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, 2000

                               Pharmos Corporation
             (Exact name of registrant as specified in its charter)

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

                         99 Wood Avenue South, Suite 301
                                Iselin, NJ 08830
               (Address of principal executive offices) (zip code)

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


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

                                      None
                                (Title of Class)


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

                  Common Stock, $.03 par value
                                (Title of Class)

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

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

     The aggregate  market value of the  registrant's  Common Stock at March 15,
2001  held by  those  persons  deemed  to be  non-affiliates  was  approximately
$94,932,007.

     As of March 15, 2001, the Registrant had outstanding  54,246,861  shares of
its $.03 par value Common Stock.


<PAGE>


                                     PART I

Item 1.  Business

Introduction

Pharmos  Corporation  (the  "Company")  is  a  bio-pharmaceutical  company  that
discovers and develops novel  therapeutics to treat a range of inflammatory  and
neurological  disorders such as traumatic  brain injury and stroke.  The Company
has an extensive  portfolio of drug  candidates  under  development,  as well as
discovery, preclinical and clinical capabilities.

Dexanabinol,  the  Company's  lead Central  Nervous  System (CNS)  product aimed
initially at treating severe head trauma and stroke,  is currently  undergoing a
pivotal  Phase III  clinical  trial for sever  traumatic  brain  injury (TBI) in
Europe.  During 2000, the Company completed the Phase II testing of dexanabinol.
These studies concluded that the goals of establishing the safety of dexanabinol
in TBI and the dosing  parameters  for the Phase III study were met, and enabled
the  Company to select  the  optimal  dose to be used in the Phase III  clinical
tests.  The Phase II studies  revealed a trend of efficacy  in the drug  treated
groups versus the placebo group and, within the most severely injured  patients,
a more than two-fold increase in the percentage of those achieving good recovery
(28.0%  in  the   dexanabinol   group  vs.  11.7%  in  the  placebo  group)  was
demonstrated.  In addition,  neurological recovery appeared to be accelerated in
the dexanabinol treated group, such that the percentage of dexanabinol  patients
achieving good recovery at 1 month was significantly  higher than in the placebo
group.

The  Company has  identified  several  promising  new  compounds  based upon its
program  to  develop  cannabinoid  compounds.   Preclinical  investigations  are
underway  for  compounds  in  stroke,  multiple  sclerosis,   neuropathic  pain,
Parkinson's  disease and  Amyotrophic  Lateral  Sclerosis.  The Company has also
synthesized  and  tested a series  of  selective  estrogen  receptor  modulators
(SERM). The initial focus of the SERMs development program is the use of charged
tamoxifen derivatives in treating breast cancer.

The  Company,  together  with  Bausch  &  Lomb  Pharmaceuticals,  Inc.  ("BLP"),
manufactures  and  markets  two  ophthalmic  products,  Lotemax(R)  (loteprednol
etabonate  ophthalmic  suspension  0.5%)  and  Alrex(R)  (loteprednol  etabonate
ophthalmic suspension 0.2%). BLP began marketing Lotemax and Alrex in 1998.

Lotemax  is a  topical,  site-specific  steroid  that is used to  treat  steroid
responsive  inflammatory eye conditions.  The prescription eye drop is also used
for  post-operative  eye inflammations  such as experienced  following  cataract
surgery.  Lotemax  has  the  broadest  range  of  approved  indications  of  any
ophthalmic  steroid on the  market.  Alrex is a specially  developed  formula of
loteprednol  etabonate  that is used in the treatment of  ophthalmic  allergies.
Alrex is indicated for the  treatment of seasonal  allergic  conjunctivitis,  an
inflammation of the eye usually caused by pollens.

The regulatory  approvals for Lotemax and Alrex are the first two of three to be
sought in the United  States  for the  Company's  and BLP's  line of  ophthalmic
products containing loteprednol etabonate. The third product, which combines the
active  ingredient  loteprednol  etabonate with an  anti-infective  agent, is in
final development.

During  2000,  BLP began  selling  Lotemax and Alrex in  Argentina.  The Company
received  its initial  international  product  revenues  from the sales of these
products.

BLP, a subsidiary  of the global eye care company,  Bausch & Lomb  Incorporated,
co-developed  Lotemax and Alrex with the Company  after the Company  granted BLP
the rights to process  and market  the new  ophthalmic  pharmaceutical  line for
North America and select international markets including Europe and Canada.

Strategy

The Company's business is the discovery and development of novel therapeutics to
treat a range of inflammatory and neurological disorders such as traumatic brain
injury and stroke. The Company seeks to enter into



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collaborative   relationships  with  established   pharmaceutical  companies  to
complete development and to commercialize its products.

The Company is applying  its  experience  in drug  design,  novel drug  delivery
technology and high  through-put  screening in developing  products  directed at
several  fields   including:   neuroprotective   compounds  forTBI  and  stroke,
non-psychotropic  cannabinoids for  neurological,  vascular and other conditions
involving  inflammatory  processes,  and  site  specific  drugs  for  ophthalmic
indications.

Products

Dexanabinol

Dexanabinol is the Company's lead synthetic  cannabinoid compound in a family of
non  psychotic   cannabinoid   molecules   originally   designed  to  avoid  the
psychotropic and sedative  spectrum of  cannabinometic  agents,  while retaining
their beneficial properties as anti-emetics,  anti-inflammatories  and analgesic
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 is a stereo
selective,  non-competitive  antagonist of the NMDA receptor  channel,  has free
radical  scavenging  properties,  and  anti-inflammatory  properties  (involving
inhibition of TNF- [alpha] production). All of these mechanisms may be important
for neuroprotection. Therefore, dexanabinol appears to have a unique modality to
neuroprotection,  combining  three  relevant  mechanisms  of  action in a single
molecule which act at different  time points of the  neurotoxic  process in head
trauma, stroke and potentially other indications.

While  head  trauma  and  stroke  are  the  highest  priority   indications  for
dexanabinol,  its spectrum of activities  has potential as an  anti-inflammatory
and protectant in other diseases such as neuropathic pain,  multiple  sclerosis,
glaucoma,  Parkinson's,  Alzheimer's  disease and  glaccoma,  as well as various
other inflammatory  conditions.  Development of dexanabinol and other members of
this family of compounds for these  chronic  indications  are  proceeding at the
preclinical level.

In  several  animal  models  (including  closed  head  injury,  focal and global
forebrain ischemia and optic nerve crush), the drug has demonstrated significant
neuroprotective  activity.  In these studies,  a single injection of dexanabinol
given  after  the  injury  resulted  in  a  significant   long-term   functional
improvement and an increase in neuronal survival.

In 1996,  a Phase I study of rising dose  tolerance  in healthy  volunteers  (50
subjects)  showed  dexanabinol  to be safe and well tolerated 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.  In late 1996,  the Company  commenced a Phase II
study of head injured patients.  This study, conducted at six medical centers in
Israel on patients  with severe head  injury,  was  reviewed and approved by the
American Brain Injury Consortium (ABIC) and the European Brain Injury Consortium
(EBIC).

In 1998, the Company announced the results of the first two cohorts of the three
cohort  Phase II  Clinical  Study  involving  67  patients.  Clinical  endpoints
established  an excellent  safety  profile of the drug in the treated  patients.
There  were no  unexpected  adverse  experiences  reported  for  either the drug
treated or placebo group. Intracranial pressure above a threshold of 25 mmHg, an
important  risk  factor  and a  predictor  of  poor  neurological  outcome,  was
significantly  reduced in the  drug-treated  patients  through  the third day of
treatment,  without a  concomitant  reduction in systolic  blood  pressure.  The
mortality rate of 10% (3/30) in the dexanabinol group compared  favorably with a
13.5%  rate in the  placebo  group  (5/37).  The  investigators  concluded  that
dexanabinol  was  shown to be safe and well  tolerated  in  severe  head  trauma
patients.  Neurological  outcomes in the study,  assessed  periodically  up to 6
months after injury,  established a strong trend of efficacy.  The percentage of
patients  achieving  Good  Neurological  Outcome,  the highest score on the five
level Glasgow Outcome Score used to assess the recovery of head trauma patients,
was  higher  in the  drug-treated  group  at each  measurement.  Among  the most
severely  injured  patients  in the study,  a better  outcome  was  consistently
observed  among the drug  treated  group


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than among the placebo treated group. Patients received an intravenous injection
of either dexanabinol or placebo within 6 hours of the injury.  Demographically,
all 67 patients were fairly  representative  of the  characteristics  describing
severe head trauma.

During 2000 the Company  announced  the results of the third cohort of the Phase
II Clinical  Study.  The study concluded that the Phase II goals of establishing
the safety of dexanabinol  in TBI and the dosing  parameters for a pivotal study
were met.  An  aggregate  of 101  patients  was  enrolled  in the  multi-center,
double-blind,  randomized  Phase II study,  which was  carried out in six trauma
centers  in  Israel  affiliated  with  the  American  Brain  Injury  Consortium.
Fifty-two of the patients were treated with  dexanabinol at three separate doses
and forty-nine  received a placebo. In the third cohort,  thirty-three  patients
received an  intravenous  injection of either 200 mg. of  dexanabinol  (N=21) or
placebo (N=12) within six hours of injury. Demographically,  these patients were
fairly representative of the TBI population, comprising mostly young men injured
in motor vehicle accidents. However, the dexanabinol and placebo groups differed
with  respect to several  important  baseline  entry  parameters  affecting  the
patients' prognosis;  for example,  injury severity as determined by the Glasgow
Coma Scale was  significantly  worse in the  treated  group than in the  placebo
group. In addition,  the patients' CT  classifications  indicating the extent of
the brain  injury  were worse in the  drug-treated  group  compared  to placebo.
Predictably, the strong trend for better neurological outcome in comparison with
placebo  that was  observed in the first two  cohorts  was not  repeated in this
cohort.  Nevertheless,  ICP above a  threshold  of 25mmHg,  a major risk  factor
affecting  the  prognosis  of TBI, was lower 40-70% of the time during the first
days after injury in the treated  group vs. the placebo  group.  This result was
similar to those of the previous two cohorts (48mg.  and 150mg.  doses) reported
in 1998. An analysis of patient  performance  on the Galveston  Orientation  and
Amnesia Test (GOAT) demonstrated significantly better results in the dexanabinol
treated patients at 1, 3 and 6 months follow-up  compared to placebo.  GOAT is a
neurological  test that  measures  awareness  of  surroundings  and  ability  to
remember.

The 6 month  outcome as measured by the Glasgow  Outcome Score (GOS) was similar
in the treated and placebo groups as a whole, a comparison of outcome within the
subgroup of very severe (Glasgow Coma Scale "GCS" 4-6) patients  revealed a more
than two-fold increase in the percentage of those achieving good recovery (28.0%
in  the  dexanabinol  group  vs.  11.7%  in the  placebo  group).  In  addition,
neurological  recovery  appeared to be  accelerated in the  dexanabinol  treated
group, such that the percentage of dexanabinol  patients achieving good recovery
(measured by GOS) at 1 month was significantly  higher than in the placebo group
(17% vs. 2%, p<0.02).

During January 2001, the Company announced that its international  pivotal trial
of dexanabinol for severe TBI commenced in Europe.  The purpose of the Phase III
study is to  determine  the safety and  efficacy  of  dexanabinol  in severe TBI
patients.  Approximately 40 centers in Europe and 30 in the U.S. are expected to
participate in the study. European countries  participating in the study include
Finland,  France, Germany, the Netherlands,  Italy, Spain, Belgium and the U.K.,
along with  Israel.  The  Company  plans to begin the U.S.  arm of the Phase III
trial later this year, and expects total study enrollment of about 860 patients.
The  Company is  collaborating  with the EBIC and the ABIC in a number of areas,
including recruitment efforts with trauma centers.

Combinatorial  chemistry  strongly  supported  by  bioinformatics  and  computer
modeling has been  employed to generate a "Combidex"  library of molecules  with
enhanced  therapeutic  benefits and limited side effects.  The Company's  hybrid
combinatorial chemistry approach utilizes rational structural scaffolds designed
by employing quantitative  structure-activity  relationships,  computer-assisted
molecular modeling based on steric and allosteric ligand-receptor  interactions,
and  virtual  computer  libraries.  Compound  libraries  are then  prepared  via
combinatorial  chemistry  directed  at  the  pharmacophores  on  the  structural
scaffolds. In contrast to conventional random stochastic chemistry, the rational
approach leads to a larger percentage of synthesized  compounds that demonstrate
activity in screening  assays and increases  the potential of developing  potent
and selective drug candidates.

