           62,795,229       22,802,077
Fixed assets, net                                                       1,255,096        1,792,322
Restricted cash                                                         4,907,686           60,000
Other assets                                                               20,589           32,283
Debt issuance costs                                                        29,471               --
                                                                    -------------    -------------
            Total assets                                            $  69,008,071    $  24,686,682
                                                                    =============    =============
Liabilities and Shareholders' Equity
Current liabilities
    Accounts payable                                                $   3,005,461    $   3,742,460
    Accrued expenses                                                    1,751,200        3,241,581
    Warrant liability                                                     823,029               --
    Accrued wages and other compensation                                1,486,529          999,647
    Convertible debentures, net                                        13,702,412        3,446,658
                                                                    -------------    -------------
            Total current liabilities                                  20,768,631       11,430,346
Other liability                                                            10,000           10,000
Convertible debentures, net                                             4,773,339               --
                                                                    -------------    -------------
        Total liabilities                                              25,551,970       11,440,346
                                                                    -------------    -------------
Commitments and Contingencies (Note 15)
Shareholders' equity
    Preferred stock, $.03 par value, 1,250,000 shares authorized,
            none issued and outstanding
    Common stock, $.03 par value; 110,000,000 shares authorized,
            85,554,016 and 56,560,660 shares outstanding
            (excluding $426 (14,189 shares in 2003 and in 2002
            held in Treasury) in 2003 and 2002, respectively            2,566,621        1,696,820
        Deferred compensation                                             (66,660)        (119,988)
        Paid in capital                                               161,960,059      114,187,558
        Accumulated deficit                                          (121,003,919)    (102,518,054)
                                                                    -------------    -------------
            Total shareholders' equity                                 43,456,101       13,246,336
                                                                    -------------    -------------
            Total liabilities and shareholders' equity              $  69,008,071    $  24,686,682
                                                                    =============    =============
</TABLE>

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



                                      F-3
<PAGE>


PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                           --------------------------------------------
                                                               2003            2002             2001
                                                           ------------    ------------    ------------
<S>                                                        <C>             <C>             <C>
Revenues
              Product sales                                          --              --    $  4,218,441
              License fee                                            --              --          80,000
                                                           ------------    ------------    ------------
Total Revenues                                                       --              --       4,298,441
Cost of Goods Sold (exclusive of depreciation
                    and amortization shown below)                    --              --       1,268,589
                                                           ------------    ------------    ------------
Expenses
              Research and development, net                $ 11,632,959    $ 12,337,840       9,349,025
              Selling, general and administrative             3,746,570       3,828,750       3,666,293
              Depreciation and amortization                     654,617         691,824         773,973
                                                           ------------    ------------    ------------
                    Total operating expenses                 16,034,146      16,858,414      13,789,291
                                                           ------------    ------------    ------------
Loss from operations                                        (16,034,146)    (16,858,414)    (10,759,439)
                                                           ------------    ------------    ------------
Other (expense) income
              Interest income                                 1,051,242         534,229         979,234
              Other (expense) income, net                       (56,362)         12,218          28,509
              Derivative loss                                (1,759,183)             --              --
              Interest expense                               (1,915,214)       (972,856)     (1,713,806)
              Gain from sale of LE product line (Note 4)             --              --      16,285,324
                                                           ------------    ------------    ------------
                    Other (expense) income, net              (2,679,517)       (426,409)     15,579,261
                                                           ------------    ------------    ------------
(Loss) income before income taxes                           (18,713,663)    (17,284,823)      4,819,822
Income tax benefit                                             (227,798)       (215,223)       (226,033)
                                                           ------------    ------------    ------------
Net (loss) income                                          $(18,485,865)   $(17,069,600)   $  5,045,855
                                                           ------------    ------------    ------------
Net (loss) income per share - basic                        $       (.27)   $       (.30)   $        .09
                                                           ============    ============    ============
Net (loss) income per share - diluted                      $       (.27)   $       (.30)   $        .09
                                                           ============    ============    ============
Weighted average shares outstanding - basic                  67,397,175      56,520,041      54,678,932
                                                           ============    ============    ============
Weighted average shares outstanding - diluted                67,397,175      56,520,041      55,298,063
                                                           ============    ============    ============
</TABLE>



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



                                      F-4
<PAGE>


PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (NOTES 9 & 10)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                       PAID-IN
                                                           COMMON STOCK              DEFERRED        CAPITAL IN       ACCUMULATED
                                                    SHARES           AMOUNT        COMPENSATION     EXCESS OF PAR       DEFICIT
                                                 -------------    -------------    -------------    -------------    -------------
<S>                                                 <C>           <C>              <C>              <C>              <C>
December 31, 2000                                   54,082,253    $   1,622,467    $           0    $ 108,965,351    $ (90,494,309)
Warrant and option exercises                         1,109,446           33,283                         2,384,259
Option issuances for consultant compensation                                             (50,175)         189,893
Stock option issuances below fair market value                                          (172,969)         207,563
Issuance of Common Stock and adjustments in
   connection with private equity sale, net
   of fees of $5,924                                   182,964            5,489                          (595,308)
Net income                                                                                                               5,045,855
                                                 -------------    -------------    -------------    -------------    -------------
December 31, 2001                                   55,374,663        1,661,239         (223,144)     111,151,758      (85,448,454)
Option issuances for consultant compensation                                              50,175           13,362
Amortization of stock option issuances below
   fair market value                                                                      52,981
Accretion of fair value of refinanced debt                                                                420,221
Stock adjustment                                       (40,583)          (1,217)                            1,092
Issuance of Common Stock - Employee
   Stock Purchase Plan                                  23,284              699                            20,057
Conversion of convertible debt and interest
   to equity                                         1,217,485           36,525                         2,581,068
Net loss                                                                                                               (17,069,600)
                                                 -------------    -------------    -------------    -------------    -------------
December 31, 2002                                   56,574,849        1,697,246         (119,988)     114,187,558     (102,518,054)
Warrant and option exercises                         3,992,845          119,785                         6,178,229
Warrant derivative adjustments                                                                            936,156
Option issuances for consultant compensation                                                               56,866
Amortization of stock option issuances below
   fair market value                                                                      53,328
Accretion of fair value of refinanced debt                                                                 68,808
Reversal of benefit conversion feature                                                                   (786,000)
Issuance of Common Stock - Employee
   Stock Purchase Plan                                  29,919              898                            38,993
Issuance of Common Stock - public offering
   sales, net of fees of $2,012K                    10,500,000          315,000                        26,548,131
Issuance of warrants  with  Convertible
   Debenture offering, net of fees of $277K                                                             3,663,949
Issuance of Common Stock - private equity
   sales, net of fees of $892K                      14,470,592          434,118                        11,067,369
Net loss                                                                                                               (18,485,865)
                                                 -------------    -------------    -------------    -------------    -------------

December 31, 2003                                   85,568,205    $   2,567,047    $     (66,660)   $ 161,960,059    $(121,003,919)
                                                 =============    =============    =============    =============    =============
</TABLE>


<TABLE>
<CAPTION>
                                                                                       TOTAL
                                                          TREASURY STOCK           SHAREHOLDERS'
                                                     SHARES           AMOUNT          EQUITY
                                                  -------------   -------------    -------------
<S>                                                      <C>      <C>              <C>
December 31, 2000                                        18,356   $        (551)   $  20,092,958
Warrant and option exercises                                                           2,417,542
Option issuances for consultant compensation                                             139,718
Stock option issuances below fair market value                                            34,594
Issuance of Common Stock and adjustments in
   connection with private equity sale, net
   of fees of $5,924                                                                    (589,819)
Net income                                                                             5,045,855
                                                  -------------   -------------    -------------
December 31, 2001                                        18,356            (551)      27,140,848
Option issuances for consultant compensation                                              63,537
Amortization of stock option issuances below
   fair market value                                                                      52,981
Accretion of fair value of refinanced debt                                               420,221
Stock adjustment                                        (4,167)             125               --
Issuance of Common Stock - Employee
   Stock Purchase Plan                                                                    20,756
Conversion of convertible debt and interest
   to equity                                                                           2,617,593
Net loss                                                                             (17,069,600)
                                                  -------------   -------------    -------------
December 31, 2002                                        14,189            (426)      13,246,336
Warrant and option exercises                                                           6,298,014
Warrant derivative adjustments                                                           936,156
Option issuances for consultant compensation                                              56,866
Amortization of stock option issuances below
   fair market value                                                                      53,328
Accretion of fair value of refinanced debt                                                68,808
Reversal of benefit conversion feature                                                  (786,000)
Issuance of Common Stock - Employee
   Stock Purchase Plan                                                                    39,891
Issuance of Common Stock - public offering
   sales, net of fees of $2,012K                                                      26,863,131
Issuance of warrants  with  Convertible
   Debenture offering, net of fees of $277K                                            3,663,949
Issuance of Common Stock - private equity
   sales, net of fees of $892K                                                        11,501,487
Net loss                                                                             (18,485,865)
                                                  -------------   -------------    -------------

December 31, 2003                                        14,189   $        (426)   $  43,456,101
                                                  =============   =============    =============
</TABLE>


