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

For the Fiscal Year Ended                            Commission File No. 0-11550
December 31, 1995
                               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)

2 INNOVATION DRIVE
ALACHUA, FL                                         32615
-----------------------------------------           ----------
(Address of principal executive offices)            (zip code)

Registrant's telephone number, including area code: (904) 462-1210

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.  [  ]

     The aggregate market value of the registrant's Common Stock at March 21,
1996 held by those persons deemed to be non-affiliates was approximately
$56,000,000

     As of March 21, 1996, the Registrant had outstanding 29,205,683 shares of
its $.03 par value Common Stock.




<PAGE>

                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

     Pharmos Corporation (the "Company") is an emerging pharmaceutical company
engaged in the discovery, design, development  and commercialization of
pharmaceuticals to meet significant therapeutic needs in major markets.  The
Company is developing pharmaceuticals in various fields including: site specific
drugs for ophthalmic indications, neuroprotective agents targeted at specific
brain receptors for the treatment of central nervous system (CNS) disorders,
systemic drugs designed to avoid CNS related side effects, and emulsion-based
products for topical and systemic applications.  The Company submitted to the
U.S. Food and Drug Administration ("FDA") a new drug application ("NDA") for the
treatment of ocular inflammation and allergy on March 30, 1995 and signed an
agreement with Bausch & Lomb Pharmaceuticals Inc. ("Bausch & Lomb") regarding
the marketing of this product in the U.S. on June 30, 1995.  In addition, the
Company has two other ophthalmic products in Phase II clinical trials, a CNS
product aimed at treating stroke, head trauma and cardiac arrest which has been
studied in a Phase I clinical trial, and an anti-cancer project in a preclinical
stage.

STRATEGY

     The Company's business objective is the design of novel drugs with safety
superiority initially targeted to ophthalmic, neurological and other disorders.
The Company expects to enter into collaborative relationships with established
pharmaceutical companies to bring its products to market.

PRODUCTS AND TECHNOLOGY

     The Company is developing pharmaceuticals which are designed to address
unmet needs in the market place and exhibit superior efficacy and safety
profiles over competing products.  Many current ophthalmic drugs have
significant side effects, such as elevation of intraocular pressure ("IOP"), or
have inconvenient dosing regimens which can significantly reduce their use.  For
many neurological indications, there are no effective drug therapies available.

     The Company is applying its experience in drug design and its novel drug
delivery technology in developing products directed at several fields including:
site specific drugs for ophthalmic indications, neuroprotective compounds
targeted at specific CNS receptors associated with neurological indications, and
systemic drugs designed to avoid CNS side effects and to have an excellent
peripheral safety profile.  The Company is also using proprietary lipid-based
technologies, primarily submicron emulsions, to achieve better delivery routes.




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     SITE SPECIFIC DRUGS FOR OPHTHALMIC INDICATIONS
     ----------------------------------------------

     LOTEMAX AND LINE EXTENSIONS

     LotemaxTM is the trade name of a drug product in a form of eye drop
suspension in which the active compound is Loteprednol Etabonate ("LE").  The
product is a unique steroid, designed to act in the eye and cure inflammatory
and allergic conditions, and then, as predicted, be deactivated to an inactive
metabolite once it reaches systemic circulation.  This pharmacological profile
results in improved safety by preventing the side effects related to exposure to
systemic steroids.  In the eye, the most unwanted side effect of steroids is the
elevation of IOP, which is sight-threatening.  While glucocorticoids, 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
potent non-steroidal agents. LotemaxTM has demonstrated a superior safety
profile without compromising efficacy.

     An NDA for LotemaxTM  for general ocular inflammatory indications ("class
labeling") was submitted to the FDA in March 1995.  A low dose LE for specific
allergic conditions ("LEA") has completed Phase III clinical studies and a
combination of LE with the antibiotic tobramycin ("LET") for the treatment of
inflammatory and ineffective indications such as post-cataract surgery is in a
preclinical development stage. In December 1995, because of the clinical
importance of uveitis, a severe form of eye inflammation, the Company, in
conjunction with Bausch & Lomb, opted to accelerate a previously planned uveitis
clinical trial to provide the FDA with additional information  fully supporting
the broad class labeling claims sought in the NDA.  The study began in early
1996 and is expected to be completed by mid 1996. Contingent upon receiving
approval of the NDA, the Company anticipates a late 1996 product launch.

     On June 30, 1995, the Company entered into an agreement with Bausch & Lomb
to market the product in the U.S., to purchase the "drug substance" from the
Company, to manufacture the "drug product" and to assist the Company in
developing the product and line extensions.  In 1995, the Company also signed an
agreement with SIPSY Chemical Corporation for exclusive manufacturing of LE for
sale to the Company.

     ADAPROLOL MALEATE

     Adaprolol Maleate is a beta blocker for the treatment of glaucoma,
designed, like LotemaxTM, as a "soft drug," with a predictable metabolic
disposition in the systemic circulation.  Systemic side effects of beta blockers
include cardiovascular and pulmonary complications due to the presence of beta
adrenergic receptors in the heart and lung.  These complications limit the use
of beta blockers in the elderly, cardiac patients and asthmatics.

     Adaprolol Maleate is in Phase II clinical trials.  A completed Phase II
study with 60 patients (with a control group treated with Timolol) has shown
that Adaprolol Maleate significantly reduces IOP in glaucoma patients by an
average 18% with no deleterious effect on mean arterial blood pressure unlike in
the Timolol-treated patients.  Presently, the Company is attempting to identify
a strategic partner to assist in the continued development of Adaprolol Maleate.




                                        3

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     NEUROPROTECTIVE AGENTS: DEXANABINOL AND ANALOGS
     ------------------------------------------------

     DEXANABINOL (HU-211)

     Dexanabinol is a synthetic cannabinoid designed to avoid the psychotropic
and sedative spectrum of canabimimetic agents, while retaining their beneficial
properties as anti-emetics, analgesics and anti-glaucoma agents.

     It is now well established that the psychotropic effects of cannabinoids
are mediated via stereo selective (-) preferring receptors.  Dexanabinol is a
(+) optical isomer and does not interact with cannabinoid receptors.  It does,
nevertheless, retain anti-emetic and anti-glaucoma properties. More importantly,
it is also a stereo selective, non-competitive antagonist of the glutamate NMDA
receptor channel, activation of which is believed to play a key role in
secondary neuronal damage due to head trauma, stroke and cardiac arrest.  The
molecule also has free radical scavenging properties, and anti-inflammatory
properties (including inhibition of TNF-  production).  Both of these latter
mechanisms are important for neuroprotection.  Therefore, dexanabinol emerges as
a unique modality for neuroprotection, combining three relevant mechanisms of
action in a single molecule.

     While trauma and stroke are the highest priority indications for
dexanabinol, this drug also has potential in chronic neuroprotection associated
with other diseases such as glaucoma and Parkinson's and Alzheimer's diseases,
as well as various inflammatory conditions.  Development of dexanabinol for
these indications is being explored at the preclinical level.

     A Phase I study of rising dose tolerance in healthy volunteers (30
subjects) has shown dexanabinol to be safe at doses up to and including the
expected therapeutic doses.  Specifically, there were no hallucinations,
sedation or blood pressure changes of the type reported with other glutamate
antagonists.  The Company plans on beginning Phase II studies in 1996.

     DRUG DESIGN FOR ELIMINATION OF CNS SIDE EFFECTS
     -----------------------------------------------

     TAMOXIFEN METHIODIDE

     Tamoxifen Methiodide is an analog of Tamoxifen, which is a widely used drug
in the treatment of breast cancer.  Several diseases not involving brain
pathology are currently treated with drugs that produce mild to dose-limiting
CNS side effects.  For instance, tamoxifen, which is used to treat breast cancer
patients and has been suggested for use as a prophylactic agent in healthy women
at risk of developing the disease, causes hot flashes and may be associated with
cognitive and affective deficits as well.  Additionally, corticosteroids, used
to treat chronic inflammatory and auto-immune diseases, cause psychotic
reactions in some patients and have been shown to cause selective neuronal death
in animals.  Neuropathic pain could be treated by certain systemic anesthetics,
but the resulting CNS side effects make such therapy unsafe.  These side effects
could be addressed by designing drugs with limited  passage to the brain through
the blood brain barrier (BBB).




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<PAGE>

     In the light of this concept, several analogs of tamoxifen and lidocaine
with poor CNS uptake have been synthesized and tested in several animal models.
Tamoxifen Methiodide, a permanently charged tamoxifen derivative, was tested in
animals (nude mice) inoculated with human breast cancer cells.  Treatment
resulted in rapid arrest of growth followed by tumor regression.  Growth arrest
was also observed in estrogen-independent tumors.  The rate and magnitude of
response was higher than that seen with tamoxifen itself.  The compound retains
the anti-osteoporotic effects of tamoxifen in bone but is considerably less
active than tamoxifen as auterotrophic agent, demonstrating an improved
therapeutic profile as compared to the parent compound.  Permanently charged
lidocaine analogs suppress electrophysiological activities typical to
neuropathic pain in vivo, similar to that achieved with the parent compound.

     EMULSION-BASED DRUG DELIVERY SYSTEMS
     ------------------------------------

     PILOCARPINE-SME

     Pilocarpine-SME is an eye drop formulation of generic Pilocarpine in a
submicron emulsion ("SME") for the treatment of glaucoma.  The development of
ocular drug delivery systems that extend corneal residence time, reduce
irritation and deliver lipophilic drugs to the eye, addresses many of the major
problems of topical eye preparations.  In general, lipophilic drugs are
difficult to deliver systematically. The Company's SME technology, consisting of
oily droplets in an aqueous medium, was developed to meet these needs.  Further,
the Company's second generation EmulsomeTM technology, which combines features
of oil-in-water emulsion and liposomal technologies, has demonstrated increased
drug loading capacity and drug availability, without the use of synthetic
surfactants.

     Ophthalmic drugs, including Pilocarpine, Indomethacin, and Adaprolol
Maleate, were successfully formulated using the Company's proprietary SME
technology, and have demonstrated advantages over standard formulations in terms
of reduced irritation and increased bioavailability in animal models as well as
in Phase I and certain Phase II clinical trials.  Pilocarpine-SME given twice a
day in a Phase II trial for glaucoma was as effective as the four times a day
regimen required with generic pilocarpine, with fewer side effects and an
improved degree of comfort and safety.  Similarly, a Phase II trial of
Adaprolol-SME demonstrated safety, efficacy and lower ocular irritation compared
to an aqueous formulation.  Presently, the Company is attempting to identify a
strategic partner to assist in the continued development of Pilocarpine-SME.

COMPETITION

     The pharmaceutical industry is highly competitive, and research relating to
drug delivery and formulation technologies is developing rapidly. The Company
competes with a number of pharmaceutical companies which have financial,
technical and marketing resources significantly greater than those of the
Company. Some companies with established positions in the pharmaceutical
industry may be better equipped than the Company to develop and market products
in the markets the Company 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




                                        5

<PAGE>

for the use of technology they have developed. These institutions may also
market competitive commercial products on their own or through joint ventures
and will compete with the Company in recruiting highly qualified scientific
personnel.

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

COLLABORATIVE RELATIONSHIPS

     The Company's commercial strategy includes the development of products 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 the Company's products in development and potential future
products. Depending on the availability of financial, marketing and scientific
resources, among other factors, the Company 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 the
Company's flexibility in pursuing alternatives for the commercialization of its
products. There can be no assurance that the Company will establish any
collaborative arrangements or that, if established, such relationship will be
successful.

     Bausch & Lomb.  On June 30, 1995, the Company signed a definitive agreement
     -------------
with Bausch & Lomb to manufacture and market LotemaxTM, the Company's lead
product, in the United States.  The agreement also covers LotemaxTM line
extension products currently being developed by the Company.

     Under the agreement, Bausch & Lomb will purchase the active drug substance
from the Company and has provided the Company  $4 million in cash advances.  An
additional $2 million is subject to reaching certain development milestones in
the LotemaxTM line extension products.  Bausch & Lomb will also collaborate in
the development of such additional products by making available amounts up to
50% of their Phase III clinical trial costs. The Company will retain certain
conditional co-marketing rights to all of the products covered by the marketing
agreement.

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 the Company's
technologies may depend, in part, upon the ability to obtain strong patent
protection.

     Some of the technologies underlying the Company's potential products were
invented or are owned by various third parties, including various universities
and Dr. Nicholas Bodor.  The Company is the licensee of these technologies under
patents held by the applicable owner through




                                        6

<PAGE>

licenses which generally remain in effect for the life of the applicable patent.
The Company generally maintains, at its expense, U.S. and foreign patent rights
with respect to both the licensed and its own technology and files and/or
prosecutes the relevant patent applications in the U.S. and foreign countries.
The Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop its competitive position. The
Company's 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. The Company
intends to file additional patent applications, when appropriate, relating to
its technology, improvements to its technology and to specific products it
develops. There can be no assurance that any additional patents will be issued,
or if issued, that they will be of commercial benefit to the Company.  In
addition, it is impossible to anticipate the breadth or degree of protection
that any such patents will afford.

     The patent positions of pharmaceutical firms, including the Company, 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, the Company 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. are maintained in secrecy until patents issue
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company 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, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that the patents relating to
the licensed technology, if issued, will be upheld by a court of competent
jurisdiction or that a competitor's product will be found to infringe such
patents.

     Other pharmaceutical and drug delivery companies and research and academic
institutions may have filed patent applications or received patents in the
Company's fields. If patents are issued to other companies that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.

     The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.

     It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commitment of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known to the individual during
the course of the individual's relationship with the Company is to be kept




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<PAGE>

confidential and not disclosed to third parties except in specific
circumstances.  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 the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. The Company's patents and licenses underlying its potential
products described herein are summarized below.

     SITE-SPECIFIC DRUGS.  In the general category of site-specific drugs which
     -------------------
are active mainly in the eye and have limited systemic side effects, the Company
has licensed several patents from Dr. Nicholas Bodor.  The earliest patents date
from 1984 and the most recent from 1993.  Some of these patents cover LotemaxTM,
the ophthalmic anti-inflammatory product, and Adaprolol Maleate, for treatment
of glaucoma.

     NEUROPROTECTIVE AGENTS.  The Company has licensed from the Hebrew
     ----------------------
University, which is the academic affiliation of the inventor, Dr. Raphael
Mechoulam, patents covering novel compounds which have demonstrated certain
beneficial neuropharmacological activity while appearing to be devoid of most of
the deleterious effects usually associated with this class of compounds.  This
group of patents has been designed to protect this family of compounds and their
uses devised by the Company and the inventors.  The earliest patent applications
resulted in patents issued in 1989, and the most recent patents date from 1994.
These patents cover Dexanabinol, which is under development for the treatment of
glaucoma, head trauma, cardiac arrest, and stroke.  The Company has received
notice of allowance for another of its U.S. patent applications relating to
certain uses of analogs of this compound.  Three additional U.S. patent
applications are pending.

     TAMOXIFEN METHIODIDE.  The Company has filed patent applications in the
     --------------------
U.S. and Israel, and has an international application, to protect pharmaceutical
compositions of Tamoxifen Methiodide and other charged derivatives of anti-
estrogens.  These charged derivatives are superior to the parent compounds in
that they are devoid of CNS side effects and show an overall improved
pharmacological profile.

     EMULSION-BASED DRUG DELIVERY SYSTEMS.  In the general category of SubMicron
     ------------------------------------
Emulsion (SME) technology, the Company licensed two patent applications from the
Hebrew University of Jerusalem ("Hebrew University") and has separately filed
six patent applications which are at different stages of prosecution.  These
patents and patent applications have been devised to protect a group of
formulation technologies devised by the Company and the inventors as they relate
to pharmaceutical and medicinal products.  The earliest patent filings for SME
technology date from 1986 and the most recent, from 1994.  These patents cover
Pilocarpine-SME, which is being developed to treat glaucoma.

     LICENSES
     --------

     The Company's license agreements generally require the Company, as
licensee, to pay royalties on sale of products developed from the licensed
technologies, and fees on revenues the Company receives for sublicenses, where
applicable.  The royalty rates defined in the licenses are customary and usual
in the pharmaceuticals industry.  The royalties will be payable for periods up




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to fifteen years from the date of certain 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 in which FDA approval has been received for a developed product.  Certain
of the license agreements also require annual payments through 2012.