As a result of its rational drug research,  the Company has  identified  several
lead candidates within its family of cannabinoid compounds that may be effective
for stroke, neuropathic pain, multiple sclerosis, and neurodegenerative diseases
such as Parkinson's and Amyotrophic Lateral Sclerosis.

The  Company  has  identified  several  lead  drug  candidates,  based  upon its
dexanabinol  family of compounds for


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<PAGE>

the development of novel and powerful drugs for stroke, TBI, multiple sclerosis,
neuropathic pain and neurodegenerative  diseases such as Parkinson's Amyotrophic
Lateral  Sclerosis.  Development  of  these  compounds  are  proceeding  at  the
preclinical level.




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<PAGE>
Loteprednol Etabonate

Lotemax and Alrex are the trade  names of drug  products in the form of eye drop
suspensions in which the active compound is loteprednol  etabonate ("LE"). LE is
a unique  steroid,  designed to act in the eye and  alleviate  inflammatory  and
allergic  conditions,  and is quickly  hydrolyzed  into a  predictable  inactive
metabolite  before  it  reaches  the  inner eye or  systemic  circulation.  This
pharmacological  profile results in improved safety by avoiding the side effects
related to exposure to most ocular steroids.  In the eye, the most unwanted side
effect of  steroids is the  elevation  of IOP,  which can be sight  threatening.
While  steroids,  for lack of an  alternative,  are  regularly  used for  severe
inflammatory  conditions of the eye, milder conditions,  such as allergies,  are
preferentially treated with less effective non-steroidal agents.

In 1998,  Lotemax received  marketing approval from the FDA for the treatment of
steroid responsive  inflammatory  conditions of the eye, including uveitis,  and
for  postoperative  eye  inflammation.  Also in 1998,  Alrex received  marketing
approval from the FDA for the treatment of seasonal allergic conjunctivitis.

LE-T, a third loteprednol  etabonate-based eye drug combined with the antibiotic
tobramycin, is undergoing a further clinical trial before submitting the NDA for
FDA approval in order to add  considerable  support to the  Company's  intent to
receive a broad  labeling  for the product  upon  approval,  a feature that will
assist its commercialization.  Upon successful completion of the clinical trial,
an NDA is expected to be filed with the FDA.

In 1995, the Company entered into an agreement with BLP to market Lotemax, Alrex
and LE-T in the U.S.  A second  agreement,  covering  Europe,  Canada  and other
selected  countries,  was signed in 1996.  Both agreements give BLP the right to
purchase  the active  component LE from the Company,  to  manufacture  the "drug
product" and to assist the Company in  developing  the  products.  In 1995,  the
Company also signed an agreement with PPG-Sipsy, a unit of PPG Industries, Inc.,
for  exclusive  manufacturing  of LE for  sale  to the  Company.  Following  FDA
approval of Lotemax and Alrex,  BLP commenced  product  shipments in April 1998,
providing the Company with its initial product revenues.

During  2000,  Lotemax and Alrex were  approved for  marketing in Argentina  and
Brazil.  Late in 2000, the Company received its initial  international  revenues
from  the  sale of its  products  in  Argentina.  A  filing  to  market  LE 0.5%
ophthalmic  suspension  for  ophthalmic  inflammatory  indications in the United
Kingdom was  submitted to the  Medicines  Control  Agency,  the drug  regulatory
agency in the U.K. Upon  approval,  the product will be submitted by BLP and the
Company for approval in other European  countries  through a Mutual  Recognition
procedure.  Sold in the U.S.  under the trademark  Lotemax,  the product will be
marketed under the Loterox trade name in the U.K.

SERM Platform

The company has developed a library of selective  estrogen  receptor  modulators
(SERM) that have been synthesized and screened by estrogen receptor binding.  So
far, one  derivative has been found to be potent in moderating the growth of the
virulent Panc-1 tumor in nude mice and is now under investigation for its action
on breast  and  intractable  tumors  such as  glioblastoma  multiforma.  Further
synthesis and screening of SERM analogs are ongoing to identify drug  candidates
for the  treatment  of  osteoporosis,  cardiovascular  diseases,  mood and other
cognitive disorders.

Competition

The pharmaceutical  industry is highly competitive.  The Company competes with a
number of pharmaceutical companies that 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 for the use of technology


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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 is to develop  products  independently  and,
where appropriate,  in collaboration with established  pharmaceutical  companies
and  institutions.  Collaborative  partners  may  provide  financial  resources,
research and manufacturing  capabilities and marketing  infrastructure to aid in
the  commercialization  of 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  additional  collaborative  arrangements  or that, if
established, any such relationships will be successful.

Bausch & Lomb Pharmaceuticals, Inc.

The Company has a contract with BLP to manufacture and market Lotemax and Alrex,
the Company's lead products,  in the United States.  The agreement  includes one
other loteprednol etabonate-based product, LE-T, currently being co-developed by
the Company and BLP. A second  agreement  extends  BLP's  rights to market these
products  in Europe,  Canada and other  selected  countries  pending  regulatory
approval.

Under the agreements,  BLP purchases the active drug substance from the Company.
BLP has provided the Company with a total of $5 million in cash  advances and is
entitled to recoup the advances by way of credits  from sales of Lotemax,  Alrex
and line  extension  products.  Another $1 million is due  subject to  receiving
regulatory approval for LE-T in the United States. An additional $1.6 million in
advances  against  future sales by BLP will be payable to the Company  following
receipt of regulatory clearance in certain markets outside of the United States.
BLP  collaborates  in the  development  of these  products  by making  available
amounts up to 50% of their Phase III clinical trial costs.  The Company  retains
certain  conditional  co-marketing  rights  in the U.S.  to all of the  products
covered by the  marketing  agreement.  As of December 31, 2000,  the Company had
repaid $3.4 million of the cash  advances  from BLP by way of credits from sales
of Lotemax and Alrex since 1998.  In 1996,  BLP made a $2 million  investment in
the common stock of the Company.

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 Dr. Nicholas Bodor and
the Hebrew  University of Jerusalem  ("Hebrew  University").  The Company is the
licensee  of these  technologies  under  patents  held by the  applicable  owner
through  licenses that generally remain in effect for the life of the applicable
patent. 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


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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 a court of competent
jurisdiction,  if issued,  will  uphold the  patents  relating  to the  licensed
technology,  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 commencement 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
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.

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  that have  demonstrated  certain  beneficial
neuropharmacological  activity  while  appearing  to be  devoid  of  most of the
deleterious  effects usually  associated  with this class of compounds.  Several
patents have 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 2000.
These patents cover dexanabinol, which is under development for the treatment of
head trauma, stroke and other indications, and novel analogs.

Site-Specific  Drugs. In the general  category of  site-specific  drugs that 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 1996.  Some of these  patents  cover  loteprednol
etabonate-based products and its formulations.



                                       8
<PAGE>

Selective  Estrogen  Receptor  Modulators  (SERM).  The Company has filed patent
applications in the U.S., Israel,  Australia,  Canada,  Japan, Brazil, Korea and
the European Patent Office to protect  pharmaceutical  compositions of tamoxifen
analogs and tamoxifen  methiodide.  In July 1997, the U.S.  Patent and Trademark
Office  issued  a patent  with  claims  covering  the use of  permanently  ionic
derivatives  of  steroid  hormones  and  their  antagonists  known as  tamoxifen
analogs.  The patent also claims novel  analogs of tamoxifen  and other  steroid
hormones and their antagonists. A second patent was issued in July 2000 claiming
anti-angiogenic  uses of these same compounds.  The Company  believes that 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  patents  from  Hebrew
University  and  has  separately  filed  ten  patent  applications  that  are at
different stages of prosecution. These patents and patent applications have been
devised to protect a group of  formulation  technologies  devised by 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 1996.  These  patents  cover a broad  range of  improved  formulations  for
increased  bioavailability  of hydrophobic  drugs, to treat various diseases and
disorders.

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
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
FDA approval has been received for a developed  product.  Certain of the license
agreements also require annual payments.

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 take a number of years
and involve 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,  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,  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.



                                       9
<PAGE>

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 FDA,
under a series of regulations called the Good Laboratory  Practice  regulations,
regulates the conduct of preclinical  studies.  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
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 of  $301,000  (for  Fiscal  Year  2001).
Companies  with less than 500  employees  and no revenues  from  products may be
eligible  for an  exception.  This  exception  was  granted  to the  Company  in
connection  with the NDA for Lotemax and Alrex and reduced the fee by 50%, 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 not satisfied or
may require additional  clinical testing.  Even if such data are submitted,  the


                                       10
<PAGE>

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 filed
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 a separate 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
maintenance  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").  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,  state and local  authorities.  In
addition,  numerous foreign authorities would regulate any future  international
sales.

There continue to be a number of legislative  and regulatory  proposals aimed at
changing  the health care  system.  It is uncertain  what,  if any,  legislative
proposals will be adopted or what actions  federal or state  agencies,  or third
party  payers  may take in  response  to any health  care  reform  proposals  or
legislation. Although the Company cannot predict whether any such legislative or
regulatory  proposals  will be adopted or the effect such  proposals may have on
its business,  the uncertainty  surrounding such proposals could have a material
adverse  effect  on  the  Company.   Furthermore,   the  Company's   ability  to
commercialize its potential  product portfolio may be adversely  affected to the
extent  that such  proposals  have a material  adverse  effect on the  business,
financial  condition and  profitability  of other companies that are prospective
collaborators for certain of the Company's potential products.

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.  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.



                                       11
<PAGE>

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 in 1992 acquired all of the outstanding  shares of Xenon Vision,
Inc., a privately held Delaware  corporation.  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 that 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 1995, the
Company acquired Oculon Corporation,  a privately-held development stage company
with anti-cataract technologies.

Human Resources

As of March 1, 2001,  the Company  had 66  employees,  11 in the U.S.  and 55 in
Israel,  of whom  approximately  14  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  dexanabinol,  SME technology for
injection  and  nutrition  as  well as for  research  relating  to  pilocarpine,
dexamethasone and ophthalmic formulations for dry eyes. The Company has received
$2,452,059 under such agreements  through December 31, 2000. The Company will be
required  to pay  royalties  to the Chief  Scientist  from  ranging  2% to 5% of
product  sales,  if any, as a result of the research  activities  conducted with
such  funds.  Aggregate  royalty  payments  are limited to the amount of funding
received.  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."

The Company  has  received  certain  funding of  $925,780  from the  Israel-U.S.
Binational Industrial Research and Development  Foundation ("BIRD-F") to develop
Lotemax and LE-T. The Company was required to pay royalties to BIRD-F on product
sales, if any, of 2.5%, through September 1999, then 5% thereafter,  as a result
of the research activities conducted with such funds. Aggregate royalty payments
are  limited  to 150% of the  amount  of such  funding  received,  linked to the
exchange rate of the U.S. dollar and the New Israeli Shekel.

In April  1997,  the Company  signed an  agreement  with the Magnet  consortium,
operated  by  the  Office  of  the  Chief  Scientist,   for  developing  generic
technologies  and for the design and  development of drug and  diagnostic  kits.
Under  such  agreement,  the  Company  is  entitled  to a  non-refundable  grant
amounting  to  approximately  60% of the actual  research  and  development  and
equipment expenditures on approved projects. No royalty obligations are required
within  the  framework.  To date,  the  Company  has  received  grants  totaling
$1,505,468 pursuant to this agreement.

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.




                                       12
<PAGE>

Pharmos Ltd. has received  certain funding from the Chief Scientist with respect
to dexanabinol and with respect to its SME Technology. The proclaimed purpose of
the  legislation  under  which such  funding was  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.




                                       13
<PAGE>

Item 2.  Properties

The Company is headquartered in Iselin, New Jersey where it leases its executive
offices and maintains clinical,  regulatory and business  development staff. The
Company  also  leases   facilities  used  in  the  operation  of  its  research,
development,  pilot  manufacturing  and  administrative  activities  in Rehovot,
Israel.  These  facilities  have been improved to meet the special  requirements
necessary  for  the  operation  of  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.

Item 3.  Legal Proceedings

   None.