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


                                      F-5
<PAGE>


PHARMOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                    --------------------------------------------
                                                                        2003            2002             2001
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
Cash flows from operating activities:
      Net (loss) income                                             $(18,485,865)   $(17,069,600)   $  5,045,855
      Adjustments to reconcile net (loss) income to net
          cash flow used in operating activities:
              Depreciation and amortization                              654,617         691,824         773,973
              Reversal of beneficial conversion feature                 (786,000)             --              --
              Change in the value of warrants                          1,759,184              --              --
              Amortization of debt discount and issuance costs         1,431,425         312,391       1,216,398
         Amortization of fair value of change in convertible debt         68,808         420,221              --
              Option issuances - consultant compensation                  56,866          63,537         139,718
              Stock options issued below fair market value                53,328          52,981          34,594
              Gain from sale of LE product line                               --              --     (16,285,324)
      Changes in operating assets and liabilities
            Inventories                                                       --              --         322,620
            Other receivables                                             17,555          (8,733)       (862,542)
            Prepaid expenses and other current assets                   (261,029)        673,704        (116,586)
            Prepaid royalties                                                 --              --           6,591
            Other assets                                                  11,694         (10,250)         (3,947)
            Accounts payable                                            (736,999)      1,545,161        (113,179)
            Accrued expenses                                          (1,490,381)     (2,450,469)         25,820
            Accrued wages & other compensation                           486,882        (318,287)        548,959
            Other liabilities                                                 --          10,000        (100,000)
                                                                    ------------    ------------    ------------
            Net cash used in operating activities                    (17,219,915)    (16,087,520)     (9,367,050)
                                                                    ------------    ------------    ------------
Cash flows from investing activities:
          Purchases of fixed assets                                     (117,391)       (565,865)       (859,174)
          (Increase) decrease in restricted cash                     (13,839,999)      3,105,802      (1,330,390)
          Proceeds from sale of LE business, net                              --              --      23,136,930
                                                                    ------------    ------------    ------------
                  Net cash (used in) provided by
                            investing activities                     (13,957,390)      2,539,937      20,947,366
                                                                    ------------    ------------    ------------
Cash flows from financing activities:
          Advances against future sales, net                                  --              --        (619,702)
          Proceeds from issuance of common stock
                     and exercise of options and warrants, net        44,702,523          20,756       2,417,542
          Proceeds from issuance of convertible debentures
                     and warrants, net                                19,764,745              --              --
          Repayment from convertible debentures, net                  (3,500,000)     (2,000,000)             --
          Fees related to refinancing convertible debt                        --        (163,000)             --
          Pricing adjustments for private placement, net                      --              --        (589,819)
                                                                    ------------    ------------    ------------
                  Net cash provided by (used in)
                            financing activities                      60,967,268      (2,142,244)      1,208,021
                                                                    ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents                  29,789,963     (15,689,827)     12,788,337
Cash and cash equivalents at beginning of year                        19,579,287      35,269,114      22,480,777
                                                                    ------------    ------------    ------------
Cash and cash equivalents at end of year                            $ 49,369,250    $ 19,579,287    $ 35,269,114
                                                                    ============    ============    ============

Supplemental Information:
Interest paid                                                       $    765,448    $    175,165    $    243,983
                                                                    ------------    ------------    ------------
Supplemental disclosure of non-cash financing activities:
Conversion of convertible debt and interest to equity               $         --    $  2,617,593              --
Non-cash fees for equity financings                                 $    663,266              --              --
</TABLE>

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


                                      F-6
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   The Company

     Pharmos  Corporation  (the "Company" or "Pharmos") is a  bio-pharmaceutical
     company  that  discovers  and  develops  new  drugs  to  treat a  range  of
     neuro-inflammatory  disorders. The Company has executive offices in Iselin,
     New Jersey and conducts  research and development  and pilot  manufacturing
     through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.

     In October 2001, the Company sold its ophthalmic product line that included
     Lotemax(R) and Alrex(R),  two products that were being marketed, and future
     extensions of loteprednol  etabonate (see Note 4). As a result of the sale,
     the Company is exclusively in the drug candidate development stage.

2.   Liquidity and Business Risks

     The Company incurred  operating losses since its inception through the year
     ended  December  31,  2000  and was not  profitable  in 2003 and  2002.  At
     December  31,  2003,  the  Company  had an  accumulated  deficit  of $121.0
     million.  Such  losses have  resulted  principally  from costs  incurred in
     research and development and from general and administrative  expenses. The
     Company  has  funded  its  operations  through  the  use of  cash  obtained
     principally  from  third  party  financing.  Management  believes  that the
     current cash and cash equivalents of $49.4 million as of December 31, 2003,
     will be sufficient to support the Company's  continuing  operations  beyond
     December 31, 2004.

     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.  Should the Company be unable to raise  adequate  financing in the
     future, long-term projects will need to be scaled back or discontinued (See
     Note 19 for subsequent events).

3.   Significant Accounting Policies

     Basis of consolidation

     The accompanying  consolidated  financial  statements include the Company's
     wholly owned subsidiary, Pharmos Ltd. All significant intercompany balances
     and transactions are eliminated in consolidation.

     Use of estimates

     The preparation of the consolidated financial statements in conformity with
     generally  accepted  accounting  principles  requires  the  Company to make
     estimates and  assumptions  that affect the reported  amounts of assets and
     liabilities, disclosure of contingent assets and liabilities at the date of
     the financial  statements and the reported  amounts of revenues,  costs and
     expenses during the reporting  period.  The most significant  estimates and
     assumptions  related to asset impairments and the tax valuation  allowance.
     Actual results could differ from those estimates.

     Net (loss)/ income per common share

     Basic net (loss)/income per common share is computed by dividing net (loss)
     income for the period,  by the sum of the weighted average number of shares
     of common  stock  issued and  outstanding.  Diluted  earnings  per share is
     computed  by  dividing  net (loss)  income for the period by the sum of the
     weighted  average number of shares of common stock issued and  outstanding,
     increased  to  include  the  number of common  shares  that would have been
     issued if all outstanding  stock options,  stock warrants,  and convertible
     debt that are dilutive are converted.



                                      F-7
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In  accordance  with FASB 128  "Earnings  per  Share,"  for the years ended
     December  31,  2003  and  2002,   there  were   16,712,467  and  6,803,278,
     respectively,  of outstanding options,  warrants and convertible debt which
     were  excluded from the dilutive EPS  calculation  due to the fact that the
     results of the exercise of such would be antidilutive.

     A reconciliation  of the basic and diluted earnings per share  computations
     for net income for the year ended December 31, 2001 is as follows:

                                                                       EARNINGS
                                             INCOME         SHARES     PER SHARE
                                           ----------     ----------   ---------
Basic EPS Net Loss                         $5,045,855     54,678,932     $.09
Effect of Dilutive Securities:
        Warrants                                             314,738
        Options                                              304,393
                                           ----------     ----------     ----
Dilutive EPS Loss applicable to common
  shareholders plus assumed conversion     $5,045,855     55,298,063     $.09
                                           ==========     ==========     ====

     In  accordance  with FASB 128  "Earnings  per  Share,"  1,811,961  options,
     warrants  and the  convertible  debt were not  included in the  calculation
     above as the results of the exercise of such would be antidilutive.

     Cash and cash equivalents

     The Company  considers  all highly  liquid  instruments  purchased  with an
     original  maturity  of three  months or less to be cash  equivalents.  Cash
     equivalents primarily consist of commercial paper and money market accounts
     in 2003 and 2002.

     Revenue recognition

     The Company earns license fees from the transfer of drug technology and the
     related  preclinical  research data. License fee revenue is recognized when
     all  performance  obligations  are completed and the amounts are considered
     collectible.  Up-front  license fees are deferred and  recognized  when all
     performance  obligations  are  completed.  The Company had no product sales
     revenue during 2003 or 2002 due to the sale of its ophthalmic  product line
     in October 2001 and does not expect  product sale revenues for the next few
     years and may never have such sales if products currently under development
     fail to be commercialized.

     Other receivables

     As of December 31, 2003 and 2002, other  receivables  consist  primarily of
     grants for research and development relating to certain projects.

     Restricted cash

     In connection with the September 2003 Convertible  Debenture offering,  the
     terms of the agreement required the Company to establish an escrow account.
     The escrowed  account is shown as Restricted Cash on the Company's  balance
     sheet and will be released to the  Company in  proportion  to the amount of
     Convertible  Debentures  converted into common shares or upon the repayment
     of the debt  beginning  March  2004.  The terms of the  debentures  further
     stipulates that the restricted  cash can only be used to fund  acquisitions
     upon the approval of the investors.  The short-term balance represents debt
     repayment  due within 12 months.  The  long-term  balance  represents  debt
     repayment due greater than 12 months.



                                      F-8
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Fixed assets

     Fixed assets are recorded at cost and are  depreciated  on a  straight-line
     basis over their  estimated  useful  lives.  The Company uses the following
     estimated useful lives:

     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
     Vehicles                                            7 years

     Leasehold  improvements  are  amortized on a  straight-line  basis over the
     shorter of the lease term or the  estimated  lives of the  related  assets.
     Maintenance and repairs are expensed as incurred.