GOVERNMENT REGULATION

     The Company's activities and products are significantly regulated by a
number of governmental entities, especially the FDA, in the U.S. and by
comparable authorities in other countries. These entities regulate, among other
things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of the Company's potential products. Product
development and approval within this regulatory framework takes a number of
years and involves the expenditure of substantial resources. Many products that
appear promising initially ultimately do not reach the market because they are
found to be unsafe (perhaps too toxic) or to lack effectiveness, as demonstrated
by testing required by government regulation during the development process. In
addition, there can be no assurance that this regulatory framework will not
change or that additional regulation will not arise at any stage of the
Company's product development that may preclude or otherwise adversely affect
approval, delay an application or require additional expenditures by the
Company. Moreover, even if approval is obtained, failure to comply with present
or future regulatory requirements, or new information adversely reflecting on
the safety or effectiveness of the approved drug, can lead to FDA withdrawal of
approval to market the product.

     The regulatory process required to be completed by the FDA before a new
drug delivery system may be marketed in the U.S. depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage form. If the drug is
a new chemical entity that has not been approved, then the process includes (I)
preclinical laboratory and animal tests, (ii) an IND application which has
become effective, (iii) adequate and well-controlled human clinical trials to
establish the safety and effectiveness of the drug for its intended indication
and (iv) FDA approval of a pertinent NDA. If the drug has been previously
approved, then the approval process is similar, except that certain toxicity
tests normally required for the IND application may not be necessary. Even with
previously approved drugs, additional toxicity testing may be required when the
delivery form is substantially changed, or when a company does not have access
to the raw data from the prior preclinical studies.

     The activities required before a pharmaceutical product may be marketed in
the U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and other end points and animal studies to
assess the potential safety and efficacy of the product as formulated. The
conduct of preclinical studies is regulated by the FDA under a series of
regulations called the Good Laboratory Practice regulations. Violations of these
regulations can, in some cases, lead to invalidation of the data from these
studies, requiring such studies to be replicated.

     The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an
Investigative New Drug ("IND") application to the FDA. FDA regulations provide
that human clinical trials may begin thirty days following the submission and
receipt of an IND application, unless the FDA advises otherwise or requests




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additional information, clarification or additional time to review the IND
application; it is generally considered good practice to obtain affirmative FDA
response before commencing trials. There is no assurance that the submission of
an IND application will eventually allow a company to commence clinical trials.
Once trials have commenced, the FDA may stop the trials, or particular types or
parts of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, safety of the product being tested or the adequacy of the
trial design.  Such holds can cause substantial delay and in some cases may
require abandonment of a product.

     Clinical testing involves the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician pursuant to an FDA-reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.

     Phase I clinical studies are commonly performed in 20 to 40 healthy human
subjects or, more rarely, in selected patients with the targeted disease or
disorder. Their goal is to establish initial data about tolerance and safety of
the drug in humans. Also, the first data regarding the absorption, distribution,
metabolism, and excretion of the drug in humans are established.

     In Phase II human clinical studies, preliminary evidence is sought
regarding the pharmacological effects of the drug and the desired therapeutic
efficacy in limited studies with small numbers of selected patients (50 to 200).
Efforts are made to evaluate the effects of various dosages and to establish an
optimal dosage level schedule and validate clinical efficacy endpoints to be
used in Phase III trials. Additional safety data are also gathered from these
studies.

     Phase III clinical studies consist of expanded, large scale studies of
patients (200 to several thousand) with the target disease or disorder, to
obtain definitive statistical evidence of the effectiveness and safety of the
proposed product and dosing regimen.  These studies may also include separate
investigations of the effects in subpopulations of patients, such as the
elderly.

     At the same time that the human clinical program is being performed,
additional non-clinical (i.e., animal) studies are also being conducted.
Expensive, long duration (12-18 months) toxicity and carcinogenicity studies are
done to demonstrate the safety of drug administration for the extended period of
time required for effective therapy. Also, a variety of laboratory, animal, and
initial human studies may be performed to establish manufacturing methods for
the drug, as well as stable, effective dosage forms.

     The results of product development, preclinical studies and clinical
studies and other information are submitted to the FDA in an NDA to seek
approval for the marketing and interstate commercial shipment of the drug. With
the NDA, a company must pay the FDA a user fee in of approximately $200,000.
Companies with less than 500 employees and no revenues from products are
eligible for an exception.  This exception was granted to the Company in
connection with the NDA for LotemaxTM and reduces the fee to $100,000, which is
payable 12 months after the NDA is filed by the FDA.  The FDA may refuse to file
or deny an NDA if applicable regulatory requirements, such as compliance with
Current Good Clinical Practice ("cGCP") requirements, are




                                       10

<PAGE>

not satisfied or may require additional clinical testing. Even if such data are
submitted, the FDA may ultimately decide that the NDA does not satisfy the
requirements for approval.  If the FDA does ultimately approve the product, it
may require, among other things, post-marketing testing, including potentially
expensive Phase IV studies, and surveillance to monitor the safety and
effectiveness of the drug. In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may be difficult and expensive to
administer, and almost always seeks to require prior approval of promotional
materials. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems occur after the product reaches
the market. After a product is approved for a given indication in an NDA,
subsequent new indications or dosages for the same product are reviewed by the
FDA via the filing and upon receipt of a Supplemental NDA ("sNDA") submission as
well as payment of another user fee. The sNDA is more focused than the NDA and
deals primarily with safety and effectiveness data related to the new indication
or dosage, and labeling information for the sNDA indication or dosage. Finally,
the FDA requires reporting of certain information, e.g., adverse experience
reports, that becomes known to a manufacturer of an approved drug.

     Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA and must pay the FDA a registration fee and
annual fee. In addition, each such establishment must inform the FDA of every
drug product it has in commercial distribution and keep such list updated.
Establishments handling controlled substances must be licensed and are inspected
by the U.S. Drug Enforcement Agency ("DEA"). The Company has a current DEA
license appropriate for handling the substances it uses in its facilities.
Domestic establishments are also subject to inspection by the FDA for compliance
with Current Good Manufacturing Practice ("cGMP") regulations after an NDA has
been filed and thereafter, at least biennially. The labeling, advertising and
promotion of drug products also must be in compliance with pertinent FDA
regulatory requirements. Failure to comply with applicable requirements relating
to production, distribution or promotion of a drug product can lead to FDA
demands that production and shipment cease, and, in some cases, that product be
recalled, or to enforcement actions that can include seizures, injunctions and
criminal prosecution.

     To develop and market its potential products abroad, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing, among other things, the design and
conduct of human clinical trials, pricing and marketing. The approval procedure
varies among countries and can involve additional testing, and the time required
to obtain approval may differ from that required to obtain FDA approval. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union ("EU") certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval set forth above. Approval by
the FDA does not ensure approval by other countries.

     Various aspects of the Company's business and operations are also regulated
by a number of other governmental agencies including the DEA, U.S. Department of
Agriculture, Environmental Protection Agency and Occupational Safety and Health
Administration as well as by other federal,




                                       11

<PAGE>

state and local authorities.  In addition, any future international sales would
be regulated by numerous foreign authorities.

     The Company's ability to commercialize its products successfully may depend
in part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance that adequate third-party
coverage will be available to enable the Company or any of its future licensees
to maintain price levels sufficient to realize an appropriate return on its
investment in product development.

CORPORATE HISTORY

          Pharmos Corporation (the "Company"), a Nevada corporation, formerly
known as Pharmatec, Inc., was incorporated under the laws of the State of Nevada
on December 20, 1982. On October 29, 1992, the Company completed a merger (the
"Merger") with Pharmos Corporation, a privately held New York corporation ("Old
Pharmos"), and on October 30, 1992 exercised an option to acquire all of the
outstanding shares of Xenon Vision, Inc., a privately held Delaware corporation
("Xenon"). Prior to the Merger, Old Pharmos was a biopharmaceutical company with
proprietary drug delivery and formulation technologies, one of which involved an
initial application of ophthalmic drugs, and another of which involved research
pharmaceuticals with neuroprotective properties being developed for applications
such as stroke and head trauma.  Prior to the Merger, the Company was a
publicly-held company primarily engaged in the development and testing of a
chemical delivery system which has been shown in animal studies to permit the
passage of drugs across the blood-brain barrier. Prior to its acquisition, Xenon
was a research-based pharmaceutical company developing several patented products
for the ophthalmic field.  In April 1995, the Company acquired Oculon
Corporation ("Oculon") a privately-held development stage company with anti-
cataract technologies and net assets of approximately $3.5 million, consisting
substantially of cash and cash equivalents.

HUMAN RESOURCES

          As of March 1, 1996, the Company had 46 full time employees, 19 in the
U.S. and 27 in Israel, of whom approximately 18 hold doctorate or medical
degrees.

          The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and considers its employee relations to be excellent.

PUBLIC FUNDING AND GRANTS

          The Company's subsidiary, Pharmos Ltd., has received certain funding
from the Chief Scientist of the Israel Ministry of Industry and Trade (the
"Chief Scientist") for research and development of SME technology for injection
and nutrition as well as for research relating to




                                       12

<PAGE>

pilocarpine, dexamethasone and ophthalmic formulations for dry eyes. The Company
has received approximately $1,400,000 under such agreements through December 31,
1995. Funding is repayable on the basis of royalties from the sale of products
developed as a result of the research activities conducted with such funds. The
obligation to pay royalties is limited to the amount of such funding received,
linked to the exchange rate of the U.S. dollar and the New Israeli Shekel.
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."

     In November 1992, the Company was awarded a grant of approximately $750,000
from the Israel-U.S. Binational Industrial Research and Development Foundation
to develop LotemaxTM. The agreement terminated in April 1995. The Company has
received the entire amount allowed under the grant as of  December 31, 1995.
Funding is repayable on the basis of royalties from the sale of products
developed as a result of the research activities conducted with such funds. The
obligation to pay royalties is limited to 150% of the amount of such funding
received.

CONDITIONS IN ISRAEL

          The Company conducts significant operations in Israel through its
subsidiary, Pharmos Ltd., and therefore is affected by the political, economic
and military conditions to which that country is subject.

          Pharmos Ltd. has received certain funding from the Chief Scientist
with respect to its SubMicron Emulsion Technology and with respect to its new
chemical entity, Dexanabinol. The proclaimed purpose of the legislation under
which such funding is provided is to develop local industry, improve the state
balance of trade and to create new jobs in Israel. Such 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 it is
the Company's belief 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, there can be no assurance that such consent, if requested,
would be granted upon terms satisfactory to the Company or granted at all.


ITEM 2.   PROPERTIES

     The Company is headquartered in Alachua, Florida and leases facilities used
in the operation of its research, development,  pilot manufacturing and
administrative activities in Alachua, Florida and Rehovot, Israel. These
facilities have been improved to meet the special requirements necessary for the
operation of the Company's research and development activities.  In the opinion
of the management these facilities are sufficient to meet the current and
anticipated future requirements of the Company. In addition management believes
that it has sufficient ability  to renew its present leases related to these
facilities or obtain suitable replacement facilities.




                                       13

<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     In September 1994, a class action was commenced in the United States
District Court for the Southern District of New York against David Blech
("Blech"), D. Blech & Co. ("Blech & Co."), Bear Stearns & Co., Inc. and certain
other Defendants alleging that Defendants conspired to manipulate and inflate
the prices of the securities of a number of publicly traded biotechnology
companies in which Blech and Blech & Co. allegedly had a controlling interest
for an alleged class period from July 1, 1991 through September 21, 1994.

     On March 28, 1995, an Amended Consolidated Class Action Complaint, entitled
In re Blech Securities Litigation, 94 Civ. 7696 (RWS) (S.D.N.Y.) ("Amended
            ---------------------
Complaint") was filed, in which action the Company was named as an additional
co-Defendant.  The Amended Complaint names as Defendants, Blech, Blech & Co.,
Bear Stearns & Co., Inc. and numerous other Defendants, including eleven
publicly traded biotechnology companies, one of which is the Company (the
"Defendants").  The Amended Complaint asserts the same basic claims as the
original complaint.  The Amended Complaint seeks certification as a class action
and requests unspecified damages against Defendants in connection with the
alleged unlawful manipulation of the stock market prices of twenty-four
different biotechnology companies.

     The Company believes that the claims against it have no factual or legal
basis, and filed in June 1995 a motion to dismiss the claims asserted against
it.  In the Company's motion to dismiss, the Company maintained, inter alia,
                                                                 ----- ----
that the Amended Complaint did not contain any specific or legally cognizable
allegations of fraudulent conduct on the part of the Company, and that the named
Plaintiffs (none of whom are alleged to have purchased or sold common stock of
the Company) lacked standing to assert any claims against the Company.

     The Company's motion to dismiss (along with motions to dismiss by numerous
other Defendants) was argued and submitted before United States District Court
Judge Robert W. Sweet, the Federal Judge assigned the case on November 9, 1995.
The Federal Judge took the motions under submission at the conclusion of oral
argument on November 9, 1995, and a decision has not yet been rendered by the
Court.

     On October 27, 1995, the Company commenced an action in Supreme Court, New
York County (the "State Court"), against Dr. Nicholas Bodor, a former director
of the Company, seeking to enjoin Dr. Bodor from taking any steps to terminate
or interfere with the Company's rights under its License Agreement with Dr.
Bodor relating to LotemaxTM.  Dr. Bodor claims that the advances against future
revenues of LotemaxTM recently received by the Company under its Marketing
Agreement with Bausch & Lomb are an up front licensing fee of which Dr. Bodor is
entitled to receive a portion and that the failure to pay would constitute
grounds for his terminating the License Agreement.  Dr. Bodor also claims that
the Marketing Agreement is actually a sublicense entitling Dr. Bodor to
additional royalties under his License Agreement.  In such event, Dr. Bodor
would be entitled to receive a portion of the Company's advances from Bausch &
Lomb as well as a higher royalty percentage from the Company on future sales of
LotemaxTM.




                                       14

<PAGE>

      The Company strongly disagrees with Dr. Bodor's characterization of the
Bausch & Lomb Marketing Agreement and believes his interpretation is incorrect
and has no merit.  To prevent Dr. Bodor from wrongfully terminating the License
Agreement, the Company commenced the action to protect its rights under both the
License Agreement and the Marketing Agreement.

     In a Memorandum Decision obtained by the Company in February 1996, the
Court ruled in favor of the Company on both motions, granting the Company's
motion for a preliminary injunction and denying Dr. Bodor's motion to dismiss.
The Court instructed the parties to submit a proposed order implementing the
terms of the Court's Memorandum Decision and affidavits regarding an appropriate
undertaking (bond) by the Company pending a final determination of the action.

     In late November 1995, Dr. Bodor commenced an action against the Company in
the state court in Florida seeking a declaratory judgement and money damages.
An amended complaint in the Florida action was recently served on the Company.
The Company will vigorously defend the Florida action.

     In March 1996, the Company reached a settlement with Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum'), licensor
to the Company's Israel subsidiary, Pharmos Ltd., of the SME technology.  Such
settlement provides the Company with an exclusive license to utilize new
technology developed by Yissum in connection with the Company's SME
technologies.

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

          At its Annual Meeting held on October 31, 1995, the stockholders of
the Company elected the following persons as directors of the Company to hold
office until the next annual meeting of the stockholders and until their
successors are duly elected and qualified:  Haim Aviv, Stephen C. Knight, David
Schlachet, Marvin P. Loeb,  E. Andrews Grinstead, III  and William C. Hulley.
Each of these individuals received 16,523,399 votes for and 84,328 votes
withheld.




                                       15

<PAGE>

                                     PART II


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

     From October 20, 1993 until January 26, 1995, the Company's Common Stock
was traded on the NASDAQ  National Market System under the symbol "PARS", and
prior thereto was traded on the Nasdaq SmallCap Market.  Prior to the Merger,
the Common Stock was quoted under the symbol "PHTC".  The Company's Common Stock
was moved to the Nasdaq SmallCap Market, effective January 27, 1995, as a result
of the Company's non-compliance with certain Nasdaq corporate governance
requirements.  The following table sets forth the range of high and low bid
prices 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, 1995                  HIGH      LOW
     ----------------------------                 ------    ------

     1st Quarter.................                 $ 1.37    $ .50
     2nd Quarter.................                   2.75      .62
     3rd Quarter.................                   3.19     1.50
     4th Quarter.................                   2.56     1.22

     Year ended December 31, 1994                  HIGH      LOW
     ----------------------------                 ------    ------

     1st Quarter.................                 $7.88     $6.50
     2nd Quarter................                   6.63      4.50
     3rd Quarter.................                  5.00      1.25
     4th Quarter.................                  2.00      1.06


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

     On March 22, 1996, there were 533 record holders of the Common Stock of the
Company and approximately 4,127  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 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.