Item 4.  Submission of Matters to a Vote of Security Holders

At the  Company's  Annual  Meeting of  Stockholders  held on July 20, 2000,  the
stockholders  of the Company  elected the following  persons as directors of the
Company to serve until the next annual meeting of  stockholders  and until their
successors are duly elected and qualified: Haim Aviv, Elkan R. Gamzu, E. Andrews
Grinstead III (deceased in February 2001),  Samuel D. Waksal,  David  Schlachet,
Mony Ben Dor and  Georges  Anthony  Marcel.  The  results of the voting  were as
follows:

                                    VOTES FOR             VOTES WITHHELD
     Haim Aviv                      41,159,667                366,908
     Elkan R. Gamzu                 41,159,667                366,908
     E. Andrews Grinstead           41,159,667                366,908
     Samuel D. Waksal               41,159,192                367,383
     David Schlachet                41,183,667                342,908
     Mony Ben Dor                   41,158,417                368,158
     Georges Anthony Marcel         41,253,667                272,908

Also at the Annual  Meeting,  the  stockholders  approved  the  adoption  of the
Company's  2000 Stock  Option Plan,  with  40,192,603  votes cast for  approval,
1,269,711 votes cast against and 64,261 abstentions.


                                       14
<PAGE>



                                     PART II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

The  Company's  Common Stock is traded on the Nasdaq  SmallCap  Market(t)m.  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, 2000              HIGH                     LOW
----------------------------             ------                   ------
1st Quarter.........................     $15.38                   $1.75
2nd Quarter.........................       6.75                    2.38
3rd Quarter.........................       4.56                    2.94
4th Quarter.........................       3.59                    1.47


Year ended December 31, 1999               HIGH                    LOW
----------------------------             ------                   ------

1st Quarter.........................      $1.78                   $1.13
2nd Quarter.........................       2.13                    1.19
3rd Quarter.........................       2.00                    1.22
4th Quarter.........................       2.44                    1.06

The high and low bid  prices for the Common  Stock  during the first  quarter of
2001 (through  March 15, 2001) were $3.00 and $1.50,  respectively.  The closing
price on March 15, 2001 was $1.75.

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

On March 15, 2001,  there were  approximately  499 record  holders of the Common
Stock of the Company and  approximately  20,416  beneficial owners of the Common
Stock of the  Company,  based upon the number of shares of Common  Stock held in
"street name".

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



                                       15
<PAGE>


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

                                                            Year Ended December 31,
                                                            -----------------------
                                       2000           1999          1998           1997           1996
                                       ----           ----          ----           ----           ----

<S>                              <C>             <C>            <C>             <C>             <C>
Revenues                         $  5,098,504    $ 3,279,397    $ 1,539,941              --             --

Gross Margin                        3,222,549      2,284,780      1,102,228              --             --

Operating expenses                 (9,969,879)    (6,999,136)    (6,109,809)    $(8,563.091)    (8,354,991)

Loss Before Extraordinary Item     (7,984,202)    (4,618,190)    (4,663,347)     (8,233,547)    (8,077,210)

Extraordinary gain from
 forgiveness of debt                       --             --             --         416,248             --

Dividend embedded in
convertible preferred stock                --             --       (642,648)     (1,952,767)            --
Preferred Stock dividends                  --        (22,253)      (242,295)       (240,375)            --
                                  -----------    ------------    -----------    ------------   ------------

Net loss applicable to
common shareholders              ($ 7,984,202)   ($4,640,443)   ($5,548,290)   ($10,010,441)   ($8,077,210)
                                 =============   ============   ============    ============   ============
Loss per share applicable
to common shareholders before
extraordinary gain - basic        ($     0.15)   ($     0.11)   ($     0.15)    ($     0.32)    ($    0.28)

Extraordinary gain per share               --             --             --            0.01             --
                                  -----------    ------------    -----------    ------------    -----------
Net loss per share applicable
to common shareholders - basic    ($     0.15)   ($     0.11)   ($     0.15)    ($     0.31)   ($     0.28)
                                 =============   ============   ============    ============   ============


Total assets                     $ 30,783,109    $ 7,791,294    $ 8,066,670    $  8,421,841    $ 7,468,293
                                 ============    ===========    ===========    ============    ===========


Long term obligations            $  7,680,872    $ 1,277,565    $ 2,691,023    $  4,100,000    $ 4,161,767
                                 ============    ===========    ===========    ============    ===========

Cash dividends declared                    --             --             --              --             --

</TABLE>



                                       16
<PAGE>



Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

During 2000 and 1999, the Company  generated  revenues from product  sales,  but
continues to be dependent upon external financing, interest income, and research
and  development  contracts  to pursue its  intended  business  activities.  The
Company has not been  profitable  since  inception and has incurred a cumulative
net  loss of  $90,494,309  through  December  31,  2000.  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  expenses over the next several  years as the  Company's  research and
development  and clinical  trial  programs  continue.  The Company's  ability to
achieve  profitability  is dependent  on the level of revenues  from the sale of
drug substance to support Lotemax and Alrex, coupled with its ability to develop
and  obtain  regulatory  approvals  for its  product  candidates,  to enter into
agreements  for  product  development  and   commercialization   with  strategic
corporate   partners  and  contract  to  develop  or  acquire  the  capacity  to
manufacture and sell its products. See "Management's  Discussion and Analysis of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."

Results of Operations

Years Ended December 31, 2000 and 1999

Revenues from sales  increased  $1,819,107  or 55%,  from  $3,279,397 in 1999 to
$5,098,504 in 2000. The increase primarily resulted from increased market shares
for the  Company's  products.  Additionally,  License Fee revenues were $225,000
compared to zero in 1999.  The license  income was primarily  generated from the
licensing of a technology of the Company for use in Japan.

Cost  of  goods  sold  increased  $881,338  or  89%,  from  $994,617  in 1999 to
$1,875,955  in 2000.  The increase  reflects  the high product  revenue for 2000
compared  to 1999.  Cost of goods  sold  includes  the cost of the  active  drug
substance  and  royalty  payments  to the  licensor.  Cost of goods in 2000 grew
faster than product revenues as a result of higher expenses for product samples,
higher LE product license expenses and higher royalties.

Total operating expenses increased $2,970,743 or 42%, from $6,999,136 in 1999 to
$9,969,879  in 2000.  The  increase in operating  expenses is  primarily  due to
increases  in  selling,   general  &  administrative   expenses,   research  and
development expenses and depreciation.

Net research and  development  expenses  increased by  $1,456,396  or 38%,  from
$3,827,001  in 1999 to  $5,283,397  in 2000.  The  increase  in R&D  expense  is
primarily  due  to  increased  to  expenditures,  including  increased  employee
headcounts,  related to the  development  of  dexanabinol  for the  treatment of
traumatic  brain injury and to increased  activity in the Company's  cannabinoid
program  to  treat  various  central   nervous  system  and   inflammation-based
conditions.

Selling,  general and  administrative  expenses  increased by $1,432,697 or 55%,
from  $2,612,170 in 1999 to $4,044,867 in 2000. The increase is primarily due to
higher staffing levels and increased investor relations activities.

Depreciation  and  amortization  expenses  increased by $135,680,  or 39%,  from
$346,044 in 1999 to $481,724 in 2000, reflecting increased  depreciation expense
related to laboratory equipment purchases.

Other  income  (expense),  net of  interest  and other  expenses,  decreased  by
$1,333,038  from income of $96,166 in 1999 to expense of  $1,236,872  in 2000. A
higher level of interest  expense was primarily due to non-cash  charges related
to the Company's  convertible debt financing,  completed in the third quarter of
2000, of approximately $2.4 million.  The increased expense was partially offset
by increased  interest income of  approximately  $1.1 million a result of higher
average cash balances in 2000.




                                       17
<PAGE>



Years Ended December 31, 1999 and 1998

Revenues from sale of product  increased  $2,091,119 or 176%, from $1,188,278 in
1998 to $3,279,397 in 1999. The increase  resulted from increased  market shares
for the  Company's  products  as well as a full year of revenue  for 1999 versus
three quarters in 1998 as product sales  commenced in April 1998.  Additionally,
the Company  recorded license income of $351,663 for the year ended December 31,
1998. The license income was primarily  generated from a  non-recurring  payment
received by the Company in exchange for the transfer of certain drug technology.

Cost of goods sold increased $556,904 or 127%, from $437,713 in 1998 to $994,617
in 1999.  The increase  reflects  the high product  revenue in 1999 versus 1998.
Cost of goods sold  includes the cost of the active drug  substance  and royalty
payments.

Total operating  expenses  increased $889,327 or 15%, from $6,109,809 in 1998 to
$6,999,136  in 1999.  The increase in operating  expenses is due to increases in
selling,  general & administrative  expenses,  research and development expenses
and depreciation.

Net  research  and  development  expenses  increased  by $335,618  or 10%,  from
$3,491,383  in 1998 to  $3,827,001  in 1999.  The  increase  in R&D  expense  is
primarily due to higher outside  consulting  costs  associated with the Phase II
testing of the Company's  dexanabinol product and on compounds in various stages
of clinical and preclinical testing.

Selling,  general and administrative expenses increased by $475,530 or 22%, from
$2,136,640  in 1998 to  $2,612,170  in 1999.  The increase is  primarily  due to
higher wage and  benefits  costs and  increased  investor  relations  activities
partially offset by reduced professional fees and reduced travel costs.

Depreciation  and  amortization  expenses  increased  by $78,200,  or 35%,  from
$267,844 in 1998 to $346,044 in 1999, reflecting increased  depreciation expense
related to laboratory equipment purchases in 1998.

Interest  and other  income,  net of interest and other  expenses,  decreased by
$248,068,  or 72%,  from  $344,234  in 1998 to $ 96,166 in 1999.  The decline is
principally  due to lower  interest  income  as a result of lower  average  cash
balances.

Liquidity and Capital Resources

While the  Company  has  received  revenues  since 1998  through the sale of its
approved  products,  it has incurred  operating  losses since its inception.  At
December 31, 2000, the Company had an accumulated  deficit of  $90,494,309.  The
Company  has  financed  its  operations  with public and  private  offerings  of
securities,  advances and other funding  pursuant to a marketing  agreement with
BLP, research contracts, license fees, royalties and sales, and interest income.

The  Company  had  working  capital of $21.7  million,  including  cash and cash
equivalents of $22.5 million, as of December 31, 2000.

During 2000, the Company received  additional  equity of $4.8 million and issued
2,615,003  shares of its common  stock from the exercise of warrants to purchase
the Company's  common stock.  During the first quarter of 2000, the Company sold
4,500,000  registered shares of common stock to several investors  pursuant to a
shelf registration that generated $12.7 million in gross proceeds.

During  2000,  under terms of the Equity Line of Credit  Agreement,  obtained in
1998, the Company issued 518,424 shares of its Common Stock and 51,162  warrants
to purchase  shares of its Common Stock to such  investor for  consideration  of
$2.1million, net of fees.



                                       18
<PAGE>

In September  2000,  the Company  completed a private  placement of  Convertible
Debentures,  common stock and  warrants to purchase  shares of common stock with
institutional investors, generating gross proceeds of $11 million.

The Convertible  Debentures,  which generated gross proceeds of $8 million,  are
due in February  2002 and carry a 6% interest  payable  semiannually  in cash or
common stock.  The Convertible  Debentures are convertible into common shares of
the  Company at the  conversion  price of $3.83 per share (or  2,088,775  common
shares) and are convertible beginning October 31, 2000. Under certain conditions
giving rise to anti-dilution adjustments, the conversion price may change. Until
converted into common stock, the terms of the Convertible Debentures require the
Company to deposit $4 million  in an escrow  account.  The  escrowed  capital is
shown as Restricted Cash on the Company's  balance sheet and will be released to
the Company in proportion to the amount of Convertible Debentures converted into
common shares or upon the repayment of the debt.

Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities
with  Beneficial  Conversion  Features  or  Contingently  Adjustable  Conversion
Ratios, require the Company to compute the Beneficial Conversion Feature ("BCF")
of the  convertible  debt.  The BCF must be  capitalized  and amortized from the
closing  date  until  the  earliest  date that the  investors  have the right to
convert the debt into common shares.  The BCF was computed at approximately $1.8
million, all of which has been amortized and included as interest expense in the
year ending  December 31, 2000.  Additionally,  the discount on the  Convertible
Debenture of  approximately $ 800,000 will be amortized to interest expense over
the life of the debt. For the year ending  December 31, 2000,  $177,976 has been
amortized.

The  Company  issued  1,024,425  common  shares in the  private  placement  that
generated  gross  proceeds  of $3 million.  Under the terms of the  transaction,
821,515  shares were  issued at closing  and  202,910  shares were issued in the
fourth  quarter  of  2000 as a  one-time  adjustment  that  did  not  result  in
additional proceeds to the Company. One investor has an option, in the form of a
warrant,  to purchase an  additional $2 million of common shares for a period of
one year  provided  that the future  purchase  price is greater than the initial
closing  price of $3.65 per  share.  The  maximum  number of shares  that can be
issued  from  this  warrant  is  547,945  and is part of the  maximum  number of
warrants  issued  for  the  total  private  placement  of  1,115,730,  including
placement agent warrants.