     Long-lived assets

     The Company periodically  evaluates potential impairments of its long-lived
     assets.  When the Company  determines that the carrying value of long-lived
     assets  may not be  recoverable  based  upon the  existence  of one or more
     indicators of impairment,  the Company evaluates the projected undiscounted
     cash flows related to the assets and other factors. If these cash flows are
     less than the  carrying  value of the  assets,  the  Company  measures  the
     impairment using discounted cash flows or other methods of determining fair
     value.

     Research and development costs

     All research and development costs are expensed when incurred.  The Company
     accounts  for  reimbursements  of  research  and  development  costs  as  a
     reduction of research and development expense.

     Income taxes

     The Company  accounts for income taxes in accordance with the provisions of
     Statement of Financial Accounting Standards No. 109, "Accounting for Income
     Taxes"  ("SFAS  109").  Under the asset and  liability  method of SFAS 109,
     deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax bases and  operating  loss and tax credit  carryforwards.  Deferred tax
     assets and  liabilities,  if any,  are  measured  using  enacted  tax rates
     expected to apply to taxable  income in the years in which those  temporary
     differences  are expected to be  recovered or settled.  Under SFAS 109, the
     effect on deferred tax assets and  liabilities  of a change in tax rates is
     recognized in income in the period that includes the enactment date.

     Foreign exchange

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

     Concentration of credit risk

     Financial instruments that potentially expose the Company to concentrations
     of credit risk consist primarily of cash and cash equivalents.  The Company
     maintains  some of its cash  balances  in accounts  that  exceed  federally
     insured  limits.  The  Company  has  not  experienced  any  losses  to date
     resulting from this practice.



                                      F-9
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Substantially  all product  sales in 2001 were to a single  customer,  as a
     result of the Company's marketing agreement with that customer.

     Fair value of financial instruments

     The carrying amounts of the Company's financial instruments, including cash
     and cash equivalents,  other receivables,  other assets,  accounts payable,
     accrued liabilities,  and convertible debentures approximate fair value due
     to their short maturities.

     Equity based compensation

     The Company accounts for its employee stock option plans in accordance with
     the provisions of Accounting  Principles Board Opinion No. 25,  "Accounting
     for Stock  Issued to  Employees",  and  related  interpretations.  As such,
     compensation expense related to employee stock options is recorded only if,
     on the date of grant,  the fair value of the  underlying  stock exceeds the
     exercise  price.  The Company adopted the  disclosure-only  requirements of
     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation",  which  allows
     entities  to  continue  to apply the  provisions  of APB Opinion No. 25 for
     transactions with employees and provide pro forma operating results and pro
     forma  per  share   disclosures   for  employee  stock  grants  as  if  the
     fair-value-based  method of  accounting in SFAS No. 123 had been applied to
     these  transactions.  Options issued to non-employees  are valued using the
     fair value methodology under SFAS No. 123.

     The  following  table  illustrates  the  effect on net  (loss)  income  and
     earnings  per share if the Company  had applied the fair value  recognition
     provisions  of SFAS  No.  123 to  stock-based  employee  compensation.  The
     estimated fair value of each option is calculated  using the  Black-Scholes
     option-pricing model.

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                            -------------------------------------------
                                                2003            2002            2001
                                            ------------    ------------    -----------
<S>                                         <C>             <C>             <C>
Net (loss) income as reported               $(18,485,865)   $(17,069,600)   $ 5,045,855
Add: Stock-based employee compensation
  expense included in reported net (loss)
  income                                          53,328          52,981         34,594
Deduct: Total stock-based employee
  compensation expense determined under
  fair value based method for all awards      (1,017,000)     (1,108,000)      (923,000)
                                            ------------    ------------    -----------
Pro forma net (loss) income                 $(19,449,537)   $(18,124,619)   $ 4,157,449
                                            ============    ============    ===========
Earnings per share:
  Basic - as reported                             $(0.27)         $(0.30)         $0.09
  Basic - pro forma                               $(0.29)         $(0.32)         $0.08
  Diluted - as reported                           $(0.27)         $(0.30)         $0.09
  Diluted - pro forma                             $(0.29)         $(0.32)         $0.08
</TABLE>

     Other disclosures required by SFAS No. 123 have been included in Note 12.

     Reclassifications

     Certain amounts for 2002 and 2001 have been  reclassified to conform to the
     fiscal 2003 presentation.  Such reclassifications did not have an impact on
     the Company's financial position or results of operations.



                                      F-10
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Recent Accounting Pronouncements

     In May 2003, the Financial  Accounting Standards Board issued Statement No.
     150  ("FAS  150"),   Accounting  for  Certain  Financial  Instruments  with
     Characteristics  of Both  Liabilities  and Equity.  FAS 150 specifies  that
     instruments  within its scope embody obligations of the issuer and that the
     issuer must  classify  them as  liabilities.  SFAS 150 requires  issuers to
     classify as liabilities the following three types of freestanding financial
     instruments:   (1)  mandatorily  redeemable  financial   instruments;   (2)
     obligations to repurchase the issuer's equity shares by transferring assets
     and (3) certain  obligations to issue a variable number of shares. SFAS 150
     defines a  "freestanding  financial  instrument" as a financial  instrument
     that (1) is entered  into  separately  and apart  from any of the  entity's
     other financial  instruments or equity  transactions or (2) is entered into
     in conjunction with some other  transaction and can be legally detached and
     exercised on a separate basis. For all financial  instruments  entered into
     or modified after May 31, 2003, SFAS 150 is effective immediately.  For all
     other  instruments  of public  companies,  SFAS 150 went into effect at the
     beginning of the first interim  period  beginning  after June 15, 2003. The
     adoption of SFAS No. 150 did not have an impact on the Company's  financial
     statements for the third quarter of 2003.

     In April 2003, the FASB issued SFAS No. 149,  Amendment of Statement 133 on
     Derivative  Instruments and Hedging  Activities  ("SFAS No. 149"). SFAS No.
     149  clarifies  under what  circumstances  a contract  with an initial  net
     investment  meets the  characteristics  of a  derivative  as  discussed  in
     Statement No. 133. It also specifies when a derivative contains a financing
     component that warrants special reporting in the Consolidated  Statement of
     Cash Flows.  SFAS No. 149 amends certain other existing  pronouncements  in
     order to improve consistency in reporting these types of transactions.  The
     new guidance is effective for contracts entered into or modified after June
     30, 2003,  and for hedging  relationships  designated  after June 30, 2003.
     This  standard  did  not  have  an  impact  on the  Company's  consolidated
     financial statements.

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
     Interest  Entities,  an  Interpretation  of ARB No. 51". FIN 46 requires an
     investor to consolidate a variable interest entity if it is determined that
     the  investor  is a primary  beneficiary  of that  entity,  subject  to the
     criteria  set forth in FIN 46.  Assets,  liabilities,  and  non-controlling
     interests  of  newly  consolidated   variable  interest  entities  will  be
     initially   measured  at  fair  value.  After  initial   measurement,   the
     consolidated  variable  interest  entity  will be  accounted  for under the
     guidance  provided by Accounting  Research  Bulletin No. 51,  "Consolidated
     Financial  Statements." FIN 46 is effective for variable  interest entities
     created or entered  into after  January 31,  2003.  For  variable  interest
     entities created or acquired before February 1, 2003, FIN 46 applies in the
     first fiscal year or interim period  beginning after December 15, 2003. The
     Company  does not believe that the  adoption of this  standard  will have a
     material impact on its consolidated financial statements.

     In November 2002, the FASB issued FASB  Interpretation  No. 45, Guarantor's
     Accounting and Disclosure  Requirements for Guarantees,  Including Indirect
     Guarantees of Indebtedness of Others (`FIN 45"), which clarifies disclosure
     and recognition/measurement requirements related to certain guarantees. The
     disclosure requirements are effective for financial statements issued after
     December  15,  2002  and  the   recognition/measurement   requirements  are
     effective on a prospective  basis for  guarantees  issued or modified after
     December 31,  2002.  This  standard  did not have a material  impact on the
     Company's consolidated financial statements.

4.   Collaborative Agreements

     In  June  1995,  the  Company  entered  into  a  marketing  agreement  (the
     "Marketing Agreement") with Bausch & Lomb Pharmaceuticals,  Inc. ("Bausch &
     Lomb"),  a shareholder of the Company,  to market Lotemax and Alrex,  on an
     exclusive basis in the United States following receipt of FDA approval. The
     Marketing Agreement also covered the Company's other loteprednol  etabonate
     based product, LE-T. Under the Marketing Agreement, Bausch & Lomb purchased
     the active drug  substance  (loteprednol



                                      F-11
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     etabonate) from the Company.  A second agreement,  covering Europe,  Canada
     and other  selected  countries,  was  signed  in  December  1996  ("the New
     Territories  Agreement").  In October 2001, the Company sold its ophthalmic
     product line,  including the Company's rights under the above agreements to
     Bausch & Lomb.

     Through October 2001, Bausch & Lomb provided the Company with $5 million in
     cash advances against future sales.  Bausch & Lomb recouped the advances by
     withholding  a  certain  percentage  of  payments  to the  Company  against
     payments for purchases of the active drug substance. With the completion of
     the sale of the  ophthalmic  business to Bausch & Lomb in October 2001, all
     such advances have been repaid.