                                       16

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE><CAPTION>

                                                     Year Ended December 31,
                                                     -----------------------
                               1995            1994             1993            1992              1991*
                               ----            ----             ----            ----              ----
<S>                         <C>               <C>               <C>             <C>   
Revenues, net               $    75,000       $     7,815       $  81,900       $  395,093       $ 1,007,026

Operating expenses, net      (8,171,085)      (12,963,114)     (9,480,595)      (6,454,670)       (3,317,961)

Acquired research and
development                           -                  -              -       (6,284,136)                -

Merger and related
expenses                              -                  -              -       (1,579,256)                -
                             ----------       ------------     ----------      -----------        ----------

Net loss                    ($8,096,085)     ($12,955,299)    ($9,398,695)    ($13,922,969)      ($2,310,935)
                            ============     =============    ============    =============      ============

Net loss per share               ($0.37)           ($1.19)         ($1.24)          ($2.26)           ($1.04)
                                 =======           =======         =======          =======           =======

Total assets                 $9,461,654        $4,289,416     $10,608,458      $10,197,057        $13,672,407
                             ===========       ==========     ===========      ===========       ============

Long term obligations        $2,294,268           $91,318        $129,240                -         $1,570,000
                             ==========           =======        ========      ===========         ==========

Cash dividends declared               -                 -               -                -                  -
                             ==========        ==========     ===========      ===========       ============
</TABLE>


*Restated to reflect the transfer of assets among entities under common control
 in a manner similar to a pooling of interests.




                                       17

<PAGE>

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

     The Company has generated limited revenues from product sales and is
dependent upon external financing, interest income, and research and development
contracts to pursue its intended business activities.  The Company has not been
profitable since inception and has incurred a cumulative net loss of $54,024,741
through December 31, 1995.  Losses have resulted principally from costs incurred
in research activities aimed at identifying and developing the Company's product
candidates, clinical research studies, merger and acquisition costs, the write-
off of purchased research and development, and general and administrative
expenses.  The Company expects to incur additional operating losses over the
next several years as the Company's research and development and clinical trials
programs continue.  The Company's ability to achieve profitability is dependent
on its ability to develop and obtain regulatory approvals for its products, to
enter into agreements for product development and commercialization with
strategic corporate partners and to develop the capacity to manufacture and sell
its products, and to secure additional financing.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

RESULTS OF OPERATIONS


Years Ended December 31, 1995 and 1994

     Total revenues increased by $67,185 from $7,815 in 1994 to $75,000 in 1995.
This increase resulted from a fee the Company received as a result of
sublicensing certain technologies which were not being actively developed by the
Company.  Revenues in 1994 related to sales of fine chemicals. The Company
phased out the selling of specialty chemicals and no such revenues were received
in 1995.

     Total operating expenses decreased by  $4,782,795, or 37%, from $13,036,461
in 1994 to $8,253,666 in 1995 primarily due to decreases in research and
development expenses, patent expenses and general and administrative expenses.

     Research and development expenses decreased by $2,931,323, or 37%,
primarily due to clinical trials of the Company's lead product Lotemax(TM) being
substantially completed in 1994;  the Company submitted a New Drug Application
("NDA")  for this product with the Federal Drug Administration ("FDA") in March
1995. Late in 1995, the Company began clinical trial testing on one of its
Lotemax line extension products and such trials are expected to continue into
1997.

     Patent expenses decreased by $461,596, or 49%, in 1995.  This decrease
reflects a return to more normalized levels of patent expenses as 1994 was
impacted by costs of defending patent challenges related to technologies
licensed by the Company.  In addition patent expenses in 1994 were impacted by
costs associated with improving the Company's patent coverage for its lead
product Lotemax(TM) and its Dexinabinol and Tamoxifen Methiodide compounds.




                                       18

<PAGE>

     General and administrative expenses decreased by $1,503,343, or 41%, in
1995 primarily reflecting the impact of the cost savings which resulted from the
Company's decisions in late 1994 and early 1995 to eliminate staff and relocate
its corporate headquarters from New York to Alachua, Florida. In 1994 the
Company recognized costs of approximately $360,000 related to this restructuring
primarily related to severance and relocation expenses.

     Net interest income in 1995 of $82,581 represented an increase of 13%
compared to 1994, and was comprised of interest income of $209,584 offset by
interest expense of $127,003.  Interest income in 1995 increased by $62,654, or
42%, compared to 1994 and resulted from  the Company's higher level of
investible funds in 1995.  Interest expense in 1995 increased by $53,270, or 72%
compared to 1994 and resulted from interest expense on the convertible
debentures issued by the Company in February 1995 and converted into Common
Stock by July 1995.

     The net loss for 1995 of  $8,096,085 reflected a decrease of $4,859,214, or
38%, from the net loss of $12,955,299 for 1994.  The decrease in operating
expenses described above accounted for substantially all of this decrease.

Years Ended December 31, 1994 and 1993

     Total revenues decreased by $74,085, or 90%, from $81,900 in 1993 to $7,815
in 1994.  The Company is phasing out the sale of specialty chemicals and has
already phased out specialized research contracts conducted for outside parties
in favor of developing patented, proprietary pharmaceuticals.

     Total 1994 operating expenses increased by $3,442,370, or 36%, from
$9,594,091 in 1993 to $13,036,461 in 1994 primarily due to increases in research
and development and Phase III clinical trials for the Company's lead compound,
LotemaxTM.

     Research and development expenses increased by $2,233,806, or 39%, from
$5,753,349 in 1993 to $7,987,155 in 1994, as the number of research personnel,
research expenses, and clinical trial programs expanded.  Patent expenses
increased by $360,818, or 62%, from $581,637 in 1993 to $942,455 in 1994.  This
is primarily due to the advancement of product development and reimbursements to
the University of Florida for patent expenses incurred under the terms of the
Company's license agreement.

     General and administrative expenses increased by $776,225, or 27%, from
$2,908,083 in 1993 to $3,684,308 in 1994.  These increases were caused primarily
by the expansion of staff in the first half of 1994, and the subsequent
restructuring costs, including severance expenses of $253,500, incurred in the
second half of 1994.  In addition, during 1994 the Company had been working to
raise funds through various financing, which were unsuccessful.  The related
costs of these financing, such as travel, printing, legal and accounting fees,
are a component of the increase in general and administrative expenses.




                                       19

<PAGE>

     Net interest income of $73,197 for 1994 was comprised of interest income of
$146,930 offset by interest expense of $73,733.  Net interest income of $111,866
for 1993 was comprised of interest income of $166,459 and interest expense of
$54,593.  The decrease in interest income from 1993 to 1994 of $19,529, or 12%,
results from smaller balances of funds and the general decline in interest rates
in 1994.  The increase in interest expense of $19,140, or 35%, between 1993 and
1994 primarily reflects costs related to financing activity in the form of a
loan and a line or credit obtained by the Company's Israeli subsidiary, Pharmos
Ltd.

     The net loss for 1994 of $12,955,299 reflected an increase of $3,556,604,
or 38%, from the net loss of $9,398,695 for 1993.  The increase of research and
development, and general and administrative expenses detailed above account for
the majority of the increase in net loss.

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently has no sources of recurring revenues and has incurred
operating losses since its inception and has financed its operations with public
and private offerings of securities, a marketing agreement with Bausch & Lomb,
research contracts, license fees, royalties and sales, and interest income.

     The Company had working capital of $6.4 million, including cash and cash
equivalents of $7.4 million as of December 31, 1995.  Management believes that
existing cash and cash equivalents combined with additional cash inflows from
investment income, grants and advances pursuant to the Marketing Agreement
described below, will be sufficient to support operations through the first
quarter of 1997.  Management believes that additional funding will be required
to fund operations until, if ever, profitable operations can be achieved.
Therefore, the Company is continuing to actively pursue various funding options,
including additional equity offerings, commercial and other borrowings,
strategic corporate alliances and business combination transactions, the
establishment of product related research and development limited partnerships,
or a combination of these methods for obtaining the additional financing that
would be required to continue the research and development necessary to complete
the development of its products and bring them to commercial markets.

     During 1995, the Company raised additional  equity of $12,481,426 through
the issuance of 14,517,309 shares of common stock.  A portion of these funds,
$201,258 net of short term deposits securing such borrowings, were used to pay
off short term bank debt and the remaining funds were available to fund ongoing
operations of the Company.  In addition, during 1995, the Company signed a
definitive marketing agreement (the "Marketing Agreement") with Bausch & Lomb to
market  Lotemax(TM), the Company's lead product, on an exclusive basis in the
United States. Under the Marketing Agreement, Bausch & Lomb will purchase the
active drug substance from the Company and provide the Company with $4 million
in cash advances through March 1996.  An additional $2 million in advances may
be made subject to reaching certain development milestones in the Lotemax(TM)
line extension products.  Bausch & Lomb will also collaborate in the development
of such additional products by making available amounts up to 50% of the
Phase III clinical trial costs.

As of the date hereof, the Company has received $4,000,000 in advances against
future sales to Bausch & Lomb of the active drug substance (needed to
manufacture the drug).  Bausch & Lomb will




                                       20

<PAGE>

be entitled to credits against such future purchases of the drug substance based
on the advances and future advances until the advances have been recouped. The
Company may be obligated to repay such advances if it is unable to supply Bausch
& Lomb with certain specified quantities of the active drug substance.


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.




                                       21

<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.              55        Chairman, Chief Executive Officer,
                                        Acting President, Chief Scientist and
                                        Director

Marvin P. Loeb                69        Director


E. Andrews Grinstead, III     50        Director

Stephen C. Knight, M.D.       36        Director

David Schlachet               50        Director

William C. Hulley             38        Director

Gad Riesenfeld, Ph.D.         52        Executive Vice President, Chief
                                        Operating Officer

S. Colin Neill                49        Acting Vice President/Finance, Chief
                                        Financial Officer, Treasurer and
                                        Secretary
John F. Howes, Ph.D.          53        Vice President/Clinical Affairs

Anat Biegon, Ph.D.            42        Vice President/Research and Development

     Haim Aviv, Ph.D., is Chairman, Chief Executive Officer, Acting President,
Chief Scientist and a Director of the Company and co-founded in 1990, Pharmos
Corporation, a New York corporation ("Old Pharmos"), which merged into the
Company on October 29, 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., a stockholder of
the Company.  Dr. Aviv is Chairman of the Board and




                                       22

<PAGE>

holds over 5% of the common stock of Peptor, Ltd., an Israeli corporation
engaged in the research and development of drugs based on peptides.  Dr. Aviv is
also a Director, officer and/or significant stockholder of several privately-
held Israeli pharmaceutical and venture capital companies.

     Marvin P. Loeb, a Director, was Chairman of the Board of the Company (then
known as Pharmatec, Inc.) from December 1982 through October 1992.  He has been
Chairman of Trimedyne, Inc. (and its subsidiaries), a publicly-held company
engaged in the manufacture of lasers, optical fibers and laser delivery systems,
since April 1981;  a Director of Gynex Pharmaceuticals, Inc., from April 1986
until its merger with and into Biotechnology General Corporation in 1993, a
publicly-held company engaged in the development and commercialization of
pharmaceutical products; a Director of Petrogen, Inc., an inactive, privately-
held company engaged in the genetic engineering of bacteria for cleanup of oil
waste and toxic waste, from April 1987 to April 1992 (Chairman from November
1980 to December 1982 and from July 1983 to April 1987); Chairman of Automedix
Sciences, Inc., an inactive, publicly-held company engaged in the development of
products for treating cancer and other diseases, since September 1980; Chairman
of Cardiomedics, Inc., a privately-held, development stage company engaged in
the development of heart assist devices, from May 1986; Chairman of Xtramedics,
Inc. (now Athena Medical Corporation), a publicly-held company developing a
feminine hygiene product, from November 1986 to February 1994, and a Director
from November 1986 until May 1994; Chairman of Ultramedics, Inc., an inactive,
privately-held company developing blood treatment products, since November 1988;
and President and Director of Marvin P. Loeb & Co. since 1965, and Master Health
Services, Inc. since 1972, both of which are family-held companies engaged in
licensing of inventions and financial consulting.

     E. Andrews Grinstead, III, a Director of the Company since 1991, is
Chairman and Chief Executive Officer of Hybridon, Inc., a publicly-held
biotechnology company.  Mr. Grinstead joined Hybridon in 1991.  From 1987 to
October 1990, he was Managing Director and group head of the life sciences group
at PaineWebber, Inc.  From 1986 to 1987,  Mr. Grinstead was Managing Director
and group head of the life sciences group at Drexel Burnham Lambert.   From 1984
to 1986, he was a Vice President at Kidder, Peabody & Co., Inc., where he
developed the life sciences corporate finance specialty group.   Prior to his
seven years on Wall Street, Mr. Grinstead served in a variety of operational and
executive positions with Eli Lilly & Company, most recently as general manager
of Venezuelan Pharmaceutical, Animal Health and Agricultural Chemical
Operations.  Since 1991, Mr. Grinstead has served as a Director of EcoScience
Corporation, a development-stage company engaged in the development of
biopesticides.  Since 1994, Mr. Grinstead has served as a member of the Board of
Trustees for the Albert B. Sabine Vaccine Foundation, a 501(c)(3) charitable
foundation dedicated to disease prevention.  Mr. Grinstead was appointed to the
President's Council of the National Academy of Sciences and the Institute of
Medicine in 1992.

     Stephen C. Knight, M.D., a Director of the Company since November 10, 1994,
is a Senior Consultant in the Process Industries section of the North American
Management Consulting Directorate at Arthur D. Little, Inc.  Dr. Knight recently
returned from a two-year assignment in the Arthur D. Little office in Brussels,
Belgium.  During the past five years, he has been involved




                                       23

<PAGE>

in a variety of corporate and research and development strategic planning,
technology assessment, and merger and acquisition studies in the pharmaceutical,
biotechnology, health care information, medical equipment and diagnostic
industries.  Prior to joining Arthur D. Little, Dr. Knight worked as a
consultant at APM, Inc.  Dr. Knight has performed medical research at the
National Institutes of Health, AT&T Bell Laboratories, and Yale and Columbia
Universities.

     David Schlachet, a Director of the Company since December 15, 1994, is Vice
President of Finance and Administration at the Weizmann Institute of Science in
Rehovot, Israel, a position he has held since 1990.  Mr. Schlachet is
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 Director of Taya Investment Company
Ltd., an Israeli publicly-held investment company.

     William C. Hulley, a Director of the Company since April 11, 1995, is Vice
President and General Partner of Adams Capital Management, a venture capital
management firm.  Mr. Hulley co-founded Adams Capital Management in January
1995.  From 1989 until January 1995, Mr. Hulley was employed by Fostin Capital
Corp, a venture capital management where he served as a General Partner of
Fostin Capital Partners beginning in 1993.  Prior to 1989, Mr. Hulley held
engineering and marketing management positions in several high technology
companies, most recently with Carnegie Group Inc.  Mr. Hulley is a director of
On Technology and several privately held companies.

     Gad Riesenfeld, Ph.D., was named Chief Operating Officer in March 1995 and
has served as Executive Vice President since December 1994. He had been the Vice
President of Corporate Development and General Manager of Florida Operations
since October 1992 and was employed by Pharmos Ltd. from March 1992 until the
Merger.  Prior thereto, he was engaged in free-lance consulting relating to the
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 private company involved in extracorporeal blood therapy.

     S. Colin Neill became Acting Vice President/Finance, Secretary, Treasurer
and Chief Financial Officer of the Company at the end of March 1995.  Mr. Neill
is a certified public accountant and worked at Price Waterhouse, the Company's
auditor, for eight years.  Prior to joining the Company, Mr. Neill worked as a
financial consultant.  From October 1992 until December 1993, Mr. Neill was Vice
President - Finance of BTR Inc., a British diversified manufacturing company.
From January 1991 to October 1992, he worked as a financial consultant.  From
1986 through January 1991, Mr. Neill served as Vice President - Financial
Services of BOC Group, Inc., a British industrial gases and health care company.