During  January 2001, the Company paid $572,539 and issued 182,964 shares of the
common stock of the Company to the investors in the convertible  debenture.  The
payment of cash and stock were the option  chosen by the Company  and  represent
adjustments  to the pricing  based upon the  Company's  stock  price  during the
adjustment period. Under the terms of the agreements, no further adjustments are
due.

The  issuance  costs  related to the Private  Placement  of  approximately  $1.4
million,  including the value of 187,929  warrants to purchase  common shares at
prices ranging from $4.34 to $4.56,  have been  capitalized.  The issuance costs
related to the  Convertible  Debenture  will be  amortized  over the life of the
debt.  For the year ending  December 31, 2000,  $224,691 has been  amortized and
included as interest  expense.  The issuance costs relating to the common shares
have been netted against the proceeds.

Cumulative  advances  from  Bausch & Lomb as of  December  31,  2000  totaled $5
million.  BLP is entitled to recoup the advances by withholding  certain amounts
from the  proceeds  payable to the  Company  for  purchases  of the active  drug
substance used in the production of Lotemax,  Alrex and line extension products.
As of December  31, 2000,  the  outstanding  advances  from BLP amounted to $1.6
million.  The Company may be obligated to repay such advances if it is unable to
supply BLP with certain specified quantities of the active drug substance.

Management  believes  that  existing  cash and cash  equivalents,  combined with
anticipated cash inflows from investment  income, the equity line of credit, R&D
grants and proceeds  from sales of the drug  substance  for Lotemax and Alrex to
BLP will be  sufficient  to support  the  Company's  operations.  The Company is
continuing to actively  pursue various  funding  options,  including  additional
equity offerings,  strategic corporate alliances,  business combinations and the
establishment of product related research and development limited  partnerships,
to obtain the  additional  financing  that would be  required  to  continue  the
development  of its  products  and bring  them to  commercial  markets.



                                       19
<PAGE>

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.


                                    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.                      61     Chairman, Chief Executive Officer,
                                                   Chief Scientist and Director
Gad Riesenfeld, Ph.D.                 57     President, Chief Operating Officer
Robert W. Cook                        45     Executive Vice President and
                                                   Chief Financial Officer
David Schlachet                       55     Director
Mony Ben Dor                          55     Director
Georges Anthony Marcel, M.D., Ph.D.   59     Director
Elkan R. Gamzu, Ph.D.                 58     Director
Samuel D. Waksal, Ph.D.               52     Director

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

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

Robert W. Cook was elected Vice President Finance and Chief Financial Officer of
Pharmos in January 1998 and became  Executive  Vice  President in February 2001.



                                       20
<PAGE>

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

David Schlachet, a Director of the Company from December 1994, served as the
Chairman of Elite Industries Ltd. from July 1997 until June 30th 2000. From
January 1996 to June 1997, Mr. Schlachet served as the Vice President of the
Strauss Group and Chief Executive Officer of Strauss Holdings Ltd, one of
Israel's largest privately owned food manufacturers. He was Vice President of
Finance and Administration at the Weizmann Institute of Science in Rehovot,
Israel from 1990 to December 1995, and was responsible for the Institute's
administration and financial activities, including personnel, budget and
finance, funding, investments, acquisitions and collaboration with the
industrial and business communities. From 1989 to 1990, Mr. Schlachet was
President and Chief Executive Officer of YEDA Research and Development Co. Ltd.,
a marketing and licensing company at the Weizmann Institute of Science. Today
Mr. Schlachet serves as Chairman of Harel Capital Markets (Israeli broker,
underwriter and asset management firm) and as a Director of Israel Discount Bank
Ltd., Hapoalim Capital Markets Ltd, Teldor Ltd. (software and computer company),
Proseed Ltd., a Venture Capital investment company, and Taya Investment Company
Ltd., an Israeli publicly-held investment company, and also serves as Managing
Partner in Biocom, a V.C. Fund in the field of Life Science.

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

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

Elkan R. Gamzu,  Ph.D.,  a Director of the Company  since  February  2000,  is a
consultant to the biotechnology and pharmaceutical industries. Prior to becoming
a  consultant,  Dr.  Gamzu held a number of senior  executive  positions  in the
biotechnology  and  pharmaceutical  industries,  including  President  and Chief
Executive  Officer of Cambridge  Neuroscience,  Inc.  from 1994 until 1998.  Dr.
Gamzu also served as President and Chief Operating Officer and Vice President of
Development for Cambridge Neuroscience,  Inc. from 1989 to 1994. Previously, Dr.
Gamzu held a variety of senior  positions with  Warner-Lambert  and  Hoffmann-La
Roche,  Inc.  Dr.  Gamzu is a member of the Board of  Directors  of three  other
biotechnology companies: the publicly traded XTL Biopharmaceuticals Ltd. and the
privately  held  biotechnology  companies  Neurotech  S.A.  of Evry,  France and
Hypnion,  Inc.  of  Worcester,  MA.  He is also on the  Board  of  Directors  of
Rho-ADDS,  sas, a Paris-based  provider of biostatistics and data management for
the biopharmaceutical industry.

Samuel D.  Waksal,  Ph.D.,  a Director  of the Company  since  March 2000,  is a
founder of ImClone Systems Incorporated and has been its Chief Executive Officer
and a Director  since August 1985 and President  since March 1987.  From 1982 to
1985,  Dr. Waksal was a member of the faculty of Mt. Sinai School of Medicine as
Associate  Professor of Pathology and Director of the Division of  Immunotherapy


                                       21
<PAGE>

within the Department of Pathology.  He has served as visiting  Investigator  of
the National Cancer  Institute,  Immunology  Branch,  Research  Associate of the
Department of Genetics,  Stanford University Medical School, Assistant Professor
of pathology at Tufts University School of Medicine and Senior Scientist for the
Tufts Cancer Research  Center.  Dr. Waksal was a scholar of the Leukemia Society
of America  from 1979 to 1984.  Dr.  Waksal  currently  serves on the  Executive
Committee of the New York Biotechnology  Association,  the Board of Directors of
Cadus Pharmaceutical Corporation and is Chairman of the New York Council for the
Humanities.


Section 16 Filings

No person who,  during the fiscal year ended  December 31, 2000, was a director,
officer or  beneficial  owner of more than ten percent of the  Company's  Common
Stock  which is the only class of  securities  of the Company  registered  under
Section 12 of the  Securities  Exchange  Act of 1934 (the  "Act"),  a "Reporting
Person" failed to file on a timely basis,  reports required by Section 16 of the
Act during the most recent  fiscal  year.  The  foregoing is based solely upon a
review by the  Company of Forms 3 and 4 during the most  recent  fiscal  year as
furnished  to the Company  under Rule  16a-3(d)  under the Act,  and Forms 5 and
amendments  thereto  furnished  to the Company  with  respect to its most recent
fiscal year, and any  representation  received by the Company from any reporting
person that no Form 5 is required.


Item 11.  Executive Compensation

The following  table  summarizes the total  compensation  of the Chief Executive
Officer of the Company for 2000 and the two previous years, as well as all other
executive  officers  of the  Company  who  received  compensation  in  excess of
$100,000 for 2000.

Summary Compensation Table
<TABLE>
<CAPTION>

                               Annual Compensation                          Long Term Compensation
                               -------------------                          ----------------------
                                                                                           Stock
Name/                                                                       Restricted   Underlying
Principal Position             Year    Salary       Bonus         Other       Stock       Options
-----------------              ----    ------       -----        -------     --------    ----------

<S>                                   <C>          <C>         <C>                        <C>
Haim Aviv, Ph.D
Chairman, Chief                 2000  $244,662     $74,044     $  2,925(1)                100,000
Executive Officer, and          1999  $236,418     $29,906     $  2,829(1)                 65,000
Chief Scientist                 1998  $236,347                 $  4,197(1)                100,000

Gad Riesenfeld, Ph.D
President and                   2000  $194,250     $20,000     $ 71,125(2)                 60,000
Chief Operating Officer         1999  $185,000     $20,000     $ 53,860(2)                 50,000
                                1998  $175,000     $25,000     $ 50,728(2)                 80,000

Robert W. Cook
Vice President Finance          2000  $183,750     $40,000     $  4,800(1)                 45,000
and Chief Financial Officer     1999  $175,000     $20,000     $  4,800(1)                 40,000
                                1998  $165,000     $20,000     $  4,800(1)                150,000

</TABLE>

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

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




                                       22

<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, 2000

<TABLE>
<CAPTION>
                         Common Stock
                          Underlying      % of Total Options
                            options           Granted to        Exercise Price
                            Granted            Employees          per Share          Expiration Date
                         ------------     ------------------    ---------------      ---------------
<S>                         <C>                 <C>                 <C>
Haim Aviv, Ph.D             100,000             15.6 %              $ 4.03               6/6/10

Gad Riesenfeld, Ph.D.       60,000               9.4 %              $ 4.03               6/6/10

Robert W. Cook              45,000               7.0 %              $ 4.03               6/6/10
</TABLE>

Aggregated Option Exercises
for the Year Ended December 31, 2000
and Option Values as of December 31, 2000:

<TABLE>
<CAPTION>

                                                                             Value of Unexercised
                       Number of                Number of Unexercised       In-the-Money Options at
                        Shares                Options at December 31, 2000    December 31, 2000
                      Acquired on  Value       --------------------------    ----------------------
Name                   Exercise   Realized    Exercisable  Unexercisable   Exercisable  Unexercisable
----                   --------   --------    -----------  -------------   -----------  -------------
<S>                    <C>        <C>           <C>            <C>           <C>         <C>
Haim Aviv, Ph.D        125,000    $781,250      265,626        198,750       $ 5,590     $16,770
Gad Riesenfeld, Ph.D    87,250    $480,864      131,833        137,500       $ 4,300     $12,900
Robert W. Cook          50,000    $214,536       60,000        125,000       $ 3,440     $10,320

</TABLE>


Stock Option Plans

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

As of December 31, 2000, there were options to purchase  1,344,002 shares of the
Company's Common Stock outstanding  under the 1997 Plan,  expiring on dates from
January 1, 2008  through  June 6, 2010.  As of  December  31,  2000,  there were
options to purchase  92,000  shares of the  Company's  Common Stock  outstanding
under the 2000 Plan, expiring in June and July 2010.

As of December 31, 1999, the Company has 1,929,101 options to purchase shares of
the Company's Common Stock  outstanding  under various option plans,  616,765 of
which are  non-qualified  options.  During  1999,  the Company  granted  392,000
options to purchase shares of its Common Stock to employees, 80,000 of which are
non-qualified  options. A summary of the various  established stock option plans
is as follows:

1992 Plan. The maximum number of shares of the Company's  Common Stock available
for issuance under the 1992 Plan is 750,000 shares, subject to adjustment in the
event of stock splits,  stock dividends,  mergers,  consolidations and the like.
Common  Stock  subject to  options  granted  under the 1992 Plan that  expire or
terminate  will again be available for options to be issued under the 1992 Plan.
As of December 31, 2000,  there were options to purchase  427,542  shares of the
Company's  Common  Stock  outstanding  under  this  plan.  Each  option  granted
outstanding  under the 1992 plan as of December  31, 2000 expires on October 31,
2005.



                                       24
<PAGE>

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

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

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

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

Under  the  1997  Plan,  upon   termination  of  an  optionee's   employment  or
consultancy,  all options held by such optionee will terminate,  except that any
option that was  exercisable on the date  employment or  consultancy  terminated
may, to the extent then exercisable, be exercised within three months thereafter
(or one year  thereafter if the termination is the result of permanent and total
disability of the holder), and except such three month period may be extended by
the Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such  three-month  period,  the option may be
exercised  within one year after death by the decedent's  estate or his legatees
or  distributees,  but only to the extent  exercisable at the time of death. The
2000  Plan  provides  that  the  Compensation  Committee  may in its  discretion
determine  when  any  particular  stock  option  shall  expire.  A stock  option
agreement may provide for  expiration  prior to the end of its term in the event
of the  termination  of the  optionee's  service to the  Company or death or any
other circumstances.

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

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




                                       25
<PAGE>
The Board of Directors may amend,  suspend or discontinue  the 2000 Plan, but it
must obtain stockholder approval to (i) increase the number of shares subject to
the 2000 Plan or (ii) change the designation of the class of persons eligible to
receive options.