     Sale of Ophthalmic Product line

     In  October  2001,  Bausch & Lomb  purchased  all  rights to the  Company's
     loteprednol  etabonate (LE) ophthalmic product line for cash and assumption
     of certain  ongoing  obligations.  The Company  received  gross proceeds of
     approximately  $25  million  in  cash  for its  rights  to  Lotemax(R)  and
     Alrex(R),  prescription  products  that were  manufactured  and marketed by
     Bausch & Lomb under a 1995 Marketing  Agreement with the Company.  Bausch &
     Lomb also acquired future  extensions of LE formulations  including LE-T, a
     product  candidate that was submitted to the FDA for marketing  approval in
     September  2003.  Bausch  & Lomb  will  pay  the  Company  additional  fees
     depending on the approval  date with the FDA as follows:  If the earlier of
     (a)  commercial  launch  or (b) 6 months  after FDA  approval  of LE-T (the
     "Triggering Event") occurs before January 1, 2002 the Company was initially
     to receive $15.4  million.  That amount has been  decreasing by $90,000 for
     each month of 2002 and 2003 to a minimum  amount of $13.3  million  (if the
     Triggering  Event occurs on December 31, 2003).  Since the Triggering Event
     had not  occurred as of December  31,  2003,  the Company and Bausch & Lomb
     will  negotiate  in good  faith to  agree  upon the  amount  of  additional
     consideration  that  Bausch & Lomb will pay the  Company  but not to exceed
     $13.3  million.  The Company can not be assured  that FDA  approval of LE-T
     will be  obtained.  The  patent  owner  of LE-T is  entitled  to 11% of the
     additional  fees that the Company  receives  as a result of the  contingent
     payment, which will be netted against any additional gain recorded.

     Under  the  terms  of the  October  2001  agreement,  which is  subject  to
     renegotiation,  upon FDA  approval  the  Company  may  receive a  milestone
     payment of up to $10 million if the following occurs: (a) net sales of LE-T
     in the first 12 months  after  commercial  launch are at least $7.5 million
     and (b) net sales of LE-T in the second  twelve  consecutive  months  after
     commercial  launch (i) exceed  $15.0  million and (ii) are greater than net
     sales in (a) above.  Future  payments  will be  included  in the  Company's
     income  when all  contingencies  are  resolved.  The  patent  owner is also
     entitled to 14.3% of the  additional  fees that the  Company  receives as a
     result of these contingent payments.

     Pharmos agreed to pay up to $3.75 million of the costs of developing  LE-T,
     of which  $600,000  was deducted  from the purchase  price paid by Bausch &
     Lomb in October  2001.  Another  $1.57 million was paid to Bausch & Lomb in
     October  2003,  leaving an additional  $1.56  million as Pharmos'  share of
     these  research  and  development  related  LE-T  expenses.  This amount is
     included in accounts payable and represents the maximum amount Pharmos owes
     Bausch & Lomb for  their  project  development  under the terms of the 2001
     agreement.

     As of October 2001,  the Company  received  $925,780  from the  Israel-U.S.
     Binational  Industrial  Research  and  Development  Foundation  to  develop
     Lotemax(R) and LE-T.  During  October 2001, in connection  with the sale of
     the Company's existing ophthalmic business, the Company paid the foundation
     royalties for Lotemax(R)  which concluded its' obligation to the foundation
     in respect to Lotemax(R). The Company retains its' obligation to repay that
     portion of funding it received from the foundation  with respect to LE-T of
     $308,350. The Company's contingent obligation to the foundation is due only
     when LE-T is approved by the FDA.



                                      F-12
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     As a  result  of the  sale of its  ophthalmic  product  line,  the  Company
     recorded a net gain of $16.3 million.  The Company incurred transaction and
     royalty costs of approximately  $2.0 million.  The Company also compensated
     the LE patent  owner  approximately  $2.7 million  ($1.5  million paid upon
     closing and $1.2 million of this amount was paid in October  2002) from the
     proceeds  of the sale of Lotemax and Alrex in return for his consent to the
     Company's  assignment of its rights under the license agreement to Bausch &
     Lomb.

5.   Fixed Assets

     Fixed assets consist of the following:
                                                             DECEMBER 31,
                                                     --------------------------
                                                         2003           2002
                                                     -----------    -----------
  Laboratory, pilot plant and other equipment        $ 2,961,815    $ 3,003,672
  Leasehold improvements                                 733,325        725,221
  Office furniture and fixtures                          515,595        479,626
  Computer equipment                                     919,031        860,252
  Vehicles                                                88,231         88,231
                                                     -----------    -----------
                                                       5,217,997      5,157,002
  Less - Accumulated depreciation and amortization    (3,962,901)    (3,364,680)
                                                     -----------    -----------
                                                     $ 1,255,096    $ 1,792,322
                                                     ===========    ===========

     Depreciation  and  amortization of fixed assets was $654,617,  $691,824 and
     $622,283 in 2003, 2002 and 2001, respectively.


6.   Accrued expenses

     Accrued expenses consist of the following:
                                                              DECEMBER 31,
                                                        -----------------------
                                                           2003         2002
                                                        ----------   ----------
     Accrued expenses, other                            $  419,022   $  524,506
     Accrued interest                                           --      341,000
     Research & development cost relating to traumatic
       brain injury project                              1,332,178      814,000
     Research & development cost relating to LE-T
       (Note 4)                                                 --    1,562,075
                                                        ----------   ----------
        Total accrued expenses                          $1,751,200   $3,241,581
                                                        ==========   ==========

7.   Grants for Research and Development

     The Company has entered  into  agreements  with the State of Israel,  which
     provide  for  grants  for  research  and  development  relating  to certain
     projects. Amounts received pursuant to these agreements have been reflected
     as a  reduction  of  research  and  development  expense.  Such  reductions
     amounted to $3,295,819,  $2,755,882 and  $1,336,566  during 2003,  2002 and
     2001,  respectively.  The  agreements  with agencies of the State of Israel
     place  certain legal  restrictions  on the transfer of the  technology  and
     manufacture  of  resulting  products  outside  Israel.  The Company will be
     required to pay royalties, at rates ranging from 3% to 5%, to such agencies
     from the sale of  products,  if any,  developed as a result of the research
     activities carried out with the grant funds.

     As of December  31,  2003,  the total  amounts  received  under such grants
     amounted to $10,905,358. Aggregate future royalty payments related to sales
     of products  developed,  if any, as a result of these grants are limited to
     $9,203,583 based on grants received through December 31, 2003.



                                      F-13
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In April 1997, the Company signed an agreement with  Consortium  Magnet for
     developing  generic  technologies  for design and  development of drugs and
     diagnostic  kits which  consortium  is  operated by the Office of the Chief
     Scientist  of Israel.  Under such  agreements  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, 2003, the
     Company  received  cumulative  grants totaling  $1,659,549 for this program
     which was completed and closed.

     During 2003,  the Company  signed an agreement  with  Consortium  Magnet to
     develop a supply of  water-soluble  prodrugs of lipophilic  compounds  that
     improve their bioavailability 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. During 2003, Pharmos was awarded a grant of $220,000.

8.   Licensing Arrangements

     The Company is a licensee of certain research  technologies and has various
     license   agreements   wherein  the  Company  has  acquired   exclusive  or
     co-exclusive   rights  to  develop  and   commercialize   certain  research
     technologies.  These  agreements  generally  require  the  Company  to  pay
     royalties on the sale of products developed and contingent  royalties based
     upon  milestones from the licensed  technologies  and fees on revenues from
     sublicenses,  where  applicable.  The  royalty  rates,  as  defined  in the
     respective   license   agreements,   are   customary   and   usual  in  the
     pharmaceutical  industry.  The royalties  will be payable for periods up to
     fifteen years from the date of specified events,  including the date of the
     first sale of such  products,  or the date from which the first  registered
     patent from the developed  technologies  is in force, or the year following
     the  date on  which  approval  from  the FDA is  received  for a  developed
     product.  No amounts have been recorded as a liability  with respect to any
     contingent royalties as of December 31, 2003 and 2002.

     Certain of the license  agreements,  which  include  agreements  related to
     Lotemax and Alrex,  required annual payments for periods  extending through
     2012.  Minimum  annual  payments under  licensing  agreements are $103,500.
     License fee expense amounted to approximately $0, $0, and $103,500 in 2003,
     2002,  and  2001,  respectively.  With  the  completion  of the sale of the
     ophthalmic business to Bausch & Lomb in October 2001, the obligations under
     these agreements have been assumed by Bausch & Lomb.