     John F. Howes, Ph.D., was named Vice President of Clinical Affairs in
December 1994.  He had been Senior Director of Clinical Affairs from the Merger
in 1992 until his recent




                                       24

<PAGE>

appointment as a Vice President.  From 1988 until the Merger, Dr. Howes served
as Vice President for Development at Xenon Vision, Inc.

     Anat Biegon, Ph.D., was named Vice President of Research and Development in
December 1994.  Dr. Biegon became head of Research and Development for the
Company in 1994.  From 1992 to 1994, Dr. Biegon was a director in Pharmos Ltd.'s
Department of Pharmacology.  From 1991 to 1992, she was a Staff Physiologist at
the University of California at Berkeley's Lawrence Berkeley Laboratory,
Division of Research Medicine and Radiation Biophysics.  From 1990 to 1991, Dr.
Biegon was a Research Associate Professor in the Department of Psychiatry at New
York University Medical Center.  From 1988 to 1990, she was an Associate
Professor in the Department of Neurobiology at the Weizmann Institute of
Science.

SECTION 16 FILINGS

     The following individuals did not file reports on Form 4 regarding certain
transactions during the fiscal year ended December 31, 1995:

      Haim Aviv - re-pricing of options and grant of options in October; Gad
Riesenfeld - re-pricing of options and grant of options in October; E. Andrews
Grinstead III - re-pricing of options and grant of options in October; Marvin
Loeb - re-pricing of options and grant of options in October;  Colin Neill -
sale of shares and grant of warrants in October; John Howes -re-pricing of
options and grant of options in October; Anat Biegon - re-pricing of options and
grant of options in October; William Hulley - grant of options in October;
Stephen Knight - grant of options in October; David Schlachet - grant of options
in October;  (Form 5's were filed for the above-named individuals, except Ms.
Biegon, in February 1995).




                                       25

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

          The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1995 and the two previous years, as well as
all other executive officers of the Company who received compensation in excess
of $100,000 for 1995.  Stock options have been adjusted for the Reverse Share
Split.

SUMMARY COMPENSATION TABLE

<TABLE><CAPTION>

                                                                         Long Term Compensation
                                                                        -------------------------
                                  Annual Compensation                   Restricted       Stock
Name/                            -------------------                      Stock        Underlying
Principal Position     Year      Salary      Bonus       Other          Awards($)       Options
------------------     ----      ------      -----       ------         ----------     ----------
<S>                    <C>      <C>          <C>         <C>             <C>            <C>
Haim Aviv, Ph.D./                                        20,551(1)
 Chairman, Chief       1995     $200,230                                                324,376
 Executive Officer,    1994      195,476                                 25,750(4)      225,000
 Acting President,     1993      187,320     $17,500                     25,750
 and Chief Scientist

Gad Riesenfeld, Ph.D./
 Executive Vice        1995      136,664                 34,481(2)                       79,333
 President, Chief      1994      110,000                 40,828(2)                       29,333
 Operating Officer     1993      110,000      17,000     28,410(2)

S. Colin Neill/
 Acting Vice           1995                             109,375(3)                       10,000(5)
 President/Finance
 and Administration,
 Chief Financial
 Officer, Secretary
 and Treasurer

John F. Howes, Ph.D./
 Vice President/       1995      115,000                                                 34,933
 Clinical Affairs      1994      109,200       5,000                                     14,933
                       1993      105,300

</TABLE>
---------------
1)   Consists of car allowance

2)   Consists of housing allowance ($15,300) contributions to insurance premiums
     ($13,500), and car allowance.

3)   Consists of non-employee compensation

4)   These amounts represent the value of 94,115 shares of Old Pharmos common
     stock (equal to 18,000 shares of Common Stock, as adjusted) issued in 1990,
     subject to forfeiture in the amount of 75%, 50%, 25% and 0%, respectively,
     on each anniversary of grant until four years after grant. (No dividends
     have been paid to date on these shares).  The market value of these 18,000
     equivalent shares as of December 31, 1995 was $26,438.

5)   Consists of warrant to purchase 10,000 shares of common stock at $1.88 per
     share expiring on 10/31/2001




                                       26

<PAGE>

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


OPTION GRANTS FOR THE YEAR
ENDED DECEMBER 31, 1995:

<TABLE><CAPTION>
                                                                       Potential Realizable Value
                              % of Total                                at Assumed Annual Rate of
                                Options                                 Stock Price Appreciation
                 Number of    Granted to       Exercise                      for Option Term
                  Options      Employees        Price      Expiration   -------------------------
 Name             Granted     During Year      Per Share     Date           5%           10%
 ----             -------     -----------      ---------     ----       ---------      --------
<S>             <C>           <C>              <C>         <C>           <C>           <C>

 Haim Aviv,         60,000       8.6%           $1.94      10/31/05       $73,100      $185,300
 Ph.D.         (1) 264,376      37.8%           $2.50      10/31/05      $171,500      $668,900

 Gad                40,000       5.8%           $1.94      10/31/05       $49,000      $123,500
 Riesenfeld,   (1)  39,333       5.6%           $2.50      10/31/05       $25,800       $99,300
 Ph.D.

 John F.            20,000       2.9%           $1.94      10/31/05       $24,000       $61,800
 Howes, Ph.D.   (1) 14,933       2.1%           $2.50      10/31/05        $9,800       $37,700

</TABLE>


(1)  represents previously issued options canceled and regranted in 1995


AGGREGATED OPTION EXERCISES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND OPTION VALUES AS OF DECEMBER 31, 1995:

<TABLE><CAPTION>
                                        Number of Unexercised                 Value of Unexercised
                Number of                    Options at                       In-the-Money Options at
                 Shares                     December 31, 1995                  December 31, 1995(1)
               Acquired on    Value     ---------------------                  -------------------
 Name           Exercise    Realized    Exercisable     Unexercisable      Exercisable     Unexercisable
 ----           --------    --------    -----------     ----------------   --------------  -------------
<S>             <C>
 Haim Aviv,
 Ph.D.            0            0          31,501            292,875          $  -0-             $ -0-

 Gad
 Riesenfeld,      0            0             0               79,333             -0-               -0-
 Ph.D.

 John F.
 Howes,           0            0             0               34,933             -0-               -0-
 Ph.D.

</TABLE>

(1)  Based upon closing price on December 31, 1995 as reported on the Nasdaq 
     SmallCap Market and the exercise price per option.




                                        27

<PAGE>

TEN YEAR OPTION REPRICINGS

<TABLE><CAPTION>
                           Number of                                                        Length of
                          Securities                                                     Original Option
                          Underlying  Market Price of  Exercise Price                    term Remaining
                           Options     Stock at Time     at Time of       Net Exercise     at Date of
    Name        Date      Repriced     of Repricing      Repricing          Price           Repricing
    ----        ----      --------     ------------      ---------          -----           ---------
<S>           <C>         <C>          <C>               <C>               <C>           <C>
 Haim Aviv,   10/31/95      39,376         $1.94            $6.80           $2.50           6.5 years
 Ph.D.        10/31/95     148,080         $1.94            $6.50           $2.50           8.5 years
              10/31/95      79,920         $1.94            $6.50           $2.50           8.5 years


 Gad          10/31/95      29,333         $1.94            $6.50           $2.50           8.5 years
 Riesenfeld,  10/31/95      10,000         $1.94           $10.46           $2.50           7.0 years
 Ph.D.


 John Howes,  10/31/95      14,933         $1.94            $6.50           $2.50           8.5 years
 Ph.D.
</TABLE>


REPORT ON REPRICING OF OPTIONS

      The Compensation/Stock Option Committee of the Board of Directors ( the 
"Committee") establishes the general compensation policies of the Company, 
establishes the compensation plans and specific compensation levels for 
executive officers, and administers the 1992 Incentive and Non-Qualified Stock 
Option Plan as well as the Company's other Stock Option Plans. The Committee is
composed of two independent, non-employee Directors.

     The Committee believes that the chief executive officer's ("CEO") 
compensation and the compensation of other officers of the Company should be 
heavily influenced by Company performance. Stock options are granted to the CEO
and other executives, primarily based upon the executive's ability to influence
the Company's long term growth.  In addition, the Committee considers factors 
such as relative Company performance, the individual's past performance and 
future potential in establishing the compensation levels and stock option 
awards.

     During 1995 the Committee considered the fact that the exercise price for 
existing stock options for executive officers, employees, current directors and 
consultants of the Company granted in prior years had become considerably in 
excess of market prices for the Company's Common Stock and that as a result 
such options did not provide the holders with the desired incentive of linking 
their long term compensation with the performance goals of the Company's 
stockholders.  This consideration along with the Committee's consideration of 
the performance of the executive officers during a very critical period of 
the Company's history, including:  the filing of the NDA for the Company's 
leading product candidate Lotemax(TM), the signing of the Marketing Agreement 
with Bausch & Lomb, the progress made by the Company with other new compounds, 
and the improved cash and equity positions of the Company as a result of equity
offerings and the implementation of cost savings, lead to the Committee's 
recommendation that




                                            28

<PAGE>

previously issued options be canceled and reissued at exercise prices closer to
the market value of the Company's Common Stock.

     As a result in October 1995, the Committee and Board approved the
cancellation and reissuance of certain previously issued options held by current
executives, employees, directors and consultants of the Company at an exercise
price of $2.50 per share.  Such price represented a 29% premium over the market
price of the Company's Common Stock as of the date of the grant.  The options
regranted subject to the 1992 Plan are subject to an exercise schedule which
provides that none of the regranted options may be exercised until one year from
the date of the grant, October 31, 1995.  See "Stock Option Plans" included
herein for a further discussion of the Company's Stock Option Plans.

STOCK OPTION PLANS

     It is currently the Company's policy that all full time key employees be
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 improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company.  The
amount and exercise price of all options discussed herein have been adjusted for
the Reverse Share Split.

     As of December 31, 1995, the Company has 994,378 options to purchase shares
of the Company's Common Stock outstanding under various option plans,  282,626
of which were issued under no established plan.  During 1995 the Company granted
options to purchase 300,000 shares of its Common Stock to employees under a plan
established in 1992 and granted options to purchase 70,000 shares of its common
stock under no established plan to Directors of the Company.   In addition,
during 1995 the Company's Board elected to reprice certain options issued prior
to 1995 under the various option plans and as a result 561,118 previously issued
options were canceled and regranted.  A summary of the various established stock
option plans is as follows:

     1983, 1984, 1986, 1988 Plans.  The Company (then known as Pharmatec, Inc.)
     ----------------------------
established Incentive Stock Option Plans in 1983, 1984, 1986 and 1988) for
officers and employees. There are currently no options outstanding under these
plans and it is anticipated that future grants of stock options will not be made
from these plans.

     1991 Plan.  Old Pharmos established a stock option plan in  1991.  There
     ---------
are currently 11,476 options outstanding under this plan and it is anticipated
that future grants of stock options will not be made from this plan.

     1992 Plan.  The 1992 Plan is administered by a committee appointed by the
     ---------
Board of Directors (the "Committee"), consisting of Messrs. Marvin P. Loeb and
E. Andrews Grinstead, III.  The 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.




                                       29

<PAGE>

     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 will again be available for options to be issued under the 1992 Plan.
As of December 31, 1995, there were options to purchase 700,266 shares of the
Company's Common Stock outstanding under this plan. Options to purchase 300,000
shares were granted on October 31, 1995 at an exercise price of $1.94 per share
and options to purchase 400,266 shares previously outstanding and having an
average exercise price of  $6.50 were canceled and reissued with an exercise
price of $2.50 per share. Each option granted outstanding under the 1992 plan as
of December 31, 1995 expires on October 31, 2005.

     The price at which shares of the Company's Common Stock may be purchased
upon exercise of an incentive stock option must be at least 100% of the fair
market value of the Company's Common Stock on the date the option is granted (or
at least 110% of fair market value in the case of a 10% Holder).

     The aggregate fair market value (determined at the time the option is
granted) of the Company's Common Stock with respect to which incentive stock
options are exercisable for the first time in any calendar year by an optionee
under the 1992 Plan, or any other plan of the Company or a subsidiary, shall not
exceed $100,000.  The 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% Holder).  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 1992 Plan, for the purpose of exercising
an option or may permit the option price to be paid in shares of the Company's
Common Stock at the then current fair market value, as defined in the 1992 Plan.

     No option may be exercised unless the holder has been an employee or
consultant of the Company or a subsidiary for six months from the date of grant.
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).  If
an optionee dies while he or she 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 Board of Directors may amend, suspend or discontinue the 1992 Plan, but
it must obtain stockholder approval to (I) increase the number of shares subject
to the 1992 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
therefor specifying a lower exercise price that is not less than the fair market
value of the Company's Common Stock on the date the new option is granted, (iv)
remove the administration of the 1992 Plan from the Committee, (v) render any
member of the Committee eligible to receive an option,




                                       30

<PAGE>

other than options granted pursuant to formula, under the 1992 Plan while
serving thereon, or (vi) amend the 1992 Plan in such a manner that options
issued under it intended to be incentive stock options fail to meet the
requirements of Incentive Stock Options as defined in Section 422 of the Code.

EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION

     Haim Aviv, Ph.D.  In addition to serving as Chairman of the Board and Chief
     ----------------
Executive Officer of the Company, Dr. Aviv has provided consulting services
under a consulting agreement with an initial three-year term ended May 3, 1993.
The term automatically renews for additional one-year periods unless either the
Company or Dr. Aviv terminates the agreement at least 90 days prior to a
scheduled expiration date.  The agreement has been renewed on an annual basis
and presently expires on May 3, 1997.  Dr. Aviv is entitled to severance pay
equal to 25% of his salary in the event of termination or non-renewal without
cause.  Under the agreement,  Dr. Aviv is required to render certain consulting
services to the Company and in consideration therefore, Dr. Aviv is entitled to
receive $170,000 per year, subject to yearly increases and review.

     The Company's subsidiary, Pharmos Ltd., employs Dr. Aviv as its Chief
Executive Officer under an employment agreement with Dr. Aviv pursuant to which
Dr. Aviv receives $30,000 per year, subject to yearly increases and review.  Dr.
Aviv is required to devote at least 50% of his business time and attention to
the business of Pharmos, Ltd. and to serve on its Board of Directors.  Dr. Aviv
was issued at par value effective as of the time of his engagement, the
equivalent of 18,000 shares of Common Stock, subject to a four year divesting
program; all shares under this agreement are fully vested.


     Gad Riesenfeld, Ph.D.  In October 1992, Old Pharmos entered into a one-year
     ---------------------
employment agreement with Dr. Riesenfeld, which is automatically renewable for
successive one-year terms unless either party gives three months prior notice of
non-renewal.  Under the Agreement, Dr. Riesenfeld devotes his full time to
serving as Executive Vice President of the Company.  Dr. Riesenfeld's annual
gross salary is $150,000.




                                       31

<PAGE>

     Directors' Compensation.  In 1995, Directors did not receive cash
     -----------------------
compensation for service on the Board or for attending Board meetings.  Non
employee members of the Board  received options to purchase shares of the
Company's Common Stock at an exercise price of $1.94 per share. Such options
expire on October 31, 2001. These options become exercisable in three equal
installments on  October 31, 1996, 1997, and 1998.  The number of shares to be
acquired under such options as granted to each Director is as follows: Messrs.
Loeb and Grinstead 20,000 each, Messrs. Knight, Hulley, and Schlachet 10,000
each.   During 1995, the Board canceled and reissued options previously issued
to current Directors.  The following table reflects the impact of such
cancellation and reissuance.