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

1997 Employees and Directors Warrants Plan

The 1997 Employees and Directors  Warrants Plan was approved by the Stock Option
Committee  as of February  12, 1997 and March 19,  1997.  1,030,000  Warrants to
purchase  1,030,000 shares of Common Stock were granted to certain  employees of
the Company.  Of such  warrants,  955,000  were granted at an exercise  price of
$1.59 per share and 75,000 were granted and an exercise price of $1.66 per share
(together,  the "1997 Employees  Warrants").  The 1997 Employees Warrants become
exercisable in increments of 25% each on their first,  second,  third and fourth
anniversaries, respectively, and shall expire in the year 2007. 100,000 Warrants
to purchase  100,000  shares of Common  Stock were  granted to  directors of the
Company at an exercise price of $1.59 per share (the "1997 Directors  Warrants")
on  February  12,  1997.  The 1997  Directors  Warrants  become  exercisable  in
increments of 25% each on the first,  second,  third and fourth anniversaries of
February 12, 1997 and shall  expire on February 12, 2003.  At December 31, 2000,
there were 496,500 1997 Employees  Warrants at $1.59, no 1997 Employees Warrants
at $1.66 and 30,000 1997 Directors Warrants at $1.59 outstanding.

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

Employment/Consulting Contracts/Directors' Compensation

Haim Aviv,  Ph.D.  In  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, 2001. 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


                                       26
<PAGE>

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 a salary,  subject to yearly  increases  and review.  Dr. Aviv's annual
gross  salary is  $248,000  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.

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  President  and  Chief  Operating   Officer  of  the  Company.   Dr.
Riesenfeld's annual gross salary is $194,250.

Robert W. Cook. In January 1998, the Company entered into a one-year  employment
agreement  with  Mr.  Cook,  which is  automatically  renewable  for  successive
one-year   terms  unless  either  party  gives  three  months  prior  notice  of
non-renewal.  Under the Agreement,  Mr. Cook devotes his full time to serving as
Vice President  Finance and Chief Financial  Officer of the Company.  Mr. Cook's
annual gross salary is $183,750.

Directors' Compensation. In 2000, Directors did not receive any compensation for
service on the Board or for attending Board meetings.

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 15, 2001, by (i)
each person who was known by the Company to own beneficially more than 5% of any
class of the Company's Common Stock, (ii) each of the Company's  Directors,  and
(iii) all current  Directors and  executive  officers of the Company as a group.
Except  as  otherwise  noted,  each  person  listed  below has sole  voting  and
dispositive power with respect to the shares listed next to such person's name.

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

Haim Aviv, Ph.D. (2)                       1,227,560                 2.2%
c/o Pharmos Ltd.
Kiryat Weitzman
Rehovot, Israel

David Schlachet (3)                           15,000                  *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel

Mony Ben Dor (3)                              10,000                  *
BioCom (Management) Limited
40 Einstein St., Ramat Aviv Tower
Tel-Aviv 69102, Israel

Georges Anthony Marcel M.D., Ph.D.(3)          9,375                  *
TMC Development
9, rue de Magdebourg
77116 Paris France



                                       27
<PAGE>




Elkan R. Gamzu, Ph.D. (3)                      7,500                  *
enERGetics
199 Wells Avenue, Suite 302
Newton, MA 02459

Samuel D. Waksal, Ph.D.                        2,000                  *
ImClone Systems Incorporated
180 Varick Street
New York, NY  10014

All Directors and                          1,523,628               2.8%
Executive Officers as a group
(8 persons)(4)
----------

* Indicates ownership of less than 1%.

(1)  Based  on  54,246,861  shares  of  Common  Stock  outstanding,   plus  each
     individual's  currently  exercisable  warrants or options.  Assumes that no
     other individual will exercise any warrants and/or options.

(2)  Includes 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  and  warrants  to
     purchase 515,628 shares of Common Stock.

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

(4)  Based on the number of shares of Common  Stock  outstanding,  plus  793,336
     currently  exercisable  warrants  and  options  held by the  Directors  and
     executive officers.

Item 13.  Certain Relationships and Related Transactions

In April 2000,  the Company  entered into  agreements  with each of Dr.  Stephen
Knight and Mr. Marvin Loeb,  former directors of the Company,  providing for the
immediate   vesting  of  their  outstanding   non-qualified   stock  options  in
consideration  for their agreement to consult on strategic and financial matters
with the Company on an unpaid basis  following  their  termination of service as
directors of the Company  through the periods ending December 31, 2000 and March
31, 2001, respectively.





                                       28
<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, 2000 and 1999

            Consolidated  Statements of Operations  for the years ended December
                31, 2000, 1999 and 1998

            Consolidated  Statements of Changes in Shareholders'  Equity for the
                years ended December 31, 2000, 1999 and 1998

            Consolidated  Statements of Cash Flows for the years ended  December
                31, 2000, 1999 and 1998

            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 note thereto.

        (3) EXHIBITS

Exhibits


3    Articles of Incorporation and By-Laws

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

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

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

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

3(e)      Amended and Restated  By-Laws  (Incorporated  by reference to Form S-3
          Registration  Statement of the Company  dated  September 28, 2000 (No.
          333-46818).

4         Instruments  defining  the  rights  of  security  holders,   including
          indentures



                                       29
<PAGE>


4(a)      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(b)      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(c)      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(d)      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(e)      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(f)      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).

4(g)      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(h)      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(i)      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(j)      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(k)      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]).

4(l)      Certificate  of  Designation,  Rights,  Preferences  and Privileges of
          Series A Preferred Stock of the Company  (Incorporated by reference to
          Form S-3  Registration  Statement  of the Company  dated  December 20,
          1996, as amended [No. 333-15165]).

4(m)      Form of Stock Purchase  Warrant dated as of September 30, 1996 between
          the Company and the Investors  (Incorporated  by reference to Form S-3
          Registration  Statement of the Company  dated  December  20, 1996,  as
          amended [No. 333-15165]).

4(n)      Form of Stock Purchase  Warrant dated as of September 30, 1996 between
          the Company and Alan M. Mark  (Incorporated  by  reference to Form S-3
          Registration  Statement of the Company  dated  December  20, 1996,  as
          amended [No. 333-15165]).


                                       30
<PAGE>

4(o)      Form of  Warrant  Agreement  dated as of March 15,  1996  between  the
          Company and Michael E. Lewis, Ph.D. (Incorporated by reference to Form
          S-3 Registration  Statement of the Company dated December 20, 1996, as
          amended [No. 333-15165]).

4(p)      Stock Purchase Agreement, dated December 12, 1996, between the Company
          and Bausch & Lomb Pharmaceuticals,  Inc. (Incorporated by reference to
          Annual Report on Form 10-K dated March 29, 1997).

4(q)      Certificate  of  Designation,  Rights  Preferences  and  Privileges of
          Series B Preferred Stock of the Company  (Incorporated by reference to
          Form S-3  Registration  of the  Company  dated  April  30,  1997  [No.
          333-26155]).

4(r)      Form of Stock Purchase  Warrant dated as of March 31, 1997 between the
          Company  and the  Investors  (Incorporated  by  reference  to Form S-3
          Registration  Statement  of the  Company  dated  April  30,  1997 [No.
          333-26155]).

4(s)      Certificate  of  Designation,  Rights  Preferences  and  Privileges of
          Series C Preferred Stock of the Company  (Incorporated by reference to
          the Company's Current Report on Form 8-K filed on February 4, 1998).

4(t)      Form of Stock  Purchase  Warrant  dated as of February 4, 1998 between
          the Company and the Investor and the Company and the  Placement  Agent
          (Incorporated by reference to the Company's Current Report on Form 8-K
          filed on February 4, 1998).

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

4(v)      Private Equity Line of Credit  Agreement dated as of December 10, 1998
          between the Company and the Investor (Incorporated by reference to the
          Company's Current Report 8-K filed on December 23, 1998).

4(w)      Amendment  Agreement dated as of December 18, 1998 between the Company
          and Dominion  Capital  Fund,  Ltd.  (Incorporated  by reference to the
          Company's Current Report 8-K filed on December 23, 1998).

4(x)      Purchase Agreement between the Company, Millennium Partners LP, Strong
          River  Investments  Inc. and St.  Albans  Partners  Ltd.,  dated as of
          September  1, 2000  (Incorporated  by  reference to Exhibit 4.1 to the
          Company's Current Report on Form 8-K filed on September 11, 2000).

4(y)      Form of 6% convertible  debenture due February 28, 2002  (Incorporated
          by reference to Exhibit 4.2 to the  Company's  Current  Report on Form
          8-K filed on September 11, 2000).

4(z)      Registration Rights Agreement between the Company, Millennium Partners
          LP, Strong River  Investments Inc. and St. Albans Partners Ltd., dated
          as of September 1, 2000  (Incorporated  by reference to Exhibit 4.3 to
          the Company's Current Report on Form 8-K filed on September 11, 2000).

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



                                       31
<PAGE>

4(a)(b)   Escrow Agreement between the company,  Millennium  Partners LP, Strong
          River  Investments Inc., St. Albans Partners Ltd. and Kleinberg Kaplan
          Wolff & Cohen  PC,  dated as of  September  1, 2000  (Incorporated  by
          reference to Exhibit 4.5 to the Company's  Current  Report on Form 8-K
          filed on September 11, 2000).

4(a)(c)   Common Stock  Investment  Agreement  between the  Company,  Millennium
          Partners  LP,  Strong  River  Investments  Inc. and Laterman & Co. LP,
          dated as of  September 1, 2000  (Incorporated  by reference to Exhibit
          4.6 to the Company's Current Report on Form 8-K filed on September 11,
          2000).

4(a)(d)   Registration Rights Agreement between the Company, Millennium Partners
          LP, Strong River  Investments  Inc. and Laterman & Co. LP, dated as of
          September  1, 2000  (Incorporated  by  reference to Exhibit 4.7 to the
          Company's Current Report on Form 8-K filed on September 11, 2000).

4(a)(e)   Form of Common Stock Adjustment Warrant  exercisable until November 1,
          2001  (Incorporated  by  reference  to  Exhibit  4.8 to the  Company's
          Current Report on Form 8-K filed on September 11, 2000).

4(a)(f)   Form of Call Warrant exercisable until September 1, 2001 (Incorporated
          by reference to Exhibit 4.9 to the  Company's  Current  Report on Form
          8-K filed on September 11, 2000).

4(a)(g)   Form of Optional  Adjustment  Warrant  exercisable  until February 28,
          2002  (Incorporated  by  reference  to Exhibit  4.10 to the  Company's
          Current Report on Form 8-K filed on September 11, 2000).

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

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

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

10        Material Contracts


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

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

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



                                       32
<PAGE>

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

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

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

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

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

10(d)     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(e)     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(f)     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(g)     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(h)     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)

10(i)     Marketing  Agreement,  dated as of  December  12,  1996,  between  the
          Company and Bausch & Lomb Pharmaceuticals, Inc. (1)

10(j)     Employment Agreement, dated December 15, 1997, between the Company and
          Robert W. Cook  (Incorporated  by  reference  to Exhibit  10(a)(a)  to
          Annual Report on Form 10-K for the year ended December 31, 1997).**

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

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

10(m)     2000  Incentive  and  Non-Qualified  Stock  Option  Plan  (Annexed  as
          Appendix A to the Proxy Statement on Form 14A filed June 19, 2000).**


                                       33
<PAGE>

10(n)     *** Agreement dated as of January 21, 2000 between the Company and Dr.
          Elkan R. Gamzu.**

10(o)     ***  Agreement  dated as of April 7, 2000  between the Company and Dr.
          Stephen C. Knight.**

10(p)     ***  Agreement  dated as of April 14, 2000 between the Company and Mr.
          Marvin P. Loeb.**


21        Subsidiaries of the Registrant

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

23(a)     *** Consent of PricewaterhouseCoopers, LLP

--------------------------

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

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

(***)  Filed herewith.

(b)    Reports on Form 8-K
       None.

(c)    Exhibits
       None.

(d)    Financial Statement Schedules

       See Item 14(a)(2) above




                                       34
<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, 2001

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

<TABLE>
<CAPTION>
Signature                                   Title                                      Date
--------                                    ----                                       ----
<S>                                         <C>                                     <C>
/s/ Robert W. Cook                          Chief Financial Officer (Principal      March 28, 2001
------------------------------------        Financial and Accounting Officer),
Robert W. Cook                              and Secretary

/s/ David Schlachet                         Director                                March 28, 2001
------------------------------------
David Schlachet

/s/ Mony Ben Dor                            Director                                March 28, 2001
------------------------------------
Mony Ben Dor

/s/ Georges Anthony Marcel                  Director                                March 28, 2001
------------------------------------
Georges Anthony Marcel, M.D.,Ph.D.