9.   Private Placement

     Convertible Debentures

     On  September  26,  2003,  the  Company  completed a private  placement  of
     convertible  debentures  and  warrants  to  six  institutional   investors,
     generating  total gross  proceeds  of $21.0  million.  $5.0  million of the
     proceeds will be used for working capital purposes,  and $16.0 million will
     be available to fund acquisitions  upon the approval of the investors.  The
     convertible  debentures are convertible into common stock of the Company at
     a fixed  price of $4.04,  205% above the closing bid price of the stock for
     the five days  preceding the closing date.  The  debentures,  which bear an
     interest  rate of 4%, will be redeemed in 13  substantially  equal  monthly
     increments  beginning  March 31,  2004.  Amounts  converted  into shares of
     Pharmos common stock will reduce the monthly  redemption  amount in inverse
     order of maturity.  The $16.0 million  earmarked for  acquisition  activity
     will be held in  escrow  until  used or  repaid.  In  connection  with  the
     financing, the Company also issued 5,514,705 three-year warrants (including
     514,705  placement agent warrants) to purchase  5,514,705  shares of common
     stock at an exercise price of $2.04 per share. Total issuance costs related
     to this  financing were  approximately  $1,229,000 in cash and $434,000 for
     the value of the placement agent warrants. The Company



                                      F-14
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     calculated  the  value  of the  warrants  at the  date of the  transaction,
     including the placement agent warrants,  at approximately  $4,652,877 under
     the Black-Scholes  option-pricing method (assumption:  volatility 75%, risk
     free rate 1.59% and zero dividend yield).  The Company allocated the $19.34
     million in net proceeds between the convertible debentures and the warrants
     based on their fair values.  The Company is reporting  the debt discount of
     approximately  $3.5 million as a direct reduction to the face amount of the
     debt in  accordance  with APB 21. The discount is being  accreted  over the
     life of the outstanding debentures. Total accretion of the debt discount in
     2003 was  approximately  $988,664.  The  issuance  costs  allocated  to the
     convertible debentures of approximately $1.4 million are being deferred and
     amortized to interest  expense over the life of the debt in  proportion  to
     the principal balance outstanding allocated to the convertible  debentures.
     During 2003, the Company amortized  $389,418 of issuance costs allocated to
     the convertible  dentures.  The issuance costs allocated to the warrants of
     approximately  $277,000  were  recorded  as a debit to  additional  paid in
     capital.  As of December 31, 2003,  1,307,000 of the total warrants  issued
     were exercised for approximately $2,666,280.

     As of December 31, 2003, the Convertible  Debenture  repayment schedule was
     as follows:

                                  2004              2005             Total
                             ------------       -----------      ------------
        Principal Amount     $ 16,153,846       $ 4,846,154      $ 21,000,000
        Applicable Discount:   (2,451,434)          (72,815)       (2,524,249)
                             ------------       -----------      ------------
        Total, Net            $ 13,702,412       $ 4,773,339      $ 18,475,751
                             ============       ===========      ============

     The financing  also addressed a possible  concern Nasdaq raised  informally
     relating to a  violation  of one of Nasdaq's  corporate  governance  rules.
     Specifically,  Nasdaq  expressed  a  concern  that  the  May  2003  private
     placement,  when  aggregated  with Pharmos' March 2003  registered  private
     placement, would have resulted in the possible issuance of more than 20% of
     Pharmos'  outstanding  securities at a price less than the applicable  fair
     market value for such shares.  Completion of the $21.0 million  convertible
     debt financing had the effect of resolving any such Nasdaq concerns.

     If after the  effective  date,  November 4, 2003,  the closing price of the
     Company's common stock for ten out of any twenty  consecutive  trading days
     exceeds $5.50,  subject to adjustment for reverse and forward stock splits,
     stock dividends,  stock combinations and other similar  transactions of the
     Common Stock that occur after the original  issue date,  the Company may on
     one occasion,  within three trading days of any such period, deliver notice
     to the holder to cause the holder to immediately  convert all or part of up
     to 50% of the original aggregate principal amount of the debenture.  If the
     Company elects to exercise its right to a $5.50 forced conversion, it shall
     exercise such right ratably among all holders of  debentures.  In addition,
     if after the  effective  date,  November 4, 2003,  the closing price of the
     Company's common stock for ten out of any twenty  consecutive  trading days
     exceeds $6.50,  the Company may deliver notice to the holder to immediately
     convert all or part of up to the  remaining  50% of the original  aggregate
     principal amount of the debentures.

     In September 2000, the Company completed a private placement of Convertible
     Debentures,  common stock and  warrants to purchase  shares of common stock
     with institutional investors, generating gross proceeds of $11 million. The
     September 2000 Convertible Debentures, which generated gross proceeds of $8
     million,  were due in  February  2002 and  carried  a 6%  interest  payable
     semiannually in cash or common stock. In connection with the September 2000
     Convertible Debentures,  the institutional investors also received warrants
     for the  purchase of 276,259  common  shares with a relative  fair value of
     $725,000.  The September 2000 Convertible  Debentures were convertible into
     common shares of the Company at the conversion price of $3.83 per share (or
     2,088,775 common shares) and were convertible  beginning  October 31, 2000.
     Under certain limited anti-dilutive conditions,  the conversion price could
     change.  Until converted into common stock or the outstanding  principal is
     repaid, the terms of the September 2000 Convertible Debentures required the
     Company to deposit $4 million in an escrow account. The escrowed capital is
     shown as Restricted Cash on the Company's balance sheet at



                                      F-15
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     December  31, 2002 and was  released to the  Company in  proportion  to the
     amount of  September  2000  Convertible  Debentures  converted  into common
     shares or upon the repayment of the debt.

     The holders of the September  2000  Convertible  Debentures and the Company
     agreed to modify the repayment and  conversion  terms in December 2001. The
     holders of $5.8 million  convertible debt (book value on December 31, 2001,
     including accrued interest)  extended the maturity date to June 30, 2003 in
     exchange  for a reduction in the  conversion  price from $3.83 to $2.63 for
     half  of the  outstanding  balance  and $ 2.15  for the  other  half of the
     outstanding balance. The convertible debt with a maturity date of June 2003
     was  convertible  beginning  December 31, 2001. The holder of the remaining
     outstanding debt of $1.9 million  (including  accrued interest) changed the
     maturity  date from  February  28, 2002 to January 31, 2002 in exchange for
     lowering the conversion  price for the other holders.  As the  modification
     was not  significant  in accordance  with EITF 96-19 the change in the fair
     value between the original  convertible  debt and the modified  convertible
     debt was accreted over the remaining  term of the  convertible  debt with a
     corresponding  charge interest  expense.  During the first quarter of 2002,
     the Company issued 1,217,485 shares of its common stock upon the conversion
     of $2.5  million  principal of the  September  2000  Convertible  Debenture
     offering  and  repaid  $2  million  of  the  September   2000   Convertible
     Debentures.  During the first quarter of 2003, the remaining balance of the
     $3.5 million was redeemed for  approximately  $4.0 million,  which included
     accrued interest.

     Emerging  Issues  Task Force Issue No.  98-5,  Accounting  for  Convertible
     Securities with Beneficial  Conversion Features or Contingently  Adjustable
     Conversion   Ratios,   required  the  Company  to  compute  the  Beneficial
     Conversion  Feature  ("BCF")  of the  convertible  debt  from  the  private
     placement of September 2000. The BCF must be capitalized and amortized from
     the closing date until the earliest date that the investors  have the right
     to convert the debt into  common  shares.  The BCF in 2000 was  computed at
     approximately  $1.8  million,  all of which was  amortized  and included as
     interest  expense in the year ending  December 31,  2000.  Two of the eight
     investors  of the March 2003  private  placement  were also  holders of the
     remaining $3.5 million September 2000 Convertible Debenture offering, which
     was  ultimately  redeemed for  approximately  $4.0 million,  which includes
     accrued  interest.  The September 2000 Convertible  Debenture holders chose
     not to convert the existing debt to common equity.  Instead,  the September
     2000 Convertible Debenture holders opted to be repaid early and participate
     in a new round of financing.  For the two investors, the sale of the common
     stock and warrants  reduced the conversion  price of the outstanding  debt,
     which  resulted in an additional BCF charge of  approximately  $2.7 million
     during the first  quarter  ending  March 31,  2003.  The total  related BCF
     charge  since  inception  of the debt of $3.5  million was  redeemed in the
     first quarter of 2003 as a result of the debt being  repaid.  The impact of
     the reversal of the total BCF charge since  inception of the debt  resulted
     in a net credit of $786,000  recorded as interest  income  during the first
     quarter ending March 31, 2003. This  accounting  treatment is in accordance
     with EITF 00-27.

     During 2001,  the Company paid  $589,819 and issued  182,964  shares of the
     common stock of the Company to the investors in the convertible  debenture.
     The  payments of cash and stock were the options  chosen by the Company and
     represent  adjustments to the pricing based upon the Company's  stock price
     during  the  adjustment  period.  Additional  shares  were  issued  for  no
     additional consideration resulting in an increase in common stock of $5,489
     and a corresponding decrease in additional paid in capital.

     Common Stock

     On May 30, 2003, the Company  completed a private  placement to sell common
     shares and warrants to ten  investors,  generating  total gross proceeds of
     $8.0  million.  The  Company  filed  a  registration   statement  with  the
     Securities and Exchange Commission to permit resales of the common stock by
     the  investors.  The private  placement  offering was  completed by issuing
     9,411,765   shares  of  common   stock  at  a  price  of  $0.85  per  share
     (representing  an approximate 20% discount to a ten-day trailing average of
     the closing price of the stock ending May 28, 2003) and 3,264,706  warrants
     at an exercise price of $1.40 per share,  which includes 441,177  placement
     agent warrants. Issuance costs of approximately



                                      F-16
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     $525,000 in cash and $240,000 for the value of the placement agent warrants
     were  recorded  as a debit  to  additional  paid in  capital.  The  Company
     calculated  the  value  of the  warrants,  including  the  placement  agent
     warrants,  being  approximately  $1,773,000 under the Black-Scholes  option
     pricing method  (assumption:  volatility 75%, risk free rate 3.15% and zero
     dividend yield). As of December 31, 2003, six of the twelve warrant holders
     (ten investors and two placement agents) have exercised  1,700,000 warrants
     totaling approximately $2,380,000.