                                                                      Length of
                                                                      Original
                           Number                                       Option
                            of        Market                            term
                        Securities   Price of   Exercise              Remaining
                        Underlying   Stock at   Price at      Net      at Date
                          Options    Time of     Time of   Exercise      of
    Name        Date     Repriced   Repricing   Repricing    Price    Repricing
    ----        ----     --------   ---------   ---------    -----    ---------
 Marvin P.    10/31/95   30,000      $1.94        $6.50      $2.50    4.5 years
  Loeb

 E. Andrews   10/31/95   80,000      $1.94        $6.50      $2.50    4.5 years
  Grinstead   10/31/95    5,738      $1.94        $5.23      $2.50    5.5 years
  III




                                       32

<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 March 1, 1996, 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
Name and Address of                      of Beneficial               Percentage
Beneficial Ownership                       Ownership               of Total (1)
--------------------                    --------------             ------------

Grace Brothers Ltd.(2)                       1,923,077                    6.6%
1000 W. Diversey Parkway
Suite 233
Chicago, IL  60614

Haim Aviv, Ph.D.(3)                            833,805                    2.9%
c/o Pharmos Ltd.
Kiryat Weizmann
Rehovot, Israel

Marvin P. Loeb(4)                              300,271                     *
Trimedyne, Inc.
2810 Barranca Road
Irvine, CA 92714

E. Andrews Grinstead, III(5)                    75,738                     *
Hybridon, Inc.
One Innovation Drive
Worcester, MA 01605

Stephen C. Knight, M.D.                          -0-                      -0-
Arthur D. Little, Incorporated
Acorn Park
Cambridge, MA 02140




                                       33

<PAGE>

David Schlachet                                  -0-                      -0-
Weizmann Institute of Science
Rehovot, Israel

William C Hulley(6)                             16,161                    -0-
Adams Capital Management, Inc.
Sewickley, PA 15143

All Directors and                            1,225,975                    9.2%
Executive Officers
as a group
(9 persons)(7)


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

(1)  Based on 29,205,683 shares of Common Stock outstanding, plus each
     individual's currently exercisable, or exercisable within 60 days, warrants
     and/or options.  Assumes that no other individual will exercise any
     warrants and/or options.

(2)  Information determined according to a Schedule 13G filed with the
     Securities and Exchange Commission.

(3)  Includes 276,153 shares of Common Stock held in the name of Avitek Ltd., of
     which Dr. Aviv is the Chairman of the Board of Directors and the principal
     stockholder, and, as such, shares the right to vote and dispose of such
     shares.  Also includes currently exercisable options to purchase 39,376
     shares of Common Stock.

(4)  Held jointly with his wife. Also includes currently exercisable options to
     purchase 20,000 shares of Common Stock.  Does not include shares held by
     his adult children, his grandchildren or a trust for the benefit of his
     grandchildren.

(5)  Consists of currently exercisable options to purchase Common Stock.

(6)  Consists of shares of Common stock held by Croesus Biotech Investments
     L.P., a limited partnership of which Mr. Hulley is a general partner.

(7)  Based on the number of shares of Common Stock outstanding, plus 135,114
     currently exercisable warrants and/or options held by the Directors and
     executive officers.




                                       34

<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In February 1995, the Company completed the sale of $1,270,000 principal
amount convertible debentures bearing an interest rate of 10% per annum in a
private placement transaction. Such debentures were convertible into shares of
the Company's Common Stock at $.52 per share.   A member of the Company's Board
of Directors, Marvin P. Loeb, purchased $70,000 of such debentures and upon
conversion of such debentures received 134,616 shares of Common Stock. In
addition the Company paid this director $3,920 in interest related to these
debentures.  Another investor in these debentures, Grace Brothers, Ltd., was a
holder of over 5% of the Company's common stock at the time of this transaction.
This investor purchased $1,000,000 of such debentures and upon conversion
received 1,923,077 shares of Common Stock. In addition the Company paid this
investor $49,167 in interest related to these debentures.

     In connection with an agreement between the Company and Mr. Dachowitz, who
served as Vice President - Finance and Chief Financial Officer through March
1995, during 1995 the Company made a severance payment of $75,000 to Mr.
Dachowitz on the date he terminated his employment with the Company.




                                       35

<PAGE>

                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

          (A)  FINANCIAL STATEMENTS AND EXHIBITS

          (1)  FINANCIAL STATEMENTS
               --------------------

               Report of Independent Accountants

               Consolidated Balance Sheets at December 31, 1995 and 1994

               Consolidated Statements of Operations for the years ended
               December 31, 1995, 1994 and 1993

               Consolidated Statements of Changes in Shareholders' Equity for
               the years ended December 31, 1995, 1994 and 1993

               Consolidated Statements of Cash Flows for the years ended
               December 31, 1995, 1994 and 1993

               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; EXECUTIVE COMPENSATION PLANS
               --------------------------------------

EXHIBITS
--------

2    PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION

     2(a) Agreement and Plan of Merger dated as of March 28, 1995 between
          Pharmos Corporation, PMC Merger Corporation and Oculon Corporation
          (Incorporated by reference to the Company's Current Report on
          Form 8-K, dated April 11, 1995, as amended).

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




                                       36

<PAGE>

          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
          (Incorporated by reference to Annual Report on Form 10-K for the year
          ended December 31, 1994).

     3(c) Amended and Restated By-Laws (Incorporated by reference to Form S-1
          Registration Statement of the Company dated June 30, 1994
          (No. 33-80916)).

4    INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES

     4(a) 1983 Incentive Stock Option Plan (The Company's 1984 and 1986 Plans
          are identical in all respects except as to the number of shares
          subject to option) (Incorporated by reference to Form S-18
          Registration Statement of the Company dated June 7, 1983 (2-84298-C)).

     4(b) Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans
          (Incorporated by reference to Annual Report on Form 10-K for the year
          ended December 31, 1988).

     4(c) 1988 Incentive Stock Option Plan (Incorporated by reference to Annual
          Report on Form 10-K for the year ended December 31, 1988).

     4(d) Pharmos Corporation 1991 Incentive Stock Option Plan (Incorporated by
          reference to Annual Report on Form 10-K for the year ended
          December 31, 1992).

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

     4(f) Form of Class A Warrant to purchase (x) shares of Common Stock and (y)
          Class B Warrants (Incorporated by reference to Annual Report on Form
          10-K for the year ended December 31, 1991).

     4(g) Form of Class B Warrant to purchase shares of Common Stock
          (Incorporated by reference to Annual Report on Form 10-K for the year
          ended December 31, 1991).

     4(h) Unit Purchase Option Agreement dated February 18, 1992 between the
          Company and David Blech (Incorporated by reference to Annual Report on
          Form 10-K for the year ended December 31, 1991).




                                       37

<PAGE>

     4(i) Form of Warrant to purchase Common Stock at an exercise price of $1.31
          per share (pre-reverse split) (Incorporated by reference to Form S-3
          Registration Statement of the Company dated September 14, 1993
          (33-68762)).

     4(j) Form of Placement Agent's Warrant Agreement, dated August 13, 1993, to
          purchase shares of Common Stock (Incorporated by reference to Form S-3
          Registration Statement of the Company dated September 14, 1993
          (33-68762)).

     4(k) Registration Agreement dated as of January 18, 1994 by and among the
          Company, David Blech and Lake Charitable Remainder Trust (Incorporated
          by reference to Form S-3 Registration Statement of the Company dated
          January 28, 1993 (33-74638)).

     4(l) Form of Stock Purchase Agreement dated as of September 2, 1994 between
          the Company and the Purchaser (Incorporated by reference to Form S-1
          Registration Statement of the Company dated June 30, 1994
          [No. 33-80916], Amendment No. 2).

     4(m) Form of Warrant Agreement dated September 2, 1994 to purchase
          42,000 shares of Common Stock (Incorporated by reference to Form
          S-1 Registration Statement of the Company dated June 30, 1994
          [No. 33-80916], Amendment No. 2).

     4(n) Form of Common Stock Purchase Agreement dated as of October 4,
          1994 between the Company and the Purchasers (Incorporated by
          reference to Form S-3 Registration Statement of the Company dated
          November 25, 1994 [No. 33-86720]).

     4(o) Warrant Agreement dated October 4, 1994 between the Company and
          Judson Cooper (Incorporated by reference to Form S-3 Registration
          Statement of the Company dated November 25, 1994 [No. 33-86720]).

     4(p) Form of Convertible Debenture Purchase Agreement dated as of
          February 7, 1995 between the Company and the Investors
          (Incorporated by reference to Annual Report on Form 10-K for the
          year ended December 31, 1994).

     4(q) Warrant Agreement dated February 7, 1995 between the Company and
          Judson Cooper (Incorporated by reference to Annual Report on Form
          10-K for the year ended December 31, 1994).




                                       38

<PAGE>

     4(r)      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(s)      Form of Penalty 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(t)      Form of Unit Purchase Agreement dated as of September 14, 1995
               between the Company and the Investors (Incorporated by reference
               to the Company's Current Report on Form 8-K, dated September 14,
               1995).

     4(u)      Form of Warrant Agreement dated as of September 14, 1995 between
               the Company and the Investors (Incorporated by reference to the
               Company's Current Report on Form 8-K, dated September 14, 1995).

     4(v)      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(w)      Form of Warrant Agreement dated as of April 30, 1995 between the
               Company and Janssen/Meyers Associates, L.P. (Incorporated by
               reference to Form S-3 Registration Statement of the Company dated
               November 14, 1995, as amended [No. 33-64289]).

     4(x)      Form of Warrant Agreement dated as of October 31, 1995 between
               the Company and S. Colin Neill (Incorporated by reference to Form
               S-3 Registration Statement of the Company dated November 14,
               1995, as amended [No. 33-64289]).

10  MATERIAL CONTRACTS

     10(a)     License Agreement dated as of March 14, 1989 between National
               Technical Information Service (NTIS), U.S. Department of Commerce
               and the Company (Incorporated by reference to Annual Report on
               Form 10-K for year ended December 31, 1989).




                                       39

<PAGE>

     10(b)     Common Stock and Warrant Purchase Agreement, dated November 5,
               1991, between the Company and David Blech (Incorporated by
               reference to Annual Report on Form 10-K for year ended December
               31, 1991).

     10(c)     Private Placement Agreement, dated November 5, 1991, between the
               Company and David Blech and D. Blech & Company, Incorporated
               (Incorporated by reference to Annual Report on Form 10-K for year
               ended December 31, 1991).

     10(d)     Stock Option Agreement, dated March 20, 1992, between the
               Company, Pharmos Corporation, Xenon Vision, Inc. and the security
               holders of Xenon Vision, Inc. (Incorporated by reference to
               Annual Report on Form 10-K for year ended December 31, 1991).

     10(e)     Agreement and Plan of Merger, dated May 13, 1992, as amended, by
               and among the Company, Pharmatec Merger Corporation and Pharmos
               Corporation (composite copy as amended to date) (Incorporated by
               reference to the Joint Proxy Statement/Registration Statement).

     10(f)     Registration Rights Agreement dated October 30, 1992 between the
               Company and the security holders of Xenon Vision, Inc.
               (Incorporated by reference to the Joint Proxy Statement/
               Registration Statement).

     10(g)     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 Form 10-K/A, for year
               ended December 31, 1992).1

     10(g)(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(g)(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(h)     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(h)(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




                                       40





<PAGE>

     10(h)(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(i)          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)(i)(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(j)          Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv")
                    dated as of May 2, 1990 and Old Pharmos Consulting Agreement
                    with Aviv dated as of May 2, 1990, as amended by letter from
                    Old Pharmos to Aviv dated June 27, 1990 and Unanimous
                    Written Consent of the Board of Directors of Old Pharmos
                    dated March 17, 1992 (Incorporated by reference to Annual
                    Report on Form 10-K, as amended by Form 10-K/A, for year
                    ended December 31, 1992).

     10(k)          Letter from Old Pharmos to D. Blech & Co. Incorporated ("D.
                    Blech & Co.") dated June 27, 1991 re: consulting services
                    (Incorporated by reference to Annual Report on Form 10-K, as
                    amended by Form 10-K/A, for year ended December 31, 1992).

     10(l)          Old Pharmos Employment Agreement with Stephen Streber dated
                    as of July 1, 1992 (Incorporated by reference to Annual
                    Report on Form 10-K, as amended by Form 10-K/A, for year
                    ended December 31, 1992).

     10(m)          Letter dated July 27, 1992 from Old Pharmos to Henry
                    Dachowitz re employment (Incorporated by reference to Annual
                    Report on Form 10-K, as amended by Form 10-K/A, for year
                    ended December 31, 1992).

     10(n)          Personal Employment Agreement dated October 1, 1992 between
                    Old Pharmos and Gad Riesenfeld (Incorporated by reference to
                    Annual Report on Form 10-K, as amended by Form 10-K/A, for
                    year ended December 31, 1992).

     10(o)          Lease Agreement dated as of November 1, 1992 between Talquin
                    Development Company and the Company (Incorporated by
                    reference to Annual Report on Form 10-K, as amended by Form
                    10-K/A, for year ended December 31, 1992).




                                       41

<PAGE>

     10(p)     Form of Purchase Agreement dated as of August 13, 1993 by and
               among the Registrant and the Investors listed on Exhibit A
               thereto (Incorporated by reference to Form S-3 Registration
               Statement of the Company dated September 29, 1993 [33-68762]).

     10(q)     Amended and Restated License Agreement with Research Component
               dated July 1, 1993 between University of Florida Research
               Foundation, Inc. and the Company (Incorporated by reference to
               Annual Report on Form 10-K, as amended by Form 10-K/A, for year
               ended December 31, 1993).1

     10(r)     License Agreement dated as of April 2, 1993 between the Company
               and Dr. Nicholas Bodor (Incorporated by reference to Annual
               Report on Form 10-K, as amended by Form 10-K/A, for year ended
               December 31, 1993).1

     10(s)     Consulting Agreement dated as of January 1, 1993 between the
               Company and Dr. Nicholas Bodor (Incorporated by reference to
               Annual Report on Form 10-K, as amended by Form 10-K/A, for year
               ended December 31, 1993).1

     10(t)     Agreement and Release dated as of November 11, 1994 between the
               Company and Stephen R. Streber (Incorporated by reference to
               Annual Report on Form 10-K for the year ended December 31, 1994).

     10(u)     Employment Agreement dated as of November 11, 1994 between the
               Company and Henry M. Dachowitz (Incorporated by reference to
               Annual Report on Form 10-K for the year ended December 31, 1994).

     10(v)     Marketing Agreement, dated as of June 30, 1995, between the
               Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by
               reference to the Company's Quarterly Report on Form 10-Q for the
               quarter ending June 30, 1995).1

     10(w)     Processing Agreement, dated as of June 30, 1995, between the
               Company and Bausch & Lomb Pharmaceuticals, Inc. (Incorporated by
               reference to the Company's Quarterly Report on Form 10-Q for the
               quarter ending June 30, 1995).1




                                       42

<PAGE>

21   SUBSIDIARIES OF THE REGISTRANT

     21(a)     Subsidiaries of the Registrant.

               Xenon Vision - Incoporated under the laws of Delaware
               Pharmos Limited - Incorporated under the laws of Israel
               Oculon Corporation - Incorporated under the laws of Delaware

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


EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

     1983 Incentive Stock Option Plan (The Company's 1984 and 1986 Plans are
     identical in all respects except as to the number of shares subject to
     option) (Incorporated by reference to Exhibit 4(a) to Annual Report on Form
     10-K for the year ended December 31, 1988).

     Amendment of 1983, 1984 and 1986 Incentive Stock Option Plans (Incorporated
     by reference to Exhibit 4(b) to Annual Report on Form 10-K for the year
     ended December 31, 1988).

     1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit 4(C)
     to Annual Report on Form 10-K for the year ended December 31, 1988).

     Pharmos Corporation 1991 Incentive Stock Option Plan (Incorporated by
     reference to Exhibit 4(e) to Annual Report on Form 10-K for the year ended
     December 31, 1992).

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

     Pharmos Ltd. Employment Agreement with Haim Aviv ("Aviv") dated as of May
     2, 1990 and Old Pharmos Consulting Agreement with Aviv dated as of May 2,
     1990, as amended by letter from Old Pharmos to Aviv dated June 27, 1990 and
     Unanimous Written Consent of the Board of Directors of Old Pharmos dated
     March 17, 1992 (Incorporated by reference to Exhibit 10(t) to Annual Report
     on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).

     Old Pharmos Employment Agreement with Stephen Streber dated as of July 1,
     1992 (Incorporated by reference to Exhibit 10(x) to Annual Report on Form
     10-K, as amended by Form 10-K/A, for year ended December 31, 1992).




                                       43

<PAGE>

     Letter dated July 27, 1992 from Old Pharmos to Henry Dachowitz re
     employment (Incorporated by reference to Exhibit 10(y) to Annual Report on
     Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).

     Personal Employment Agreement dated October 1, 1992 between Old Pharmos and
     Gad Riesenfeld (Incorporated by reference to Exhibit 10(z) to Annual Report
     on Form 10-K, as amended by Form 10-K/A, for year ended December 31, 1992).