/s/ Elkan R. Gamzu            .             Director                                March 28, 2001
------------------------------------
Elkan R. Gamzu, Ph.D.

/s/ Samuel D. Waksal                        Director                                March 28, 2001
------------------------------------
Samuel D. Waksal, Ph.D.

</TABLE>
<PAGE>


                                       35


                               Pharmos Corporation
                   Index to Consolidated Financial Statements


Report of Independent Accountants                                       F-2

Consolidated balance sheets as of December 31, 2000 and 1999            F-3

Consolidated statement of operations for the years ended
      December 31, 2000, 1999 and 1998                                  F-4

Consolidated statement of changes in shareholders' equity
        for the years ended December 31, 2000, 1999 and 1998            F-5

Consolidated statement of cash flows for the years ended
        December 31, 2000, 1999 and 1998                                F-6

Notes to consolidated financial statements                              F-7


                                       F-1

<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 changes in shareholders' equity and of
cash flows present fairly, in all material  respects,  the financial position of
Pharmos  Corporation  and its  subsidiary at December 31, 2000 and 1999, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2000 in  conformity  with  accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United  States of America  which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management and evaluating the overall financial statement  presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.


/s/ PricewaterhouseCoopers  LLP
  New York, New York
  February 12, 2001



                                       F-2

<PAGE>
<TABLE>
<CAPTION>


Pharmos Corporation
Consolidated Balance Sheets
---------------------------------------------------------------------------------------------------

                                                                            December 31,
                                                                   --------------------------------
                                                                        2000               1999
                                                                  ---------------      ------------
<S>                                                                 <C>                <C>
Assets
     Current assets
            Cash and cash equivalents                               $  22,480,777      $  2,918,554
            Inventories                                                   796,550         1,837,751
            Receivables                                                 1,188,502           961,769
            Prepaid royalties                                               6,591           284,193
            Prepaid expenses and other current assets                     281,109           222,391
                                                                    -------------      ------------
              Total current assets                                     24,753,529         6,224,658
          Fixed assets, net                                             1,681,390         1,183,859
          Prepaid royalties, net of current portion                       143,000           166,477
          Intangible assets, net                                          151,690           198,214
          Restricted cash                                               4,035,414                --
          Other assets                                                     18,086            18,086
                                                                    -------------      ------------
                Total assets                                        $  30,783,109      $  7,791,294
                                                                    =============      ============

          Liabilities and Shareholders' Equity
          Current liabilities
            Note payable                                            $          --      $    338,128
            Accounts payable                                              458,504           680,054
            Accrued expenses                                            1,162,098           711,189
            Accrued wages and other compensation                          768,975           549,542
            Advances against future sales                                 619,702         2,010,000
                                                                    -------------      ------------
                Total current liabilities                               3,009,279         4,288,913

          Advances against future sales, net of current portion         1,000,000         1,177,565
          Convertible debentures, net                                   6,580,872                --
          Other liabilities                                               100,000           100,000
                                                                    -------------      ------------
              Total liabilities                                        10,690,151         5,566,478
                                                                    -------------      ------------

     Commitments and Contingencies (Note 14)

     Shareholders' equity
       Preferred stock, $.03 par value, 1,250,000
            shares authorized, none issued and outstanding
       Common stock, $.03 par value; 80,000,000 shares
           authorized, 54,063,897 and 45,424,401 shares
           issued and outstanding (excluding $551 in 2000
           and 1999, held in Treasury) in 2000 and 1999,
           respectively                                                 1,621,916         1,362,181
         Paid in capital                                              108,965,351        83,372,742
         Accumulated deficit                                          (90,494,309)      (82,510,107)
                                                                    -------------      ------------

           Total shareholders' equity                                  20,092,958         2,224,816
                                                                    -------------      ------------
           Total liabilities and shareholders' equity               $  30,783,109      $  7,791,294
                                                                    =============      ============
</TABLE>

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


                                       F-3
<PAGE>

<TABLE>
<CAPTION>

Pharmos Corporation
Consolidated Statement of Operations
------------------------------------------------------------------------------------------------------------
                                                                         Year Ended December 31,
                                                              ----------------------------------------------
                                                                    2000            1999            1998
                                                                    ----            ----            ----
<S>                                                            <C>             <C>             <C>
     Revenues
            Product sales                                      $  4,873,504    $  3,279,397    $  1,188,278
            License fee                                             225,000              --         351,663
                                                                ------------    ------------    ------------

     Total Revenues                                               5,098,504       3,279,397       1,539,941

     Cost of Goods Sold                                           1,875,955         994,617         437,713
                                                                ------------    ------------    ------------

     Gross Margin                                                 3,222,549       2,284,780       1,102,228
                                                                ------------    ------------    ------------

     Expenses
             Research and development, net                        5,283,397       3,827,001       3,491,383
             Selling, general and administrative                  4,044,867       2,612,170       2,136,640
             Patents                                                159,891         213,921         213,942
             Depreciation and amortization                          481,724         346,044         267,844
                                                                ------------    ------------    ------------

     Total operating expenses                                     9,969,879       6,999,136       6,109,809
                                                                ------------    ------------    ------------

     Loss from operations                                        (6,747,330)     (4,714,356)     (5,007,581)
                                                                ------------    ------------    ------------

     Other income (expense)
             Interest income                                      1,133,439         129,481         315,336
             Other income (expense), net                            (10,226)         (2,790)         38,844
             Interest expense                                    (2,360,085)        (30,525)         (9,946)
                                                                ------------    ------------    ------------

     Other income (expense), net                                 (1,236,872)         96,166         344,234
                                                                ------------    ------------    ------------

     Net loss                                                    (7,984,202)     (4,618,190)     (4,663,347)

     Less:  Dividend embedded in convertible preferred
              stock                                                      --              --        (642,648)
            Preferred stock dividends                                    --         (22,253)       (242,295)
                                                                ------------    ------------    ------------

     Net loss applicable to common shareholders                $ (7,984,202)   $ (4,640,443)   $ (5,548,290)
                                                                ============    ============    ============
     Net loss per share applicable to common
              shareholders - basic and diluted                 $       (.15)   $       (.11)   $       (.15)
                                                                ============    ============    ============
     Weighted average shares outstanding - basic and diluted     52,109,589      42,725,157      37,277,186
                                                                ============    ============    ============
</TABLE>

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


                                      F-4
<PAGE>
<TABLE>
<CAPTION>

Pharmos Corporation
Consolidated Statement of Changes in Shareholders' Equity (Note 9)
For the Years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------------------------------
                                                                                  Series A & B         Series C
                                                                                  Convertible        Convertible       Paid-in
                                                             Common Stock        Preferred Stock    Preferred Stock    Capital in
                                                         Shares        Amount    Shares    Amount   Shares    Amount   Excess of
                                                         ------        ------    ------    ------   ------    ------   ----------
<S>                                                  <C>            <C>           <C>       <C>     <C>       <C>      <C>
     December 31, 1997                               34,391,638     $1,031,748    2,755     $83                        $70,516,913


     Issuance of Series C preferred stock, net
       of offering costs of $411,135                                                                5,000     $ 150      4,588,715
     Warrant exercises                                  970,728         29,122                                           1,649,212
     Conversion of Series B preferred stock           1,704,978         51,150   (2,755)    (83)                           (51,067)
     Common Stock Dividend upon conversion
       of P/S, Series B                                  34,904          1,047                                              53,724
     Conversion of Series C preferred stock           2,230,010         66,900                     (3,500)     (105)       (66,795)
     Common Stock Dividend upon conversion
       of P/S, Series C                                  69,947          2,098                                             104,189
     Issuance of Common Stock - equity
       credit line, net of fees of $216,114             397,907         11,938                                             371,949
     Dividend embedded in convertible
       preferred stock                                                                                                     642,648
     Preferred Stock Dividends                                                                                             242,295
     Net loss
                                                     ----------     ----------  ------- ------- --------- --------- --------------
     December 31, 1998                               39,800,112      1,194,003        0       0     1,500        45     78,051,783

     Warrant and option exercises                       150,000          4,500                                             121,500
     Conversion of Series C preferred stock           1,270,058         38,102                     (1,500)      (45)       (38,057)
     Common Stock Dividend upon conversion
       of P/S, Series C                                  76,066          2,282                                              88,307
     Issuance of Common Stock - equity credit
       line, net of fees of $199,197                  4,128,165        123,845                                           5,126,956
     Preferred Stock Dividends                                                                                              22,253
     Net loss
                                                     ----------     ----------  ------- ------- --------- --------- --------------
     December 31, 1999                               45,424,401      1,362,732        0       0         0         0     83,372,742

     Warrant exercises                                2,615,003         78,450                                           4,754,443
     Warrant issuances - consultant compensation                                                                           243,449
     Issuance of Common Stock - equity credit
       line, net of $77,831                             518,424         15,552                                           2,130,352
     Issuance of Common Stock - private equity
       sales, net of fees of $382,000                 5,524,425        165,733                                          18,464,365
     Net loss
                                                     ----------     ----------  ------- ------- --------- --------- --------------
     December 31, 2000                               54,082,253     $1,622,467        0 $     0         0 $       0   $108,965,351
                                                     ==========     ==========  ======= ======= ========= =========   ============

<CAPTION>



                                                                                           Total
                                                     Accumulated   Treasury   Stock      Shareholders'
                                                      Deficit      Shares      Amount      Equity
                                                      -------      ------      ------      ------
<S>           <C> <C>                                <C>           <C>        <C>        <C>
     December 31, 1997                               ($72,069,727) 18,356     ($ 551)    ($521,534)


     Issuance of Series C preferred stock, net
       of offering costs of $411,135                                                     4,588,865
     Warrant exercises                                                                   1,678,334
     Conversion of Series B preferred stock                                                      0
     Common Stock Dividend upon conversion
       of P/S, Series B                                  (54,771)                                0
     Conversion of Series C preferred stock                                                      0
     Common Stock Dividend upon conversion
       of P/S, Series C                                 (106,287)                                0
     Issuance of Common Stock - equity
       credit line, net of fees of $216,114                                                383,887
     Dividend embedded in convertible
       preferred stock                                  (642,648)                                0
     Preferred Stock Dividends                          (242,295)                                0
     Net loss                                         (4,663,347)                       (4,663,347)
                                                     ----------- -------- ---------- -------------
     December 31, 1998                               (77,779,075)  18,356       (551)    1,466,205

     Warrant and option exercises                                                          126,000
     Conversion of Series C preferred stock                                                      0
     Common Stock Dividend upon conversion
       of P/S, Series C                                  (90,589)                                0
     Issuance of Common Stock - equity credit
       line, net of fees of $199,197                                                     5,250,801
     Preferred Stock Dividends                           (22,253)                                0
     Net loss                                         (4,618,190)                       (4,618,190)
                                                     ----------- -------- ---------- -------------
     December 31, 1999                               (82,510,107)  18,356       (551)    2,224,816

     Warrant exercises                                                                   4,832,893
     Warrant issuances - consultant compensation                                           243,449
     Issuance of Common Stock - equity credit
       line, net of $77,831                                                              2,145,904
     Issuance of Common Stock - private equity
       sales, net of fees of $382,000                                                   18,630,098
     Net loss                                         (7,984,202)                       (7,984,202)
                                                     ----------- -------- ---------- -------------
     December 31, 2000                               $90,494,309)  18,356     ($ 551)  $20,092,958
                                                     ============ =======   ========== ===========
</TABLE>





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





                                       F-5
<PAGE>
<TABLE>
<CAPTION>

Pharmos Corporation
Consolidated Statement of Cash Flows
-------------------------------------------------------------------------------------------------------------------------

                                                                            Year Ended December 31,
                                                                   2000            1999               1998
                                                                  -----            -----              -----

<S>                                                            <C>               <C>              <C>
Cash flows from operating activities
 Net loss                                                      $ (7,984,202)     $(4,618,190)     $(4,663,347)
 Adjustments to reconcile net loss to net
   cash flow used in operating activities
     Depreciation and amortization                                  481,724          346,044          267,844
     Amortization of Beneficial Conversion Feature                1,796,344               --               --
     Amortization of Debt Discount and Issuance costs               449,053               --               --
     Warrant issuances - consultant compensation                    243,449               --               --