     On March 4, 2003, the Company  completed a private placement to sell common
     shares and warrants to eight investors,  generating total gross proceeds of
     $4.3 million under a shelf registration. The private placement offering was
     completed by issuing  5,058,827  shares of common stock at a price of $0.85
     per share (the fair market value on March 4, 2003) and  1,141,182  warrants
     at an exercise price of $1.25 per share,  which includes 129,412  placement
     agent  warrants.  Issuance  costs  of  approximately  $127,000  in cash and
     $45,000 for the value of the  placement  agent  warrants were recorded as a
     debit to additional  paid in capital.  As of December 31, 2003, five of the
     nine  warrant  holders  (eight  investors  and one  placement  agent)  have
     exercised 823,533 warrants totaling approximately $1,029,416.

     According  to EITF  00-19,  the  warrants  issued  in March  2003  meet the
     requirements of and will be accounted for as a liability  since  registered
     shares  must be  delivered  upon  settlement.  The Company  calculated  the
     initial value of the warrants at the date of the transaction, including the
     placement  agent   warrants,   being   approximately   $394,000  under  the
     Black-Scholes option-pricing method (assumption:  volatility 75%, risk free
     rate 2.88% and zero  dividend  yield).  The value of the  warrants is being
     marked to market each reporting period as a derivative loss until exercised
     or expiration and has a value of $823,029 at December 31, 2003.
      Upon exercise of each of the warrants, the related liability is removed by
     recording an adjustment to additional paid-in-capital.  A total of $936,156
     was recorded as a credit to additional paid-in-capital in 2003 as result of
     exercises  totaling  approximately  $1.3  million and the  recording of the
     initial value of the warrants of approximately $394,000.

     One common stock investor from a private placement in September 2000 had an
     option  ("Call  Warrant"),  in  the  form  of a  warrant,  to  purchase  an
     additional  $2 million  of common  shares for a period of one year from the
     closing  dateprovided  that the future  purchase  price is greater than the
     initial closing price of $3.65 per share. The maximum number of shares that
     could be issued  from this  warrant was 547,945 and was part of the maximum
     number of warrants  issued for the total  private  placement of  1,115,730,
     including  placement  agent  warrants at prices ranging from $3.65 to $6.08
     per  share.  The  warrants  to the  one  investor  for the  purchase  of an
     additional  $2 million of common stock were valued using the Black  Scholes
     option-pricing  model  (assumptions:  volatility  of 78%, risk free rate of
     5.89% and a zero dividend yield). The warrants to the placement agents were
     valued  using  the  Black  Scholes  option-pricing  model  using  the  same
     assumptions as above. Both warrant issuances were recorded upon issuance as
     additional paid-in-capital.  The investor exercised the Call Warrant in the
     third quarter of 2001,  with the Company  issuing  542,299  common  shares.
     During the fourth  quarter of 2001, the Company issued 281,659 shares as an
     adjustment  to the  pricing of the Call  Warrant  based upon the  Company's
     stock price  during the  adjustment  period as defined in the Call  Warrant
     agreement.


10.  Common and Preferred Stock Transactions

     2003 Transactions

     The Company issued  3,992,845  shares of its common stock upon the exercise
     of stock options and warrants, and received consideration of $6,298,014.

     In December 2003,  the Company  completed a public  offering.  Pharmos sold
     10,500,000  common shares at a purchase  price of $2.75 per share for gross
     proceeds of $28,875,000. The stock was offered



                                      F-17
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     in  a  firm   commitment   underwriting   pursuant  to  an  existing  shelf
     registration  statement.  The net proceeds of this offering to Pharmos were
     approximately $26.9 million.

     During,  2003,  the Company issued 29,919 shares of common stock with gross
     proceeds of $39,891 pursuant to the Pharmos Corporation 2001 Employee Stock
     Purchase  Plan.  All full-time  and part-time  employees of the Company who
     have  completed  a  minimum  of 6 months  of  employment  are  eligible  to
     participate.  The price of the  Common  Stock is  calculated  at 85% of the
     lower of either the mean  between the  highest  and lowest  prices at which
     Pharmos common stock trades on the first business day of the month,  or the
     mean between the highest and lowest  trading  prices on the day of exercise
     (the last day of the  month).  A  participant  can  purchase  shares not to
     exceed 10% of one's annualized base pay;  $25,000;  or 5% or more of shares
     outstanding.  The total number of shares  reserved  for issuance  under the
     2001 Plan is 500,000  shares.  As of December 31, 2003,  there were 446,697
     shares remaining for issuance under the 2001 Plan.

     As of December 31, 2003, the Company had reserved  5,198,020  common shares
     for  the  possible  conversion  of the  convertible  debentures  issued  in
     September 2003,  3,771,968 for outstanding  stock options and 7,722,997 for
     outstanding warrants.

     2002 Transactions

     During,  2002,  the Company issued 23,384 shares of common stock with gross
     proceeds of $20,756 pursuant to the Pharmos Corporation 2001 Employee Stock
     Purchase Plan

     On October 23,  2002,  the Board of  Directors  of the  Company  approved a
     stockholder  rights plan as set forth in the Rights Agreement,  dated as of
     October 23, 2002,  between the Company and American  Stock Transfer & Trust
     Company,  as  Rights  Agent.  Under  the  Rights  Agreement,   each  common
     stockholder  of record as of the close of  business  on  November  6, 2002,
     received a dividend of one right for each share of common stock held.  Each
     right  entitled the holder to purchase from the Company one  one-thousandth
     of a share of a new series of  participating  preferred stock at an initial
     purchase  price of $15.00.  The plan is  designed  to impose a  significant
     penalty  upon  any  person  or  group  that  acquires  15% or  more  of our
     outstanding common stock without the approval of our board. The stockholder
     rights are  triggered  either ten days after a third  party  announces  its
     acquisition  of 15% or more of the  Company's  common stock or ten business
     days after someone  starts a tender offer to acquire such amount of shares.
     At that time,  all  stockholders,  other than the person who  acquired  the
     block or started the tender  offer,  will have the right for 60 days,  upon
     payment of $15, to purchase $30 worth of common  stock of the  Company,  in
     substitution  for the new preferred  stock  authorized  by the  stockholder
     rights  plan,  at  the  time  current  market  price.  As  a  result,   the
     stockholders  of the  Company  will be able to  purchase a large  number of
     shares at a discount,  significantly diluting the interest of the acquiring
     person  and  making it  significantly  more  expensive  for that  person to
     acquire control of the Company.

     2001 Transactions

     The Company issued  1,109,446  shares of its common stock upon the exercise
     of stock options and warrants, and received consideration of $2,417,542.

     On January 1, 2001 the Company  terminated the employment  contract for two
     employees,  who became  independent  consultants.  In  accordance  with the
     incentive  option  plan,  all  terminated  employees  who  are  extended  a
     consulting contract may continue to vest their options. Since the employees
     became consultants on a prospective  basis, the options  outstanding on the
     date of  termination  are marked to market each  quarter  until the options
     vest.  The Company is recording  the value of the services  being  received
     based on the fair  market  value of the  options  using  the  Black-Scholes
     option-pricing  model,  which  was  more  reliable  than  the  value of the
     services provided. The fair value of these options has been estimated based
     on the following weighted average assumptions: volatility of 78%, risk free
     rate



                                      F-18
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     of 5.89% and a zero dividend  yield.  For the year ended  December 31, 2001
     the  Company  recorded  professional  fees  relating  to  these  terminated
     employees of $139,718.










                                      F-19
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.  Warrants

     Some of the warrants issued in connection with various equity financing and
     related  transactions  during  1991  through  2001  contain   anti-dilution
     provisions requiring adjustment.  The following table summarizes the common
     shares issuable upon exercise of warrants  outstanding at December 31, 2003
     as adjusted for the events which have  triggered  anti-dilution  provisions
     contained in the respective warrant agreements:

                                                   COMMON SHARES
                                                     ISSUABLE           EXERCISE
   ISSUANCE DATE                EXPIRATION DATE    UPON EXERCISE          PRICE
   -------------                ---------------    -------------        --------
   April 1995                    April 2005            340,600          $   2.75
                                 April 2005             10,000          $   0.78
   February 1997                 February 2007         486,500          $   1.59
   March 1997                    March 2008            171,052          $   1.38
   January 1998                  October 2005           17,000          $   1.66
   November 1999                 November 2004           4,000          $   1.19
   December 1999                 December 2004           4,000          $   1.19
   January 2000                  January 2005            4,000          $   1.19
   February 2000                 February 2005           4,000          $   1.19
   March 2000                    March 2005              4,000          $   1.19
   April 2000                    April 2005              4,000          $   1.19
   May 2000                      May 2005                4,000          $   1.19
   June 2000                     June 2005               4,000          $   1.19
   July 2000                     July 2005               4,000          $   1.19
   August 2000                   August 2005             4,000          $   1.19
   September 2000                September 2005         95,843          $   4.56
                                 September 2005         92,086          $   4.34
                                 September 2005        379,856          $   4.95
   March 2003                    March 2007            317,649          $   1.25
   May 2003                      May 2008            1,564,706          $   1.40
   September 2003                September 2006      4,207,705          $   2.04
                                                     ---------          --------
     Total shares and average
          exercise price                             7,722,997          $   2.06
                                                     =========          ========



                                      F-20
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  Stock Option Plans

     The Company's  shareholders have approved  incentive stock option plans for
     officers and employees.  Options granted are generally  exercisable  over a
     specified period, not less than one year from the date of grant,  generally
     expire ten years from the date of grant and vest evenly over four years.