     Agreement and Release dated as of November 11, 1994 between the Company and
     Stephen R. Streber (Exhibit 10(u) hereto).

     Employment Agreement dated as of November 11, 1994 between the Company and
     Henry M. Dachowitz (Exhibit 10(t) hereto).

     (B)  REPORTS ON FORM 8-K

          Since October 1, 1995 the Company has filed the following reports on
          Form 8-K

          1.   The Company's Current Report on Form 8-K, dated February 15,
               1996, filed pursuant to Section 13 of the Exchange Act.

          2.   The Company's Current Report on Form 8-K, dated October 27, 1995,
               as amended, filed pursuant to Section 13 of the Exchange Act.

     (C)  EXHIBITS

          See Item 14(a)(3) above

     (D)  FINANCIAL STATEMENT SCHEDULES

          See Item 14(a)(2) above




                                       44

<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 28, 1996

     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:

SIGNATURE                          TITLE                         DATE
---------                          -----                         ----


/s/ S. COLIN NEILL       Acting Vice President/Finance      March 28, 1996
------------------
S. Colin Neill           and Administration, Acting
                         Chief Financial Officer,
                         Acting Secretary and Acting
                         Treasurer  (Principal Financial
                         and Accounting Officer)


/s/ MARVIN P. LOEB                 Director                 March 28, 1996
----------------------
Marvin P. Loeb

/s/ E. ANDREWS GRINSTEAD III       Director                 March 28, 1996
----------------------------
E. Andrews Grinstead III

/s/ STEPHEN C. KNIGHT              Director                 March 28, 1996
---------------------
Stephen C. Knight

/s/ DAVID SCHLACHET                Director                 March 28, 1996
-------------------
David Schlachet

/s/ WILLIAM C. HULLEY              Director                 March 28, 1996
-------------------------
William C. Hulley




                                       45

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



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, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pharmos
Corporation and its subsidiaries at December 31, 1995 and 1994 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these statements
based on our audits.  We conducted our audits of these statements in accordance
with generally accepted auditing standards 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 the opinion expressed
above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  The Company has suffered recurring
losses from operations and, at December 31, 1995, has an accumulated deficit of
$54,024,741 that raise substantial doubt about its ability to continue as a
going concern.  Management's plans in regard to these matters are described in
Note 2.  The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP
New York, New York
March 26, 1996

<PAGE>

PHARMOS CORPORATION
<TABLE><CAPTION>

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------
                                                                    December  31,          December  31,
                                                                      1995                   1994
Assets
<S>                                                              <C>                    <C>
 Cash and cash equivalents                                             $7,442,791             $1,864,065
 Prepaid expenses and other current assets                                477,393                735,582
                                                                 ----------------        ---------------
      Total current assets                                              7,920,184              2,599,647

 Fixed assets, net                                                        855,456              1,258,935
 Other assets                                                             301,704
 Intangible assets, net                                                   384,310                430,834
                                                                 ----------------        ---------------

      Total assets                                                     $9,461,654             $4,289,416
                                                                 ================        ===============


Liabilities and Shareholders' Equity
 Accounts payable                                                        $739,356             $1,920,104
 Accrued wages and other compensation                                     205,336                234,688
 Accrued expenses & other liabilities                                     516,034                383,452
 Current portion of long term debt                                         93,684                480,219
                                                                 ----------------        ---------------
      Total current liabilities                                         1,554,410              3,018,463

 Long term debt                                                           181,648                 39,132
 Other liabilities                                                        235,479                 52,186
 Advances against future sales                                          1,877,141
                                                                 ----------------        ---------------
      Total liabilities                                                 3,848,678              3,109,781
                                                                 ================        ===============

 Shareholders' equity
   Preferred stock, 1,250,000 shares authorized,
      none issued
   Common stock, $.03 par value; 50,000,000 and 20,000,000 
     shares authorized, 29,149,039 and 14,631,726 shares issued,
     29,130,683 and 14,613,370 shares outstanding, respectively           874,471                438,952
   Paid in capital in excess of par                                    58,763,797             46,669,890
   Accumulated deficit                                                (54,024,741)           (45,928,656)
                                                                 ----------------        ---------------
                                                                        5,613,527              1,180,186

   Less: Common stock in treasury, at par                                    (551)                  (551)
                                                                 ----------------        ---------------
      Total shareholders' equity                                        5,612,976              1,179,635
                                                                 ----------------        ---------------
 Commitments and contingencies (Note 12)

      Total liabilities and shareholders' equity                       $9,461,654             $4,289,416
                                                                 ================        ===============
</TABLE>

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

<PAGE>


<TABLE><CAPTION>
PHARMOS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------
                                                                             Year Ended December 31,
                                                                 1995                 1994                1993
                                                                 ----                 ----                ----

<S>                                                           <C>                  <C>                 <C>
Revenues
 Sales of fine chemicals, net                                        $75,000              $7,815              $81,900
                                                              --------------       -------------       --------------
 License fees, royalties, net                                         75,000               7,815               81,900
                                                              --------------       -------------       --------------
Expenses
 Research and development, net                                     5,055,832           7,987,155            5,753,349
 Patents                                                             480,859             942,455              581,637
 General and administrative                                        2,180,965           3,684,308            2,908,083
 Depreciation and amortization                                       536,010             422,543              351,022
                                                                   ---------           ---------            ---------
                                                                   8,253,666          13,036,461            9,594,091
                                                              --------------       --------------      --------------

Loss from operations                                              (8,178,666)        (13,028,646)          (9,512,191)

Interest income, net of interest expense of $127,003,
 $73,733 and $54,593, respectively                                    82,581              73,197              111,866
Other income                                                                                 150                1,630
                                                              --------------       -------------       --------------
Net loss                                                         ($8,096,085)       ($12,955,299)         ($9,398,695)
                                                              ==============       ==============      ==============

Loss per share                                                        ($0.37)             ($1.19)              ($1.24)
                                                              ==============       ==============      ==============

Weighted average shares outstanding                               21,885,862          10,852,807            7,569,678
                                                              ==============       ==============      ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial 
statements.

<PAGE>



PHARMOS CORPORATION

<TABLE><CAPTION>

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (NOTE 9)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   
                                                                                            Convertible Class B         Paid-in
                                                                        Common Stock            Common Stock           Capital in  
                                                           Shares          Amount          Shares         Amount     Excess of Par
                                                           ------       ------------       ------         ------     -------------

<S>                                                         <C>            <C>             <C>             <C>        <C>
December 31, 1992                                           3,605,902        $108,177      3,342,460       $100,274    $32,517,705 
Issuance of common stock, net of offering costs
     of $1,065,607                                          1,666,668          50,000                                    8,884,401 
Amortization of unearned compensation                                                                                              
Warrant exchange                                              875,000          26,250                                      (26,250)
Net loss                                                                                                                           
                                                          -----------     -----------   ------------    -----------   ------------ 
December 31, 1993                                           6,147,570         184,427      3,342,460        100,274     41,375,856 

Conversion of Class B common stock to common stock          3,342,460         100,274     (3,342,460)      (100,274)               
Issuance of common stock, net of offering costs
     of $317,400                                            5,086,665         152,600                                    5,147,500 
Warrant exercise                                               54,893           1,647                                      146,526 
Share adjustment for reverse split                                138               4                                           (4)
Return of shares to treasury                                                                                                    12 
Net loss                                                                                                                           
                                                          -----------     -----------   ------------    -----------   ------------ 
December 31, 1994                                          14,631,726         438,952                                   46,669,890 

Issuance of common stock to purchase Oculon Corp.           6,000,000         180,000                                    2,892,426 
Conversion of debentures to common stock                    2,442,309          73,269                                    1,196,731 
Warrant exercise                                               75,000           2,250                                       36,750 
Issuance of common stock, net of offering costs
     of $900,000                                            6,000,000         180,000                                    7,920,000 
Warrant grant to consultant                                                                                                 48,000 
Share adjustment for reverse split                                  4
Net loss                                                                                                                           
                                                          -----------     -----------   ------------    -----------   ------------ 
December 31, 1995                                          29,149,039        $874,471                                  $58,763,797 
                                                          ===========     ===========   ============    ===========   ============ 


<CAPTION> 
                                                     --------------------------------------------------------------------
                                                                                                                 Total
                                                     
                                                       Accumulated     Unearned      Treasury      Stock      Shareholders'
                                                         Deficit     Compensation    Shares        Amount       Equity
December 31, 1992                                      -----------   ------------    --------      ------     -------------
<S>                                                    <C>              <C>             <C>          <C>       <C>
Issuance of common stock, net of offering costs        ($23,574,662)    ($35,265)       17,962        ($539)   $9,115,690
     of $1,065,607                                   
Amortization of unearned compensation                                                                           8,934,401
Warrant exchange                                                          35,265                                   35,265
Net loss                                                 (9,398,695)                                           (9,398,695)
                                                      -------------     --------   -----------      -------   ----------- 
December 31, 1993                                       (32,973,357)                    17,962         (539)    8,686,661
                                                     
Conversion of Class B common stock to common stock   
Issuance of common stock, net of offering costs                                                 
     of $317,400                                                                                                5,300,100
Warrant exercise                                                                                                  148,173
Share adjustment for reverse split                   
Return of shares to treasury                                                               394          (12)
Net loss                                                (12,955,299)                                          (12,955,299)
                                                      -------------     --------   -----------      -------   ----------- 
December 31, 1994                                       (45,928,656)                    18,356         (551)    1,179,635
Issuance of common stock to purchase Oculon Corp.                                                               3,072,426
Conversion of debentures to common stock                                                                        1,270,000
Warrant exercise                                                                                                   39,000
Issuance of common stock, net of offering costs      
     of $900,000                                                                                                8,100,000
Warrant grant to consultant                                                                                        48,000
Share adjustment for reverse split                   
Net loss                                                 (8,096,085)                                           (8,096,085)
                                                      -------------     --------   -----------      -------   ----------- 
December 31, 1995                                      ($54,024,741)                    18,356        ($551)   $5,612,976
                                                      =============     ========   ===========      =======   ===========
 
</TABLE>


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

<PAGE>

PHARMOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>

                                                                                   Year Ended December 31,
                                                                       1995              1994            1993
                                                                   ($8,096,085)      ($12,955,299)     ($9,398,695)
                                                                  -------------     --------------     -------------

<S>                                                                  <C>                  <C>             <C>
Cash flows from operating activities
  Net loss
 Adjustments to reconcile net loss to net
  cash flow used in operating activities
       Depreciation and amortization                                    536,010            422,543           351,022
       Warrant grant to consultant                                       48,000
       Unearned compensation expense                                                                          35,265
Changes in operating assets and liabilities, net
  of effects of Oculon 
       Prepaid expenses and other current assets                        360,629            415,695          (599,579)
       Accounts payable                                              (1,180,748)           590,500           926,057
       Accrued expenses, wages and other liabilities                     89,219            117,265           (31,054)
       Advances against future sales                                  1,877,141
       Advance payments                                                                                     (183,813)
                                                                  -------------     --------------     -------------
       Total adjustments                                              1,730,251          1,546,003           497,898
                                                                  -------------     --------------     -------------
Net cash flows used in operating activities                          (6,365,834)       (11,409,296)       (8,900,797)
                                                                  -------------     --------------     -------------

Cash flows from investing activities
     Purchases of fixed assets, net                                     (56,647)          (111,062)         (639,374)
     Decrease in certificates of deposit                                                                     180,000
                                                                  -------------     --------------     -------------
Net cash flows used in investing activities                             (56,647)          (111,062)         (459,374)
                                                                  -------------     --------------     -------------
Cash flows from financing activities
     Proceeds from issuances of common stock, net                     8,100,000          5,300,100         8,934,401
     Proceeds from issuance of convertible debentures                 1,270,000
     Proceeds from exercise of warrants                                  39,000            148,173
     Proceeds from acquisition of Oculon, net                         3,072,426
     Increase (decrease) in loans payable                              (480,219)           480,219
                                                                  -------------     --------------     -------------
Net cash flows provided by financing activities                      12,001,207          5,928,492         8,934,401
                                                                  -------------     --------------     -------------
Net increase (decrease) in cash and cash equivalents                  5,578,726         (5,591,866)         (425,770)

Cash and cash equivalents at beginning of year                        1,864,065          7,455,931         8,291,839
                                                                  -------------     --------------     -------------
Cash and cash equivalents at end of year                             $7,442,791         $1,864,065        $7,866,069
                                                                  =============     ==============     =============
</TABLE>

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

<PAGE>

Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------


     1.   The Company

          Pharmos Corporation  (the "Company")  is a bio-pharmaceutical  company
          incorporated under the laws of the  state of Nevada and is engaged  in
          the design and development of novel pharmaceutical products in various
          fields  including: site  specific  drugs for  ophthalmic  indications,
          neuroprotective  agents for  treatment  of    central  nervous  system
          ("CNS") disorders, systemic  drugs designed to avoid CNS  related side
          effects,   and  emulsion  based  products  for  topical  and  systemic
          applications.  The Company uses  a variety of patented and proprietary
          technologies  to improve  the efficacy  and/or safety  of drugs.   The
          Company's  compounds  are  in  various  stages  of  development,  from
          preclinical to advanced clinical trials and in March 1995, the Company
          completed the  submission of  its first  New Drug  Application ("NDA")
          with the U.S. Food & Drug Administration ('FDA").  In conjunction with
          its development efforts, the Company has also undertaken  research and
          development contracts in  the past and has sold  fine chemicals to the
          pharmaceutical research community.  The Company conducts operations in
          Alachua,  Florida and  through its  wholly-owned subsidiary,  Pharmos,
          Ltd., in Rehovot Israel.

     2.   Liquidity and Business Risks

          The Company  currently has  no sources of  recurring revenues  and has
          incurred  operating losses since its inception.  At December 31, 1995,
          the Company  has an  accumulated deficit of  $54,024,741. Such  losses
          have   resulted  principally  from  costs  incurred  in  research  and
          development and  from general  and administrative  expenses associated
          with  the Company's operations.   The  Company expects  that operating
          losses  will  continue for  at least  the  next few  years  as product
          development,  clinical testing  and  other  operations  continue.  The
          Company currently funds its operations  principally through the use of
          cash obtained from  third party financing.   Management believes  that
          existing  cash and cash equivalents of $7.4 million as of December 31,
          1995, combined with  anticipated cash inflows from  investment income,
          grants and advances pursuant to  the Marketing Agreement (See Note 4),
          will be sufficient to support  operations through the first quarter of
          1997.   The Company is  continuing to actively pursue  various funding
          options, including equity offerings, commercial and  other borrowings,
          strategic corporate  alliances and business  combination transactions,
          the  establishment of product related research and development limited
          partnerships,  or  a combination  of these  methods for  obtaining the
          additional  financing that would be required  to continue the research
          and  development necessary to complete the development of its products
          and bring them to commercial markets.

          As described in Note 1, in March 1995, the Company submitted its first
          NDA.   It is  reasonably possible  that  FDA approval for this product
          candidate will not be granted on  a timely basis or at all.  Any delay
          in obtaining or  failure to obtain such approval  would materially and
          adversely affect the marketing of the Company's drug candidate and the
          Company's business, financial position and results of operations.

















                                        1




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





3.   Significant Accounting Policies

     Basis of Consolidation
     The accompanying   financial   statements  include   all   wholly   owned
     subsidiaries.  Intercompany transactions are eliminated in consolidation.

     Accounting estimates
     The  preparation of  financial  statements  in  conformity  with  generally
     accepted  accounting principles requires  management to make  estimates and
     assumptions that effect the reported  amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities at  the  date  of  the
     financial statements  and the  reported amounts  of  revenues and  expenses
     during  the  reported  period.  Actual  results  could  differ  from  those
     estimates.

     Cash and cash equivalents
     The Company  invests its excess cash  in U.S. Treasury  securities and debt
     instruments of financial  institutions and corporations with  strong credit
     ratings.     The   Company   has   established   guidelines   relative   to
     diversification   and  maturity   that  maintain   safety  and   liquidity.
     Investments  having original  maturities of  three months  or less  and are
     classified as cash equivalents.