 Changes in operating assets and liabilities
     Inventories                                                  1,041,201         (110,655)          77,531
    Receivables                                                    (226,733)        (411,712)        (312,402)
    Prepaid expenses and other current assets                       (58,718)         (15,598)         (35,494)
    Advanced royalties                                              301,079          174,970           91,027
    Other assets                                                         --           60,314           (4,887)
    Accounts payable                                               (221,550)        (256,846)      (1,640,069)
    Accrued expenses                                                450,909           31,452         (130,132)
    Accrued wages                                                   219,433           92,967           55,290
                                                               ------------      -----------      -----------

    Net cash used in operating activities                        (3,508,011)      (4,707,254)      (6,294,639)
                                                               ------------      -----------      -----------

Cash flows from investing activities:
    Purchases of fixed assets                                      (932,731)        (302,350)        (698,921)
                                                               ------------      -----------      -----------

    Net cash used in investing activities                          (932,731)        (302,350)        (698,921)
                                                               ------------      -----------      -----------

 Cash flows from financing activities:
    Advances against future sales, net                           (1,567,863)      (1,239,689)        (572,746)
    Proceeds from issuance of common stock
         and exercise of warrants, net                           23,462,991          126,000        1,678,334
    Proceeds from issuance of convertible debentures, net         4,335,475               --               --
    Proceeds from issuance of preferred stock, net                       --               --        4,588,865
    Proceeds from exercise of equity credit line                  2,145,904        5,250,803          383,887
    (Increase) in restricted cash                                (4,035,414)              --               --
    (Decrease) increase in notes payable, net                      (338,128)         338,128          (55,253)
                                                               ------------      -----------      -----------
     Net cash provided by financing activities                   24,002,965        4,475,242        6,023,087
                                                               ------------      -----------      -----------
     Net  increase (decrease) in cash and cash equivalents       19,562,223         (534,362)        (970,473)
     Cash and cash equivalents at beginning of year               2,918,554        3,452,916        4,423,389
                                                               ------------      -----------      -----------
     Cash and cash equivalents at end of year                  $ 22,480,777      $ 2,918,554      $ 3,452,916
                                                               ============      ===========      ===========
</TABLE>


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


                                      F-6
<PAGE>


Pharmos Corporation
Notes to Consolidated Financial Statements

1.   The Company

     Pharmos  Corporation (the "Company") is a  bio-pharmaceutical  company that
     discovers and develops novel  therapeutics to treat a range of inflammatory
     and neurological  disorders such as traumatic brain injury and stroke.  The
     Company has an expansive portfolio of drug candidates under development, as
     well as discovery,  preclinical and clinical capabilities.  The Company has
     executive offices in Iselin, New Jersey and conducts operations through its
     wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.

     In March 1998,  the Company  received  approval for three separate New Drug
     Applications  ("NDA") from the U.S. Food and Drug  Administration  ("FDA").
     These approvals were for Lotemax(R) and Alrex(R). Lotemax has been approved
     for the treatment of several  ocular  inflammatory  indications,  including
     uveitis, and for post-operative  inflammation.  Alrex has been approved for
     the treatment of seasonal allergic conjunctivitis.

2.   Liquidity and Business Risks

     While the Company has  generated  revenue  through the sale of its approved
     products  in the  market,  it  has  incurred  operating  losses  since  its
     inception.  At December 31, 2000, the Company has an accumulated deficit of
     $90,494,309.  Such losses have resulted  principally from costs incurred in
     research and development and from general and administrative  expenses. The
     Company  has  funded  its  operations  through  the  use of  cash  obtained
     principally from third party financing.  Management  believes that cash and
     cash  equivalents  of $22.5 million as of December 31, 2000,  combined with
     the  anticipated  cash inflows from revenues  derived from sales of Lotemax
     and  Alrex,  will  be  sufficient  to  support  the  Company's   continuing
     operations.

     In order to finance the  development of its drug  pipeline,  the Company is
     continuing to actively pursue various  funding  options,  including  equity
     offerings,  strategic corporate alliances,  business combinations,  and the
     establishment  of research and  development  partnerships.  There can be no
     assurance  that the Company will be successful in  commercializing  its new
     product candidates.

3.   Significant Accounting Policies

     Basis of consolidation

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

     Use of estimates

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

     Net loss per common share

     Basic net loss per common  share is computed  by dividing  net loss for the
     period, reduced by any preferred stock dividends (embedded,  declared or in
     arrears),  by the sum of the  weighted  average  number of shares of common
     stock  issued and  outstanding.  Diluted  earnings per share is computed by
     dividing net loss for the period by the sum of the weighted  average number
     of shares of common stock issued and outstanding,  increased to include the
     number of common  shares  that  would have been  issued if all  outstanding
     preferred  stock,  stock options,  and stock warrants that are dilutive are
     converted.  Diluted  common  shares  are  based  on the  most  advantageous
     convertible  rate or  exercise  price  available  to the  security  holder.


                                      F-7
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     December  31,  2000,1999  and 1998  outstanding  options  and  warrants  to
     purchase  5,005,240,  5,890,273  and  5,634,842  shares  of  common  stock,
     respectively,  with exercise  prices ranging from $ .75 to $ 6.08 per share
     could  potentially  dilute basic  earnings per share in the future but have
     not been included in the  computation of diluted net loss per share because
     to do so would be antidilutive for the periods presented.

     Cash and cash equivalents

     The Company considers all highly liquid debt instruments  purchased with an
     original  maturity  of three  months or less to be cash  equivalents.  Cash
     equivalents primarily consist of commercial paper and money market accounts
     in 2000, 1999 and 1998.

     Revenue recognition

     Sales  revenue is  recognized  upon the transfer of the title and rights of
     products to customers, less allowances for estimated returns and discounts.
     License fees and royalties are  recognized  when earned in accordance  with
     the underlying agreements.  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.

     In December 1999,the staff of the Securities and Exchange Commission of the
     United States issued Staff  Accounting  Bulletin ("SAB") No. 101, " Revenue
     Recognition in Financial  Statements".  SAB 101 summarizes certain views of
     the staff in applying generally accepted  accounting  principles to revenue
     recognition  in  financial  statements.   The  Company  has  finalized  its
     assessment  as to the impact of SAB 101,  and  determined  that there is no
     material effect on its current revenue recognition policies.

     Inventories

     Inventories  consist of  loteprednol  etabonate,  the compound  used in the
     Company's  products,  Lotemax and Alrex, and is stated at the lower of cost
     or market with cost determined on a weighted average basis.

     Fixed assets

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

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

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

     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 their estimated  useful life of fifteen
     years.  As of December  31,  2000 and 1999,  accumulated  amortization  was
     $888,090  and  $841,566,  respectively.  Amortization  expense  amounted to
     $46,524 in each of the years ended December 31, 2000, 1999 and 1998.


                                      F-8
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     As a result of the current period operating loss combined with a history of
     operating  losses,   management  assessed  whether  or  not  the  Company's
     intangible  assets were  recoverable.  As of December 31, 2000,  management
     estimates  that the net future  cash  inflows  expected  to result from the
     commercial marketing of the licensed  technologies will exceed the carrying
     amount of the Company's  intangible  assets 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 quantify the amount of such  impairment and the loss to
     be recorded.

     Research and development costs

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

     Income taxes

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

     Foreign exchange

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

     Concentration of credit risk

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

     Equity based compensation

     The Company accounts for its employee stock option plans in accordance with
     the provisions of Accounting  Principles Board Opinion No. 25,  "Accounting
     for Stock  Issued to  Employees",  and  related  interpretations.  As such,
     compensation expense related to employee stock options is recorded only if,
     on the date of grant,  the fair value of the  underlying  stock exceeds the
     exercise  price.  The Company adopted the  disclosure-only  requirements of
     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation",  which  allows
     entities  to  continue  to apply the  provisions  of APB Opinion No. 25 for
     transactions with employees and provide pro forma operating results and pro
     forma per share  disclosures  for  employee  stock  grants made in 1996 and
     future years as if the  fair-value-based  method of  accounting in SFAS No.
     123  had  been   applied  to  these   transactions.   Warrants   issued  to
     non-employees  are valued using the fair value  methodology  under SFAS No.
     123.


                                      F-9
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements

     In  March  2000,  the  Financial  Accounting  Standard  Board  issued  FASB
     Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
     Based  Compensation"  ("FIN 44") which  provides  guidance for applying APB
     Opinion No.25.  FIN 44 applies  prospectively  to new awards,  exchanges of
     awards in a business  combination,  modifications to outstanding awards and
     changes  in  grantee  status  on or after  July  1,2000.  However,  certain
     conclusions  in FIN 44  cover  specific  events  that  occur  after  either
     December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have
     a material effect on the Company.

     Reclassifications

     Certain amounts for 1999 and 1998 have been  reclassified to conform to the
     fiscal 2000 presentation.  Such reclassifications did not have an impact on
     the Company's financial position or results of operations.

     Comprehensive income

     Effective  January 1, 1998, the Company adopted the provisions of Statement
     of Financial Accounting Standards No. 130, "Reporting  Compehensive Income"
     ("SFAS 130").  SFAS 130 establishes  standards for reporting  comprehensive
     income,  defined as all changes in equity from non-owner sources.  Adoption
     of SFAS 130 did not  have a  material  effect  on the  Company's  financial
     position or results of operations.

     Segment and geographic information

     Effective  January 1, 1998, the Company adopted the provisions of Statement
     of Financial Accounting  Standards No. 131,  "Disclosures about Segments of
     an Enterprise and Related  Information"  (SFAS 131").  SFAS 131 establishes
     standards for the way public enterprises report information about operating
     segments in annual financial  statements and requires those  enterprises to
     report selected  information about operating  segments in interim financial
     reports  issued to  stockholders.  See Note 16 for  additional  disclosures
     related to segment and geographic information.

4.   Collaborative Agreements

     In  June  1995,  the  Company  entered  into  a  marketing  agreement  (the
     "Marketing Agreement") with Bausch & Lomb Pharmaceuticals,  Inc. ("Bausch &
     Lomb"),  a shareholder of the Company,  to market Lotemax and Alrex,  on an
     exclusive basis in the United States following receipt of FDA approval. The
     Marketing  Agreement also covers the Company's other loteprednol  etabonate
     based  product,  LE-T.  Under the Marketing  Agreement,  Bausch & Lomb will
     purchase  the  active  drug  substance  (loteprednol  etabonate)  from  the
     Company.  A second  agreement,  covering Europe,  Canada and other selected
     countries, was signed in December 1996 ("the New Territories Agreement").

     Through December 31, 2000, Bausch and Lomb has provided the Company with $5
     million in cash advances against future sales, of which  approximately $1.6
     million is  outstanding  at December 31, 2000.  An additional $1 million is
     due from Bausch and Lomb upon the receipt of  regulatory  approval for LE-T
     in the United  States.  Bausch & Lomb is entitled to recoup the advances by
     withholding  certain amounts against  payments for future  purchases of the
     active drug substance,  based on the advances made,  until all the advances
     have been repaid. 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.  The portion of advances  expected to be recouped by
     Bausch and Lomb in 2001, based on management's estimate of product sales to
     Bausch & Lomb in 2001,  has been  presented  as a current  liability in the
     accompanying balance sheet at December 31, 2000.



                                      F-10
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements


     Bausch & Lomb also  collaborates  in the  development of 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  and  the  New  Territories
     Agreement.

     Total  receivables  from Bausch & Lomb as of December 31, 2000 and December
     31, 1999 were $870,043 and $621,935, respectively.

5.   Fixed Assets

     Fixed assets consist of the following:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                                      ------------
                                                                 2000               1999
                                                                 ----               ----

<S>                                                           <C>                <C>
     Laboratory, pilot plant and other equipment              $2,400,221         $ 2,087,289
     Leasehold improvements                                      467,444             272,196
     Office furniture and fixtures                               249,480             165,655
     Computer equipment                                          582,396             242,093
     Vehicles                                                     38,742              38,742
                                                             -----------         -----------
                                                               3,738,283           2,805,975
     Less - Accumulated depreciation and amortization         (2,056,893)         (1,622,116)
                                                             -----------         -----------
                                                             $ 1,681,390         $ 1,183,859
                                                             ===========         ===========
</TABLE>

     Depreciation  and  amortization of fixed assets was $435,200,  $299,520 and
     $221,320 in 2000, 1999 and 1998, respectively.