     A summary of the various established stock options plans is as follows:

     1992 Plan.  The  maximum  number of shares of the  Company's  Common  Stock
     available for issuance under the 1992 Plan was 750,000  shares,  subject to
     adjustment  in  the  event  of  stock  splits,  stock  dividends,  mergers,
     consolidations  and the like.  As of December 31, 2003,  there were 277,086
     options outstanding to purchase the Company's Common Stock under this plan.
     Each option granted which is outstanding under the 1992 plan as of December
     31, 2003 expires on October 31, 2005.

     1997  Plan  and  2000  Plan.  The  1997  Plan  was  and  the  2000  Plan is
     administered  by a  committee  appointed  by the  Board of  Directors  (the
     "Compensation  Committee").  The Compensation  Committee will designate the
     persons to receive options, the number of shares subject to the options and
     the terms of the  options,  including  the option price and the duration of
     each option, subject to certain limitations.

     The maximum  number of shares of Common Stock  available for issuance under
     the 1997 Plan was 1,500,000 shares, as amended,  and under the 2000 Plan is
     3,500,000 shares.  Each plan is subject to adjustment in the event of stock
     splits, stock dividends, mergers, consolidations and the like. Common Stock
     subject  to  options  granted  under  the 1997  Plan and the 2000 Plan that
     expire or terminate  will again be available for options to be issued under
     each Plan.

     All  incentive  stock option  grants during 2003 were made from the Pharmos
     Corporation 2000 Incentive and Non-Qualified Stock Option Plan. The Company
     does not plan to  issue  any  additional  options  under  the 1992 and 1997
     Plans.





                                      F-21
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The following table summarizes activity in approved incentive stock options
     approved by the Company's Board of Directors:

                                                                   WEIGHTED
                                                    UNDER          AVERAGE
                                                    OPTION      EXERCISE PRICE
                                                  ----------    --------------
Options Outstanding at 12/31/00                    1,519,838        $2.71

Granted at fair market value                          57,000        $2.56
Granted below fair market value                      453,500        $1.88
Exercised                                            (12,500)       $1.25
Cancelled                                             (3,000)       $4.03
                                                  ----------        -----
Options Outstanding at 12/31/01                    2,014,838        $2.53
Granted                                              692,000        $1.90
Cancelled                                           (135,575)       $2.41
                                                  ----------        -----
Options Outstanding at 12/31/02                    2,571,263        $2.36
                                                  ----------        -----
Granted                                              767,500        $1.02
Exercised                                           (165,062)       $1.36
Cancelled                                           (106,194)       $2.33
                                                  ----------        -----

Options Outstanding at 12/31/03                    3,067,507        $2.08
                                                  ==========        =====
Options exercisable at 12/31/03                    1,639,100        $2.52
                                                  ==========        =====
Options exercisable at 12/31/02                    1,282,837        $2.51
                                                  ==========        =====
Options exercisable at 12/31/01                      898,399        $2.47
                                                  ==========        =====

Additional  information with respect to the outstanding  incentive stock options
as of December 31, 2003 is as follows:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                     ---------------------------------------------  ---------------------------
                                      WEIGHTED
                                      AVERAGE          WEIGHTED                     WEIGHTED
RANGE OF EXERCISE      OPTIONS        REMAINING         AVERAGE        OPTIONS      AVERAGE
    PRICES           OUTSTANDING  CONTRACTUAL LIFE  EXERCISE PRICE  EXERCISABLE  EXERCISE PRICE
-----------------    -----------  ----------------  --------------  -----------  --------------
<C>                   <C>             <C>             <C>             <C>          <C>
$1.02 - $1.88         1,295,150       7.5 years       $    1.31         327,000    $    1.62
$1.90 - $2.09           801,769       6.7 years       $    1.92         455,325    $    1.93
$2.44 - $4.03           970,588       7.5 years       $    3.26         856,775    $    3.18
                      ---------       ---------       ---------       ---------    ---------
                      3,067,507       7.0 years       $    2.08       1,639,100    $    2.52
</TABLE>




                                      F-22
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company's Board of Directors  approved  nonqualified  stock options for
     key  employees,   directors  and  certain  non-employee  consultants.   All
     nonqualified  stock  option  grants  during 2003 were made from the Pharmos
     Corporation 2000 Incentive and Non-Qualified Stock Option Plan.

     The following  table  summarizes  activity in  Board-approved  nonqualified
     stock options:

                                                                   WEIGHTED
                                                    UNDER          AVERAGE
                                                    OPTION      EXERCISE PRICE
                                                  ----------    --------------
Options Outstanding at 12/31/00                     504,180         $2.97

Granted below fair market value                     100,000         $1.88
Exercised                                          (136,988)        $2.20
Cancelled                                           (30,000)        $2.77
                                                    -------         -----
Options Outstanding at 12/31/01                     437,192         $2.97

Granted                                             180,000         $1.74
Cancelled                                           (93,250)        $3.59
                                                    -------         -----
Options Outstanding at 12/31/02                     523,942         $2.41
                                                    -------         -----

Granted                                             200,000         $1.66
                                                    -------         -----
Options Outstanding at 12/31/03                     723,942         $2.01
                                                    =======         =====
Options exercisable at 12/31/03                     411,775         $2.46
                                                    =======         =====
Options exercisable at 12/31/02                     253,568         $2.72
                                                    =======         =====
Options exercisable at 12/31/01                     184,756         $3.18
                                                    =======         =====


     Additional  information with respect to the outstanding  nonqualified stock
     options as of December 31, 2003 is as follows:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                         ---------------------------------------------  ---------------------------
                                          WEIGHTED
                                          AVERAGE          WEIGHTED                     WEIGHTED
     RANGE OF EXERCISE     OPTIONS        REMAINING         AVERAGE        OPTIONS      AVERAGE
           PRICES        OUTSTANDING  CONTRACTUAL LIFE  EXERCISE PRICE  EXERCISABLE  EXERCISE PRICE
     -----------------   -----------  ----------------  --------------  -----------  --------------
<S>                         <C>           <C>              <C>             <C>         <C>
      $0.79 - $1.88         400,000       7.9 years        $   1.23        162,083     $   1.54
      $1.90 - $3.69         188,194       6.7 years        $   2.24        129,131     $   2.33
      $4.00 - $5.20         135,748       7.5 years        $   4.01        120,561     $   4.01
                            -------       ---------        --------        -------     --------
                            723,942       7.4 years        $   2.01        411,775     $   2.46
</TABLE>

     As of December 31, 2003, there were 1,855,825  shares  remaining  available
     for issuance under these plans.

     The Company applies Accounting  Principles Board Opinion No. 25, Accounting
     for Stock Issued to Employees,  and related  interpretations  in accounting
     for its plans.  During 2001,  the Company issued  453,500  incentive  stock
     options and 100,000  non-qualified stock options to employees and directors
     at an exercise  price of $1.88 per share.  The exercise  price of $1.88 was
     representative  of the  average  price  during the month the  options  were
     granted,  but was below the closing  market price on the date of the grant.
     Accordingly,  the  Company  recorded  an  initial  compensation  expense of
     $34,594  and  deferred  compensation  expense of  $207,563  to reflect  the
     difference  between the exercise  price and the closing market price on the
     date of the grant.  The deferred  compensation  expense is being  amortized
     over the



                                      F-23
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     four-year vesting period. Total compensation expense was $53,328,  $52,981,
     and $34,594 for the years ending 2003, 2002, and 2001, respectively.

     Fair value of options:

     For  disclosure  purposes under SFAS No. 123, the fair value of each option
     grant was  estimated  on the date of grant using the  Black-Scholes  option
     valuation model with the following weighted-average assumptions:

                                             Year Ended December 31,
                                  ---------------------------------------------
                                      2003            2002             2001
                                  ------------    ------------     ------------
     Risk-interest rates          2.37 - 2.88%    2.63 - 4.39%     3.90 - 4.94%
     Expected lives (in years)          5             1 to 5          1 to 5
     Dividend yield                     0%              0%              0%
     Expected volatility               89%             75%             78%


13.  Related Parties

     In December 2001, the Company's Pharmos Ltd.  subsidiary  renewed a License
     Agreement  with  Herbamed,  Ltd.,  a company  controlled  by the  Company's
     Chairman and Chief Executive  Officer.  The License  Agreement,  originally
     entered into in May 1997,  licenses to Herbamed the Company's patent rights
     for the oral  delivery of  lipophilic  substances  in the limited  field of
     nutraceuticals, which include food and dietary supplements, food additives,
     vitamins  and  herbs.  Under the terms of the  revised  License  Agreement,
     Herbamed will pay to Pharmos Ltd. royalties of 6% on net sales of up to $20
     million,  5% on net sales between $20 million and $50 million and 4% on net
     sales in excess of $50  million.  During the year ended  December 31, 2003,
     the Company recognized  revenue of $4,355 per the licensing  agreement with
     Herbamed.