     Revenue recognition
     Revenue for contracted  research and development services is  recognized as
     performed.   Revenue from  these  contracts  is  recognized as  costs  are
     incurred (as defined in the  contract), generally direct labor and supplies
     plus agreed overhead rates.  Any advance payments on contracts are deferred
     until  the related services are performed.   License fees and royalties are
     recognized when earned in accordance with the underlying agreements.  Sales
     revenue is recognized upon shipment of goods.

     Fixed assets
     Fixed assets are  recorded at cost. Maintenance and repairs are expensed as
     incurred.  Property, furniture and equipment are depreciated on a straight-
     line basis over  their estimated  useful lives  which range  from three  to
     fourteen  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.

     Intangible assets
     Intangible  assets   represent  the   Company's  rights   to  develop   and
     commercialize certain products derived from  certain licensed technologies.
     The assets are being  amortized over   fifteen years.   As of December  31,
     1995   and  1994,  accumulated  amortization  was  $655,470  and  $608,946,
     respectively.  In  1995  the Financial  Accounting  Standards  Board issued
     Statement of Financial Accounting Standards No. 121 (SFAS 121)  "Accounting
     for the  Impairment of Long-Lived  Assets and for  Long-Lived Assets  to Be
     Disposed Of". SFAS 121 requires that assets to be held and used be reviewed
     for impairment whenever events or changes indicate that the carrying amount
     of  the asset in question may not be  recoverable.  In accordance with this
     statement, and  as a result of  the current period operating  loss combined
     with a















                                        2




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------


     history  of  operating  losses,  management assessed  whether  or  not  the
     Company's intangible  assets were  recoverable.  As  of December  31, 1995,
     management estimates  that the net  future cash inflows expected  to result
     from the commercial exploitation  of the licensed technologies will  exceed
     the carrying amount and accordingly, no impairment loss was recognized.

     On a periodic basis, the  Company will assess whether there  are conditions
     present that indicate  an impairment  of long lived  assets and long  lived
     assets  to be disposed  of.  In  the event  such an impairment  is present,
     management will  consider the undiscounted  cash flows from such  assets to
     qualify the amount of such impairment and the loss to be recorded.

     Amortization expense amounted to approximately $46,000 in each of the years
     ended December 31,  1995, 1994 and 1993.

     Research and development costs
     All research and development costs are expensed when incurred.  The Company
     has  accounted  for  reimbursements of  research  and  development expenses
     received with respect to the  royalty participation agreements described in
     Note 7 as a reduction of research and development expense. 

     Income taxes
     Income  taxes are provided for  on a liability  method whereby deferred tax
     assets  are recognized for  deductible temporary differences  and operating
     loss carry forwards and deferred tax liabilities are recognized for taxable
     temporary differences.  Temporary differences  are the  differences between
     the  reported  amounts of  assets  and  liabilities  and their  tax  bases.
     Deferred  tax assets  are reduced  by  a valuation  allowance when,  in the
     opinion of management, it is more likely than not that some portion or  all
     of the deferred  tax assets will not  be realized. Deferred tax  assets and
     liabilities are adjusted for the effects  of changes in tax laws and  rates
     on the date of enactment.

     Postemployment benefits
     Effective January  1,  1994, the  Company  adopted Statement  of  Financial
     Accounting Standards  No. 112,  'Employers'  Accounting for  Postemployment
     Benefits'  ("SFAS 112").   The implementation  of SFAS  112 did not  have a
     significant  impact  on  the  Company's financial  position  or  results of
     operations.

     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  the
     determination of current period income and loss.

     Treasury stock
     Shares of common stock held in treasury are accounted for at par value with
     any  difference between cost and par  included in paid-in capital in excess
     of par value.














                                        3




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------


     Loss per share
     Loss per share is calculated based on the weighted average number of common
     shares and convertible Class B common shares outstanding during the period.
     Options and warrants outstanding are excluded from the calculations because
     their impact would be antidilutive.

     Restatement for reverse stock split
     On October 18, 1993,  the Company announced a  reverse stock split on a  1-
     for-4  basis  of  all  common   and  Class  B  convertible  common  shares.
     Additionally,   the  reverse  stock  split  provided  for  a  corresponding
     reduction in the number of shares of authorized preferred, common and Class
     B convertible common shares.

     All common  and Class  B convertible common  shares, warrants,  options and
     related per share  data, except for the  par value per share,  reflected in
     the   accompanying  financial  statements  and  notes  thereto,  have  been
     presented as if the reverse stock split in October 1993  on a 1-for-4 basis
     and reduction in  the number of shares of authorized shares had occurred as
     of the beginning of the earliest year presented.

     New accounting principle
     In October 1995, the Financial  Accounting Standards Board issued Statement
     of  Financial  Accounting  Standards No.  123  "Accounting  for Stock-based
     Compensation", which the  Company will adopt in 1996.   The Company intends
     to adopt this  statement through disclosure in  the notes to the  financial
     statements. 

     Reclassifications
     Certain amounts for 1994  and 1993 have been  reclassified to conform  with
     the presentation in 1995 to maintain comparability.  Such reclassifications
     did not have an impact on the Company's shareholders' equity.

4.   Collaborative Agreement 



     On June 30, 1995, the Company signed a marketing agreement (the  "Marketing
     Agreement") with Bausch  & Lomb Pharmaceuticals, Inc. ("Bausch  & Lomb") to
     market Lotemax(TM), the Company's lead product candidate,  on  an exclusive
     basis  in  the  United States.  As described in Notes 1 and 2, this product
     candidate is pending  FDA approval.  The Marketing  Agreement also includes
     Lotemax(TM)  line  extension  products  currently  being  developed  by the
     Company.  Under  the  Marketing  Agreement, Bausch & Lomb will purchase the
     active  drug substance (Loteprednol Etabonate) from the Company and provide
     the  Company  with  $4  million  in  cash  advances through March 1996.  An
     additional  $2  million  advances  may  be made subject to reaching certain
     development   milestones   in  the  Lotemax(TM)  line  extension  products.
     Bausch &  Lomb  will also collaborate in the development of such additional
     products  by  making  available amounts up to 50% of the Phase III clinical
     trial  costs.  The  Company  has  retained certain conditional co-marketing
     rights to all of the products covered by the Marketing Agreement.












                                        4




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------



     As of   December 31, 1995, the Company  has received $1,877,141 in advances
     against future sales to Bausch & Lomb  of the active drug substance (needed
     to manufacture  the  drug).   Bausch &  Lomb will  be  entitled to  credits
     against  such future purchases of the  drug substance based on the advances
     and future advances until the advances have been recouped. The Company  may
     be obligated to repay such advances if it is unable to supply Bausch & Lomb
     with  certain specified quantities  of the active  drug substance. Advances
     received through December  31, 1995 are reflected as a  long term liability
     in the  accompanying balance sheet   as, in  the opinion of  management, no
     recoupment of such advances is expected to occur in 1996. 
     
5.   The Acquisition of Oculon Corporation
     
   
     
     In  April  1995, the Company acquired Oculon Corporation ("Oculon"),  a
     privately-held  drug   development   stage   company   with   anti-cataract
     technologies. The acquisition was primarily intended to provide a source of
     working capital for the Company, the operations of Oculon were discontinued
     and technologies licensed by Oculon were assigned to the licensor. Under an
     agreement  with the licensor,  the Company  has no  future responsibilities
     related to the maintenance of patents or payment of license fees related to
     these technologies.  In the  event certain  of  these technologies  produce
     future royalty revenues, the Company  would receive a proportional share of
     such royalties.
     
     
     Under the terms of the acquisition agreement, the Company issued 6,000,000
     shares of its   common stock to  the holders of Oculon's Series  III Senior
     Preferred Stock. The shares  of all other  holders of Oculon capital  stock
     were  canceled.  In addition,  the  Company  issued  ten year  warrants  to
     purchase 500,000 shares of  the Company's common stock at an exercise price
     of  $2.75  per share  to  certain  holders  of  Oculon stock  options.  The
     acquisition agreement also provides that  additional consideration of up to
     600,000  shares  may be  issuable  if the  Company  fails  to meet  certain
     milestones  relating to  further development  or  commercialization of  the
     technology and products acquired from Oculon.
     
     
     At the time of the acquisition, Oculon had net assets with a fair value of
     $3,555,812, including  cash  and  cash  equivalents  of  $4,218,669.  The
     transaction was accounted for as an acquisition of net assets. Accordingly,
     the  shares of  stock and warrants  issued have  been recorded at  the fair
     value of the net assets received less transaction costs of $483,386.




























                                        5




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------




6.   Fixed Assets

Fixed assets consist of the following:
                                                               December 31,     
                                                          1995           1994   
Laboratory, pilot plant and other equipment         $1,600,611        $1,715,352
Office furniture and fixtures                          233,230           326,569
Vans                                                    51,378            51,378
Computer equipment                                     109,544            66,948
Leasehold improvements                                 567,738           596,066
                                                    ----------        ----------
                                                     2,562,501         2,756,313
Less - Accumulated depreciation and amortization
                                                    (1,707,045)      (1,497,378)
                                                    ----------------------------
                                                     $ 855,456         $1,258,93
                                                     =========         =========


     Depreciation  and  amortization  of  fixed  assets  amounted  to  $489,486,
     $389,261 and $304,498 in 1995, 1994 and 1993, respectively.

7.   Government Grants for Research and Development

     The Company has entered into agreements with U.S.  federal agencies and the
     State  of Israel  which provide  for  grants for  research and  development
     relating to certain projects.   Amounts earned pursuant to these agreements
     have been  reflected as  a reduction of  research and  development expense.
     Such reductions amounted to $331,546, $900,298, and $1,014,403 during 1995,
     1994 and 1993, respectively.

     The grant agreements generally provide for reimbursement of a percentage of
     allowable  research  and   development  costs,  to  a   specified  maximum,
     undertaken in  the Company's  research facilities.   The  grants are to  be
     repaid on the basis of royalties from  the sale of products developed as  a
     result of  the research activities carried out with the grant funds.  As of
     December 31,  1995, the total  amounts received under grants  which contain
     repayment provisions amounted to $2,189,120.  Potential repayment liability
     for royalties related  to these grants amounted to  $2,564,120.  Agreements
     with  certain  agencies  of  the   State  of  Israel  place  certain  legal
     restrictions on  the transfer  of technology  and manufacture  of resulting
     products outside Israel.  































                                        6




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





     
 8.  Licensing Arrangements

     The  Company  is   both  a  licensor  and  licensee   of  certain  research
     technologies.

     As a  licensor, the Company has entered into various agreements under which
     the rights  to certain  of its technologies  are licensed  to others.   The
     Company is to  be compensated  by receipt  of its share  of defined  future
     product sales or royalties earned  by the licensee.  These agreements  have
     provided for  funding  of research,  either  in whole  or  in part  by  the
     licensee.
       
     As a licensee, the Company has various license agreements with certain U.S.
     federal  agencies and  the State  of  Israel, certain  universities, and  a
     former director who had been a  vice president of the Company, wherein  the
     Company has  acquired  exclusive  or  coexclusive  rights  to  develop  and
     commercialize  certain  research  technologies.    These agreements,  which
     include  agreements  related to Lotemax(TM) (the Company's  lead  product
     candidate),  generally require  the Company  to  pay royalties  on sale  of
     products developed 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 certain 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 in which U.S. Food and Drug Administration approval  has
     been received for a developed product.  No amounts have been recorded as  a
     liability with  respect to  these contingent royalties  as of  December 31,
     1995, as none  of the specified events have occurred.  In addition, certain
     of the  license agreements  require annual  payments for  periods extending
     through  2012.  License  fee expense  amounted  to  approximately $355,000,
     $455,000 and  $270,000 during  1995, 1994  and  1993 respectively.   As  of
     December  31, 1995, aggregate minimum annual payments under such agreements
     range from $103,500 to $132,500 per year.  
      
          As discussed  in Note 12,  the Company  is involved  in disputes  with
     certain of its licensors.


9.   Shareholders' Equity, Warrants,  Stock Options   and Certain Related  Party
     and Other Financing Transactions

     1993 transactions
     On August 13,  1993, the Company completed  a private offering (the  " 1993
     Private Placement") of 1,666,668 shares of common stock at $6.00 per share.
     The proceeds of the 1993 Private Placement,  net of costs, were $8,934,401.
     In connection  with this  offering the Company  issued 161,667  warrants to
     purchase an  equivalent number of shares of the  Company's  common stock to
     placement agents  who assisted in this  transaction.  Such  warrants had an
     exercise  price of  $7.50 per share  and expire  in August 1998.   The sole
     shareholder and chief executive officer of one placement agent was David
















                                        7




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------




     Blech. Mr. Blech  served as a director of the Company  until February 1994.
     This placement  agent  earned commissions  of  $734,500 and  also  received
     134,167 of the  warrants described above.

     In connection  with the 1993  Private Placement, Lake  Charitable Remainder
     Trust,  of which David  Blech is the  income beneficiary, agreed  to cancel
     1,800,000 of its $5.00 and $7.00 per share warrants in exchange for 875,000
     newly issued shares of  the Company's common stock.   This transaction  was
     completed in December 1993.

     On October 20,  1993, the Company  qualified and began  listing its  common
     shares on the National Market System of the NASDAQ, ticker symbol PARS.

     During 1993,  the Company paid $155,950 in consulting  fees to D. Blech and
     Company for services  rendered.  Additionally, the Company  paid $50,000 in
     consulting fees  to one director  and $202,692 in consulting  and licensing
     fees to another director during 1993 under the terms of certain  consulting
     and license agreements.

     The Company leased corporate office space in New York through May  15, 1993
     from D.  Blech & Company on a month to month basis at a rate at $6,000  per
     month.

     1994 transactions
     The Company issued an aggregate of  5,086,665 unregistered shares of common
     stock in two private  placement transactions on September 2 and  October 4,
     1994 (the  "1994 Private Placement  Transactions").  The proceeds  from the
     1994 Private Placement Transactions were  $5,300,100, net of issuance costs
     of   $317,400.  In connection with the 1994 Private Placement Transactions,
     the Company also issued to the finders an aggregate of  242,000 warrants to
     purchase  an equivalent  number of  shares of  the Company's  common stock.
     42,000  of such  warrants had  an exercise  price of $3.50  per share   and
     expire in September 1999.   200,000 of such warrants had  an exercise price
     of $.90 per share, and expire in October 1999. 

     During 1994, the Company paid $100,000 and recorded an additional liability
     of $53,192, which  was paid  in 1995,   in consulting  fees to  D. Blech  &
     Company.   Additionally, the Company made  payments of $182,934 to a former
     director of the Company  (who served as a director through  March 1994) for
     consulting and  licensing fees; an  additional $100,000 due to  this former
     director was included in accrued expenses at December 31, 1994 and was paid
     in 1995.  A second former director of the Company (who served as a director
     through October 1994) was paid $50,000 for consulting services.

     During the  first quarter  of 1994, the  Company exchanged  all convertible
     Class B stock for an equal amount  of shares of the Company's common stock.
     There was no impact on shareholder's equity as a result of this exchange.






















                                        8




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





     1995 transactions
     On January 18, 1995, the  Company's stockholders authorized an amendment to
     the Company's  Restated Articles  of Incorporation  which  provided for  an
     increase in the number of shares of authorized common stock from 20 million
     shares to 50 million shares, and the elimination of the Class B convertible
     common stock.

     In  January  1995,  the Company  sought  a  waiver from  Nasdaq  of  a rule
     requiring shareholder  approval or prior  notification of the  October 1994
     Private Placement Transaction, a transaction involving the  issuance of 20%
     or more of the Common Stock outstanding at below market prices.  The Nasdaq
     Listing  Qualifications  Committee  rejected  the  Company's  request,  and
     determined that the Company's Common Stock had to be moved from  the Nasdaq
     National Market and listed on the Nasdaq SmallCap Market, effective January
     27, 1995, as a result of the Company's non-compliance with Nasdaq corporate
     governance requirements.

     In February  1995, the Company  completed the sale of  $1,270,000 principal
     amount convertible debentures in a private placement transaction to several
     accredited investors, including a large institutional shareholder. A member
     of the Company's  Board of Directors purchased $70,000  of such debentures.
     During  1995, all of the debentures were converted into 2,442,309 shares of
     the  Company's common stock  at an  exchange price of  $.52 per  share.  In
     connection with  this transaction the  Company issued warrants  to purchase
     150,000 shares  of common  stock at an  exercise price  of $.52  per share.
     During  1995, warrants  to purchase  75,000 shares  were exercised  and the
     remaining 75,000 were exercised in January 1996.  

     In connection  with the  acquisition of  Oculon (see  Note 5), the  Company
     issued  6,000,000 shares  of  its  common stock  and  warrants to  purchase
     500,000 shares of common stock.

     On  September  14,  1995,  the  Company completed  a  private  offering  of
     6,000,000 units at  $1.50 per unit. The  proceeds of the  private offering,
     net of costs of  $900,000, were $8,100,000. Each unit consisted  of 1 share
     of  the Company's  common stock and  one warrant  to purchase 0.075  of one
     share  of common  stock (450,000  shares). In  addition the  Company issued
     warrants  to  purchase  450,000 of  common  stock to  the  two  finders who
     assisted  in this  transaction.  Both  groups of warrants  have an exercise
     price of $1.80 per share and may be exercised commencing September 14, 1996
     and expire on September 14, 2000.

     During 1995,  the Company issued  warrants to consultants who  assisted the
     Company on various  business and financial matters as  follows: warrants to
     purchase 10,000  shares at  an exercise  price of  $1.88  per share,  which
     expire  on October  31, 2001;  warrants to  purchase 10,000  shares of  the
     Company's common stock at an exercise price of $.78 per share, which expire
     on April 10, 2005; warrants to purchase 75,000 shares, 25,000 each of which
     have an exercise price  of $.75, $1.00  and $1.50 per share,  respectively,
     and may be  exercised beginning May 1,  1996 and expire on  April 30, 2000.
     The Company recognized compensation expense of $48,000 related  to warrants
     in 1995.
















                                        9




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





     Many of the warrants  issued  in connection with various equity  financings
     and related transactions  during 1991 through  1995  contain  anti-dilution
     provisions requiring adjustment if at  a latter date, securities are issued
     at  prices below  the respective  warrant's exercise  price. The  following
     table summarizes the shares issuable upon  exercise of warrants outstanding
     at December 31,  1995 as adjusted for the events which have triggered anti-
     dilution provisions contained in the respective warrant agreements:

                                                  Shares
                                                  Issuable
                                                  Upon           Exercise
        Issuance Date    Expiration Date          Exercise       Price
        -------------    ---------------          --------       -----

     November 1991         November 1996          223,342        $5.24

     November 1991         March 1998             236,540         2.29
                           March 1998             267,971         2.83

                           March 1998             331,328         1.66

     August 1993           August 1998            398,852         3.04

     September 1994        September 1999         61,766          2.38
     October 1994          October 1999           222,222          .81

     February 1995         February 2000          75,000           .52

     April 1995            April 2005             556,680         2.47

                           April 2005             10,000           .78
                           April 2000             25,000           .75

                           April 2000             25,000          1.00

                           April 2000             25,000          1.50

     September 1995        September 2000         900,000         1.80
     October 1995          October 2001            10,000         1.88
                                                  -------

     Total shares and average exercise price    3,368,701        $2.29
                                                =========        =====




                                       10




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





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, and  generally
expire ten   years  from the  date of  grant.   The  following table  summarizes
activity in approved incentive stock options:

                                                Shares       Average
                                                Under        Exercise
                                                Option       Price
                                                ------       -----
                                         
Options Outstanding at December 31, 1992         93,883    $ 6.47
                                         
Exercised                                       (10,500)    10.50
                                                -------
Options Outstanding at December 31, 1993         83,383      5.97
                                         
                                         
                                         
Granted                                         389,439      6.50
                                         
Expired                                         (38,832)     7.02
                                                -------
Options outstanding at December 31, 1994        433,990      6.35
                                         
                                         
                                         
Granted                                         300,000      1.94
                                         
Expired                                        (181,804)     6.12
Canceled                                       (252,186)     6.66
                                         
Reissued                                        252,186      2.50
                                                -------
                                         
Options outstanding at December 31, 1995        552,186      2.19
                                                =======      ====
                                         
                                         
Options exercisable at December 31, 1995              -         -
                                                =======     =====



















                                       11




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------






The Company's  Board of Directors approved  nonqualified stock options   for key
employees, directors  and certain non-employee consultants.  The following table
summarizes activity in Board-approved nonqualified stock options:

                                              Shares     Average  
                                              Under      Exercise
                                              Option     Price
                                              ------     -----

               Options Outstanding at         229,868    $10.79
               December 31, 1992

               Granted                        63,254       7.29
               Exercised                      (36,875)    15.30
                                              -------

               Options Outstanding at         256,247      8.24
               December 31, 1993



               Granted                        407,160      6.50

               Expired                        (28,251)    10.50
                                              -------

               Options outstanding at         635,156      7.02
               December 31, 1994



               Granted                         70,000      1.94
               Expired                       (262,964)     7.44

               Canceled                      (308,932)     6.49

               Reissued                       308,932      2.50
                                              -------

               Options outstanding at         442,192      3.10
                                              =======     =====
               December 31, 1995 


               Options exercisable at         168,577     $4.18
                                              =======     =====
               December 31, 1995









                                       12




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------




10.  Loans Payable

     The  Company's Israeli  subsidiary, Pharmos  Limited,  obtained short  term
     financing in 1994  in the form  of a short term  loan and a line  of credit
     facility  from one  of  its  banks. Such  agreements  provide for  interest
     payable monthly at an annualized rate of LIBOR plus 1.5%.  Borrowings under
     such agreement amounted to $401,953 at December 31, 1994 and were repaid in
     full  in November 1995.   As of  December 31, 1995, Pharmos  Limited had an
     unutilized line of credit of $100,000 denominated in New Israeli Shekels.

     The Company has a note payable outstanding relating to the refurbishment of
     the  Florida facility.   The  note is  payable in  monthly installments  of
     $7,500 including interest at 8%, the final payment is due in June 1996.  As
     of  December 31, 1995, the outstanding  obligation amounted to $ 39,133 and
     is recorded as a current liability in the accompanying balance sheet. 

     The Company's subsidiary,  Oculon Corporation ( Note 5 ) has a note payable
     related to  leasehold improvements  to a research  facility (Note  12). The
     note  is payable in  monthly installments of   $6,281 including interest at
     the prime rate plus  1% ( 8.5% at December  31, 1995) the final payment  is
     due in September 1999.  As of  December 31, 1995 the outstanding balance of
     such note was  $236,199 of which $54,551  has been classified as  a current
     liability in the accompanying balance sheet.

     Minimum  annual principal  repayments  of long  term  debt by  year are  as
     follows: 1996-$93,684, 1997- $60,355 , 1998 -$66,701 , 1999-$54,592.

11.  Income Taxes

     No provision  for  income taxes  was  recorded for  the three  years  ended
     December 31, 1995 due to net operating losses incurred.  Net operating loss
     carry forwards  for U.S. tax  purposes of approximately  $47,500,000 expire
     from 2000 through 2010.

     The Company's gross  deferred tax assets of $19,387,000  and $16,297,000 at
     December 31,  1995  and 1994,  respectively,  represent primarily  the  tax
     effect of both the net operating loss carry forwards and deferred  research
     and  development  costs  and, research  and  development  tax  credit carry
     forwards.  As  a result  of previous business  combinations and changes  in
     stock ownership, substantially  all of these net operating  loss and credit
     carry forwards are subject to substantial restriction with regard to annual
     utilization.  A  full valuation allowance has been  established with regard
     to the gross deferred tax assets.
























                                       13




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------






12.  Commitments and Contingencies

     Legal  proceedings
     On October 27, 1995, the Company commenced  an action in Supreme Court, New
     York County (the "Court"), against Dr. Nicholas Bodor, a former director of
     the Company, seeking to enjoin Dr. Bodor from taking any steps to terminate
     or interfere  with the  Company's rights under  an agreement  (the "License
     Agreement")  with Dr. Bodor  relating to LotemaxTM.   Dr. Bodor claims that
     the advances against future revenues of LotemaxTM  received by  the Company
     under its Marketing Agreement with Bausch &  Lomb are an up front licensing
     fee of  which Dr.  Bodor  is entitled  to receive  a portion  and that  the
     failure  to  pay  would  constitute grounds  for  terminating  the  License
     Agreement.  Dr. Bodor also claims that  the Marketing Agreement is actually
     a sublicense entitling Dr. Bodor  to additional royalties under his License
     Agreement and in response has  commenced a separate action seeking judicial
     clarification  of these  issues.    If successful  in  all aspects  of  the
     litigation, Dr. Bodor  could possibly receive approximately  $750,000 based
     on advances received by the Company as  of December 31, 1995, and a similar
     amount based  on advances  received by the  Company in  1996, as well  as a
     higher royalty percentage on sales of LotemaxTM.

     The Company strongly  disagrees with  Dr. Bodor's  characterization of  the
     Marketing Agreement and believes his interpretation is incorrect and has no
     merit.   To  prevent  Dr.  Bodor from  wrongfully  terminating the  License
     Agreement, the  Company commenced  the action to  protect its  rights under
     both the License Agreement and the Marketing Agreement.

     In a  Memorandum Decision  obtained by  the Company  in February 1996,  the
     Court ruled in favor of the Company on both motions, granting the Company's
     motion  for a  preliminary injunction  and  denying Dr.  Bodor's motion  to
     dismiss.   The Court  instructed  the parties  to submit  a proposed  order
     implementing the  terms of the  Court's Memorandum Decision  and affidavits
     regarding an appropriate undertaking (bond)  by the Company pending a final
     determination of  the action.  Although the  Company intends to  vigorously
     defend its position  related to this  matter and  believes its position  is
     correct in this dispute and that it will prevail,  an adverse determination
     or resolution of this  dispute could have a material adverse  effect on the
     Company's financial position  and results of operations.
   
     In March 1995,  the Company was named  as an additional co-defendant  in an
     amended complaint  filed in a  pending purported class action  suit against
     David  Blech, D. Blech  & Co. and  a number of  other defendants, including
     eleven  publicly traded  biotechnology  companies.    The  complaint  seeks
     damages for alleged unlawful manipulation of the stock market prices of the
     named  biotechnology  companies.    The Company  believes  that  the claims
     against it  have no factual or  legal basis and  are without merit  and has
     filed a motion  to dismiss the claims  asserted against it.   The Company's
     motion  to  dismiss  (along  with  motions to  dismiss  by  numerous  other
     Defendants) was argued  and submitted before  United States District  Court
     on November 9, 1995 and a decision has not yet been rendered  by the Court.
     Management believes that  the ultimate outcome will not  have a significant
     impact on the Company's financial position or results of operations.















                                       14




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





     Management has  reviewed  with counsel  all other  actions and  proceedings
     pending against or involving the Company.  Although the ultimate outcome of
     such actions  and proceedings  cannot be predicted  with certainty  at this
     time, management believes that losses, if any, in excess of amounts accrued
     resulting from  those actions  will not have  a significant  impact on  the
     Company's financial position or results of operations. 

     Leases 
     The Company  leases research  and office facilities  in Israel  and Florida
     which are  used in operation  of the Company's research  and administration
     activities. The Florida facility which serves as a research and development
     facility as well as the corporate headquarters is leased under an agreement
     which expires  in November 1996 and can be  renewed at the Company's option
     for two additional one year periods.  The research and development facility
     in Israel is leased under  an agreement which expires in  May  1998 but may
     be terminated at the Company's option in May 1997. 

     The Company also has  a long term lease on office facilities  in  New York,
     which  previously served  as the  Company's  executive headquarters,  which
     expires  in March  2000.    In conjunction  with  relocating its  corporate
     headquarters,  the Company entered into a non-cancelable sublease agreement
     for  this facility. Such sublease  expires in March  2000.  The anticipated
     shortfall  between  future lease  payments to  be made by  the Company  and
     income to be  received under the sublease  amounts to $36,000 and  has been
     reflected as a liability in the accompanying  balance sheet at December 31,
     1995.

     Oculon  Corporation  leased  office and  research facilities  in Cambridge,
     Massachusetts  and Seattle,  Washington under  long  term lease  agreements
     which  expire in  July and  October 1999,  respectively.   The Company  has
     entered into subleases  for these facilities. The sublease  for the Seattle
     facility  is  non-cancelable and  expires  in  October  1999. There  is  no
     difference between  the anticipated minimum  payments to be made  under the
     lease agreement and  the minimum sublease income  to be received  under the
     sublease agreement.     The Cambridge  facility is  subleased under  a non-
     cancelable agreement which expires on  December 31, 1996.  Minimum sublease
     income  to  be  received  under  the  non-cancelable  sublease  amounts  to
     $241,000.  Minimum  future  payments  under  the  lease  agreement  for the
     Cambridge  facility amount  to  $815,000. Management  expects  that in  the
     normal course of business  that the sublease which expires in December 1996
     will be replaced  by a new sublease.  The Company has recorded  a liability
     based upon management's estimate of the amount by  which future payments to
     be made under  the lease agreement  are expected to exceed  contractual and
     estimated future sublease  income. As of December 31,  1995, such estimated
     liability amounted to  $185,000, of which $90,000 is reflected as a current
     liability.   It is  possible that  the Company  will not  be successful  in
     obtaining a new sublease  after December 1996, or if successful,  that such
     rental income  will be insufficient  to cover the Company's  minimum rental
     payments.  If the Company is not successful, additional provisions will  be
     required.

     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.














                                       15




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------




     At  December 31,  1995 the  future minimum  lease commitments  and sublease
     rental receivables  with respect  to non-cancelable  operating leases  with
     terms in excess of one year are as follows: 

                                       Lease             Sublease
                                       Commitments       Rentals
                                       -----------       -------

                           1996         $1,017,626       590,600

                           1997            777,726       373,517
                           1998            777,726       373,517

                           1999            387,323       315,269

                           2000             35,131        35,131
                                        ----------       -------

                                        $2,995,532    $1,688,034
                                        ==========    ==========

     Rent expense during 1995, 1994 and 1993 amounted to $542,885, $488,136, and
     $316,602, respectively. Rent expense in 1995 is  net of $88,698 of sublease
     income.

     In  connection with  the sublease  of  the Seattle  facility the  Company's
     subsidiary Oculon Corporation   leases certain leasehold  improvements to a
     third  party under  a  sublease agreement.  As of  December  31, 1995,  the
     present value of such payments of $206,407 is reflected in the accompanying
     balance as $146,100 in other assets and  the current portion of $60,307  in
     prepaid  expenses and other current assets.  Future payments to be received
     under this leasehold improvements sublease are as follows: $81,318 each  in
     1996, 1997 and 1998 and $64,387 in 1999. 

     Manufacturing agreement 
     The Company has a five year agreement with a foreign company to manufacture
     bulk quantities of the drug product which will be used in Lotemax(TM),  the
     Company's lead  product. As of  December 31, 1995,  the Company has  a non-
     cancellable commitment to purchase approximately  $750,000 in 1996, payable
     in a foreign currency.   In the event the Company does not receive approval
     from the FDA or other countries to market its Lotemax(TM) or line extension
     products, the active drug  substance required to  be purchased pursuant  to
     this commitment could have little or no value to the Company. 

     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.


























                                       16




<PAGE>



Pharmos Corporation

Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993          
------------------------------------------





     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,  1995, 1994  or 1993.   The Company  does not
     intend to pay a cash dividend in the foreseeable future.

15.  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
     $10,731, $16,890 and $6,559 in 1995, 1994 and 1993 respectively.

16.  Estimated Fair Value of Financial Instruments
     The estimated fair value of financial instruments has been determined based
     upon available market information and appropriate valuation  methodologies.
     However,  considerable judgement  is necessarily  required in  interpreting
     market  data to  develop  the  estimates of  fair  value. Accordingly,  the
     estimates presented  herein are not  necessarily indicative of  the amounts
     that  the Company might realize  in a current market exchange.   The use of
     different market  assumptions and or  estimation methodologies  may have  a
     material effect on the estimated fair value.

     The carrying  amounts of  cash and cash  equivalents, accounts  payable and
     accrued  expenses  are  reasonable  estimates  of  their fair  values.  The
     estimated fair value of investment  in sublease is not materially different
     from its  carrying value for  financial statement purposes at  December 31,
     1995.  In making this  determination the Company used interest rates  based
     upon the credit worthiness of the sublessor.  Due to the uncertainty of the
     timing of  future product sales  it is not  practical to estimate  the fair
     value  of  advances  against  future  sales which  have  a  carrying  value
     $1,877,141 at December 31, 1995.




                                       17