14.  Income Taxes

     No  provision  for federal  income  taxes was  recorded for the years ended
     December  31,  2003 and  2002  due to net  operating  losses  incurred.  No
     provision  for income taxes was  recorded  for the year ended  December 31,
     2001  since  the  Company  was  able  to  utilize  its net  operating  loss
     carryforwards  and offset the taxes due. Net operating  loss  carryforwards
     for U.S. tax purposes of approximately $99,670,603 expire from 2006 through
     2023.

     During  2003 and 2002,  the  Company  sold a portion  of its New Jersey net
     operating  loss  carryforwards  to a third  party  under  the New  Jersey's
     Technology  Business  Tax  Certificate  Transfer  Program and, as a result,
     recorded a tax benefit of $227,798 and $215,223, respectively.

     The Company's  gross deferred tax assets of $38,962,000  and $34,251,000 at
     December 31, 2003 and 2002,  respectively,  represented  primarily  the tax
     effect of both the net operating  loss  carryforwards  ($36 million in 2003
     and $30.4 million in 2002),  deferred  research and development costs ($0.6
     million in 2003 and $1.3 million in 2002) and research and  development tax
     credit  carryforwards ($2.2 million in 2003 and $1.7 million in 2002). As a
     result of previous  business  combinations  and changes in stock ownership,
     substantially   all  of  these  net   operating   losses   and  tax  credit
     carryforwards are subject to significant  restriction with regard to annual
     utilization. A full valuation allowance has been established with regard to
     the gross  deferred  tax  assets  due to  management's  uncertainty  of the
     recoverability of the deferred tax assets.



                                      F-24
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15.  Commitments and Contingencies

     Leases

     The Company leases research and office facilities in Israel and New Jersey.
     The  facilities  in  Israel  are  used in the  operation  of the  Company's
     research and development activities.

     All of the  leases and  subleases  described  above call for base  rentals,
     payment of certain building maintenance costs (where applicable) and future
     increases based on the consumer price indices.

     At December 31, 2003, the future minimum lease  commitments with respect to
     non-cancelable  operating leases (including  office and equipment  leases),
     net of sublease agreements, with initial terms in excess of one year are as
     follows:

                                                LEASE
                                             COMMITMENTS
                                             -----------
                  2004                        $377,736
                  2005                          81,375
                  2006                          57,978
                  2007                          12,212
                  2008                               0
                                              --------
                                              $529,301
                                              ========

     Rent expense during 2003, 2002 and 2001 amounted to $501,665,  $467,879 and
     $353,793,  respectively.  In 2003,  2002 and 2001,  rent  expense is net of
     sublease income of $97,630, $81,358 and $86,454, respectively.

     Clinical service fees

     The Company has certain professional  clinical service fees relating to the
     Phase III clinical study for dexanabinol  for traumatic brain injury.  Upon
     the completion of certain agreed upon  milestones,  additional fees will be
     paid.  The fees that the Company is  obligated  to pay upon the reaching of
     the  agreed  upon  milestones  is not  included  in the above  table due to
     uncertainties  in  timing.  The  maximum  amount  that  could  be  paid  is
     approximately  $10.9  million and is not  committed  beyond  2004.  Through
     December  31, 2003,  the Company has  recorded  $9.0 million as an expense.
     During 2003 and 2002,  the Company  recorded  expenses of $4.2  million and
     $2.5 million, respectively.

     Consulting contracts and employment agreements

     In the normal course of business, the Company enters into annual employment
     and consulting contracts with various employees and consultants.

     Dividend restrictions

     Dividends may be paid by the Company's  subsidiary,  Pharmos Limited,  only
     out of retained  earnings as  determined  for Israeli  statutory  purposes.
     There are no retained  earnings in Israel  available  for  distribution  as
     dividends  as of December  31,  2003,  2002 or 2001.  The Company  does not
     intend to pay a cash dividend in the foreseeable future.



                                      F-25
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.  Employee Benefit Plan

     The Company has a 401-K defined  contribution  profit-sharing plan covering
     certain employees. Contributions to the plan are based on salary reductions
     by the participants,  matching employer  contributions as determined by the
     Company, and allowable  discretionary  contributions,  as determined by the
     Company's Board of Directors, subject to certain limitations. Contributions
     by the  Company to the plan  amounted  to  $51,893,  $45,296 and $39,637 in
     2003, 2002 and 2001, respectively.

17.  Segment and Geographic Information

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

     Geographic  information  for the years ending  December 31, 2003,  2002 and
     2001 are as follows:

                                      2003            2002             2001
                                 ------------     ------------     ------------
    Net revenues
        United States                      --               --     $  4,298,441
        Israel                             --               --               --
                                 ------------     ------------     ------------
                                           --               --     $  4,298,441
                                 ============     ============     ============
    Net income (loss)
        United States            $(17,943,150)    $(16,514,635)    $  5,564,634
        Israel                       (542,715)        (554,965)        (518,779)
                                 ------------     ------------     ------------
                                 $(18,485,865)    $(17,069,600)    $  5,045,855
                                 ============     ============     ============
    Total assets
        United States            $ 66,203,358     $ 20,656,322     $ 40,648,880
        Israel                      2,804,713        4,030,360        3,614,111
                                 ------------     ------------     ------------
                                 $ 69,008,071     $ 24,686,682     $ 44,262,991
                                 ============     ============     ============
    Long lived assets, net
        United States            $    139,443     $    232,734     $    164,517
        Israel                      1,115,653        1,559,588        1,753,764
                                 ------------     ------------     ------------
                                 $  1,255,096     $  1,792,322     $  1,918,281
                                 ============     ============     ============
    Capital expenditures, net
        United States            $     32,396     $    155,467     $    138,424
        Israel                         84,995          410,398          720,750
                                 ------------     ------------     ------------
                                 $    117,391     $    565,865     $    859,174
                                 ============     ============     ============



                                      F-26
<PAGE>


PHARMOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


18. Quarterly Information (Unaudited)

<TABLE>
<CAPTION>
   YEAR ENDED
DECEMBER 31, 2003                1ST QUARTER    2ND QUARTER    3RD QUARTER    4TH QUARTER
-----------------                -----------    -----------    -----------    -----------
<S>                              <C>            <C>            <C>            <C>
Revenues                                  --             --             --             --
Gross Margin                              --             --             --             --
Operating Expenses               $ 5,063,580    $ 3,238,173    $ 3,695,117    $ 4,037,276
Loss from Operations              (5,063,580)    (3,238,173)    (3,695,117)    (4,037,276)
Other Income (Expense), net          564,375     (1,075,946)      (493,899)    (1,674,047)
Net loss                         $(4,499,205)   $(4,314,119)   $(4,189,016)   $(5,483,525)
Netloss
  per share - basic & diluted*   $      (.08)   $      (.07)   $      (.06)   $      (.07)
</TABLE>

*The addition of earnings per share by quarter may not equal total  earnings per
 share for the year.

<TABLE>
<CAPTION>
   YEAR ENDED
DECEMBER 31, 2002                1ST QUARTER    2ND QUARTER    3RD QUARTER    4TH QUARTER
-----------------                -----------    -----------    -----------    -----------
<S>                              <C>            <C>            <C>            <C>
Revenues                                  --             --             --             --
Gross Margin                              --             --             --             --
Operating Expenses               $ 4,752,088    $ 3,293,525    $ 5,394,968    $ 3,417,883
Loss from Operations              (4,752,088)    (3,293,525)    (5,394,968)    (3,417,833)
Other Income (Expense), net         (215,981)       (57,498)       (53,596)       (99,334)
Net loss                         $(4,968,069)   $(3,351,023)   $(5,448,564)   $(3,517,167)
Net income loss
  per share - basic & diluted*   $      (.09)   $      (.06)   $      (.10)   $      (.06)
</TABLE>

*The addition of earnings per share by quarter may not equal total  earnings per
 share for the year.

19.  Subsequent events

     During January 2004, the  underwriters of the December 2003 public offering
     exercised their  over-allotment  option in full to purchase an aggregate of
     1,575,000  shares of Pharmos' common stock at a purchase price of $2.75 per
     share, less the underwriting discount. Total net proceeds from the exercise
     of the over-allotment option was $4.07 million.

     During the first quarter of 2004,  one of the investors  from the September
     2003  Convertible  Debentures  private  placement  converted  a total of $2
     million plus  interest.  The Company issued 497,662 shares of common stock.
     As  part of the escrow agreement,  approximately  $1,524,000  of restricted
     cash was released to the Company.



                                      F-27