6.   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 received pursuant to these agreements
     have been  reflected as a reduction of research  and  development  expense.
     Such  reductions  amounted to $326,438,  $138,102 and $376,007 during 2000,
     1999 and 1998,  respectively.  The agreements with agencies of the State of
     Israel place certain legal  restrictions  on the transfer of technology and
     manufacture  of  resulting  products  outside  Israel.  The Company will be
     required to pay royalties, at rates ranging from 3% to 5%, to such agencies
     from the sale of  products,  if any,  developed as a result of the research
     activities carried out with the grant funds.

     As of December  31,  2000,  the total  amounts  received  under such grants
     amounted to $3,957,527,  of which $3,377,839 relates to grants that contain
     royalty  provisions.  Aggregate future royalty payments related to sales of
     products  developed,  if any,  as a result of these  grants are  limited to
     $2,246,421 based on grants received through December 31, 2000.

     In April 1997, the Company also signed an agreement with Consortium  Magnet
     for developing generic technologies for design and development of drugs and
     diagnostic kits, operated by the Office of the Chief Scientist.  Under such
     agreements the Company is entitled to a  non-refundable  grant amounting to
     approximately   60%  of  actual  research  and  development  and  equipment
     expenditures  on approved  projects.  No royalty  obligations  are required
     within the  framework.  The  Company  received  grants  totaling  $543,807,
     $418,074  and $0 in 2000,  1999 and 1998,  respectively,  pursuant  to this
     agreement.


                                      F-11
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements


7.   Licensing Arrangements

     The Company is a licensee of certain research  technologies and has various
     license   agreements   wherein  the  Company  has  acquired   exclusive  or
     co-exclusive   rights  to  develop  and   commercialize   certain  research
     technologies. These agreements, which include agreements related to Lotemax
     and Alrex,  generally  require the Company to pay  royalties on the sale of
     products developed and contingent  royalties based upon milestones from the
     licensed  technologies  and  fees  on  revenues  from  sublicenses,   where
     applicable.  The  royalty  rates,  as  defined  in the  respective  license
     agreements,  are customary and usual in the  pharmaceutical  industry.  The
     royalties  will be payable for periods up to fifteen years from the date of
     specified events, including the date of the first sale of such products, or
     the date  from  which  the  first  registered  patent  from  the  developed
     technologies  is in force, or the year following the date on which approval
     from the FDA  received  for a  developed  product.  No  amounts  have  been
     recorded as a liability  with  respect to any  contingent  royalties  as of
     December 31, 2000.

     Certain of the  license  agreements  require  annual  payments  for periods
     extending through 2012. Minimum annual payments under licensing  agreements
     are $103,500. License fee expense amounted to approximately $103,500 during
     2000, 1999, and 1998.

     The  Company  has  paid a  licensor,  who  is a  former  director,  prepaid
     royalties   against  future  royalties  on  sales  of  Lotemax  and  Alrex.
     Outstanding  prepaid  royalties  totaled  $149,591  and $  450,670  and are
     reflected as an asset on the balance  sheets at December 31, 2000 and 1999,
     respectively.  The Company has agreed to prepay additional  royalties based
     on future  advances and other  non-royalty  payments  from Bausch & Lomb or
     other  parties  with whom the  Company  enters  into  marketing  or similar
     arrangements.

8.   Private Placement

     In September 2000, the Company completed a private placement of convertible
     debentures,  common stock and  warrants to purchase  shares of common stock
     with institutional investors, generating gross proceeds of $11 million.

     The Convertible  Debentures,  which generated gross proceeds of $8 million,
     are due in February 2002 and carry a 6% interest  payable  semiannually  in
     cash or common stock.  The  Convertible  Debentures  are  convertible  into
     common shares of the Company at the conversion price of $3.83 per share (or
     2,088,775  common shares) and are convertible  beginning  October 31, 2000.
     Under certain  anti-dilutive  conditions,  the conversion price may change.
     Until converted into common stock, the terms of the Convertible  Debentures
     require  the  Company  to deposit  $4  million  in an escrow  account.  The
     escrowed capital is shown as Restricted Cash on the Company's balance sheet
     and  will be  released  to the  Company  in  proportion  to the  amount  of
     Convertible  Debentures  converted into common shares or upon the repayment
     of the debt.

     Emerging  Issues  Task Force Issue No.  98-5,  Accounting  for  Convertible
     Securities with Beneficial  Conversion Features or Contingently  Adjustable
     Conversion Ratios, require the Company to compute the Beneficial Conversion
     Feature  ("BCF") of the  convertible  debt. The BCF must be capitalized and
     amortized  from the closing date until the earliest date that the investors
     have the right to convert the debt into common shares. The BCF was computed
     at approximately $1.8 million, all of which has been amortized and included
     as interest expense in the year ending December 31, 2000. Additionally, the
     discount on the  Convertible  Debenture of  approximately $ 800,000 will be
     amortized  to  interest  expense  over the life of the  debt.  For the year
     ending December 31, 2000, $177,976 has been amortized.

     The Company issued  1,024,425  common shares in the private  placement that
     generated gross proceeds of $3 million. Under the terms of the transaction,
     821,515 shares were issued at closing and 202,910 shares were issued in the
     fourth  quarter  of 2000 as a one-time  adjustment  that did not change the
     proceeds  to the


                                      F-12
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     Company.  One investor has an option, in the form of a warrant, to purchase
     an additional $2 million of common shares for a period of one year provided
     that the future purchase price is greater than the initial closing price of
     $3.65 per share.  The maximum number of shares that can be issued from this
     warrant is 547,945 and is part of the maximum number of warrants issued for
     the  total  private  placement  of  1,115,730,  including  placement  agent
     warrants at prices ranging from $3.65 to $6.08 per share.

     The issuance costs related to the Private  Placement of approximately  $1.4
     million,  including the value of 187,929 warrants to purchase common shares
     at prices ranging from $4.34 to $4.56, have been capitalized.  The issuance
     costs related to the Convertible  Debenture will be amortized over the life
     of the debt.  For the year ending  December  31,  2000,  $224,691  has been
     amortized and included as interest  expense.  The issuance costs related to
     the common stock were netted against the proceeds.

9.   Common and Preferred Stock Transactions

     2000 Transactions

     During  2000,  the Company  issued  1,024,425  shares of common  stock in a
     private placement  transaction that generated gross proceeds of $3 million.
     Additionally,  the Company  issued  warrants  to  purchase up to  1,115,730
     shares of common stock at prices  ranging from $3.65 to $6.08 per share and
     expiring  in 2001  and  2005  in  connection  with  the  private  placement
     described in Note 8.

     The Company issued  2,615,003  shares of its common stock upon the exercise
     of stock options and warrants, and received consideration of $4,832,893.

     During the first quarter of 2000, the Company issued  4,500,000  registered
     shares  of its  common  stock  under  a  "shelf"  registration  to  several
     investors, and received consideration,  net of offering costs and expenses,
     of $12,648,383.

     The Company  entered into a Private  Equity Line of Credit  Agreement  (the
     "Credit Agreement") as of December 10, 1998, and as amended on December 18,
     1998, with Dominion  Capital Fund, Ltd.,  which  subsequently  assigned its
     rights to Centennial Parkway LLC (the "Investor"). Pursuant to the terms of
     the Credit Agreement, the Company may, from time to time during a specified
     term,  cause the Investor to purchase up to an aggregate of  $10,000,000 of
     the Company's  common stock, par value $.03 per share (the "Common Stock").
     The price per share of  Common  Stock to be paid by the  Investor  is to be
     determined  at the time of each purchase  according to a specified  formula
     which is based upon the average  closing  bid price of the Common  Stock on
     the  principal  trading  exchange  or  market  for the  Common  Stock  (the
     "Principal Market") over a prescribed,  five-day period. With each purchase
     of Common Stock, the Investor is also to receive warrants exercisable for a
     number of shares of Common  Stock  equal to ten  percent  of the  number of
     shares of Common Stock  purchased  at an exercise  price per share equal to
     125% of the closing bid price of the Common Stock on the  Principal  Market
     on a specified  date.  As of  December  31,  2000,  $1.7  million  remained
     available under the equity line of credit.

     The Company  issued  options for the  purchase of 523,000  shares of common
     stock to employees,  directors and other key personnel, under provisions of
     the 1997 Incentive and Non-Qualified  Stock Option Plan and options for the
     purchase of 12,000 shares of common stock to employees under  provisions of
     the 2000  Incentive and  Non-Qualified  Stock Option Plan.  The options are
     exercisable  over a ten-year  period and will  expire on June 6, 2010.  The
     options will vest in four annual  installments of 25% each on June 6, 2001,
     2002, 2003 and 2004, respectively.  The options are exercisable at a strike
     price of $4.03 per share,  which represents the closing market value of the
     common  stock  on the date the  options  were  awarded.  In  addition,  the
     Company,  under  provisions of the 1997 Incentive and  Non-Qualified  Stock
     Option Plan,  issued  options for the  purchase of 15,000  shares of common
     stock which are exercisable  over a ten-year period and vest in four



                                      F-13
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     annual  installments of 25% each, at an exercise price of $ 2.41 and issued
     options  for the  purchase  of  10,000  shares of  common  stock  which are
     exercisable over a ten-year period,  vested on the date of the grant, at an
     exercise price of $ 2.41.  Further,  the Company,  under  provisions of the
     2000 Incentive and Non-Qualified  Stock Option Plan, issued options for the
     purchase  of 75,000  shares of common  stock which are  exercisable  over a
     ten-year  period and vest in four annual  installments  of 25% each,  at an
     exercise price of $ 4.00.

     During  2000,  under  terms of the Credit  Agreement,  the  Company  issued
     518,424  shares of its Common Stock and warrants to purchase  51,162 shares
     of its Common Stock to the Investor for consideration of $2,145,904, net of
     fees.  The warrants have exercise  prices  ranging from $2.19 to $16.80 per
     share and expire in 2003.

     During 2000, the Company issued  warrants to purchase  32,000 shares of its
     common stock (4000 warrants each month through August 2000) as compensation
     to a  consultant.  The  warrants  were  immediately  exercisable,  have  an
     exercise price of $1.19 per share and expire by 2005.

     1999 Transactions

     In October 1999, the  shareholders of the Company  approved the increase in
     the  number of  authorized  shares  of  common  stock  from  60,000,000  to
     80,000,000 and approved an increase in the number of shares of common stock
     reserved for issuance  under the 1997  Incentive  and  Non-Qualified  Stock
     Option Plan from 1,000,000 to 1,500,000.

     In April 1999,  the Company,  under  provisions  of the 1997  Incentive and
     Non-Qualified Stock Option Plan, issued options to employees, directors and
     other key personnel for the purchase of 292,000 shares of common stock. The
     options are exercisable over a ten-year period and will expire on April 16,
     2009.  The  options  will vest in four annual  installments  of 25% each on
     April  16,  2000,  2001,  2002 and  2003,  respectively.  The  options  are
     exercisable  at a strike  price of $1.25 per share,  which  represents  the
     closing  market  value of the  common  stock on the date the  options  were
     awarded. In addition,  the Company,  under provisions of the 1997 Incentive
     and  Non-Qualified  Stock Option Plan,  issued  options for the purchase of
     20,000 shares of common stock which are exercisable  over a ten-year period
     and vest in four  annual  installments  of 25%  each,  at  exercise  prices
     ranging from $ 1.25 to $ 2.09.

     During  1999,  the Company  issued  1,346,124  shares of common  stock upon
     conversion of its Series C convertible  preferred stock. These transactions
     completed  the  conversion  of the Series C  convertible  preferred  stock,
     leaving no preferred stock outstanding at December 31, 1999.

     In  connection  with the  issuances  of the  Series A, B and C  convertible
     preferred stock, the Company was required to recognize, in its earnings per
     share  ("EPS")  calculation,  the  value of the  conversion  discount  as a
     dividend to the preferred stockholders. The dividend has been recognized in
     the EPS  calculation  on a pro rata basis over the  period  beginning  with
     issuance  to the  earliest  date that  conversion  can occur.  The  Company
     recorded a preferred stock dividend of $ 0 and $642,648 for the years ended
     December  31,1999  and 1998,  respectively,  on the  outstanding  shares of
     convertible preferred stock in connection with the conversion discount.

     During  1999,  under  terms of the Credit  Agreement,  the  Company  issued
     4,128,165  shares of its Common  Stock and  warrants  to  purchase  348,495
     shares of its Common Stock to the Investor for consideration of $5,250,803,
     net of fees.  The warrants  have exercise  prices  ranging from $ 1.41 to $
     2.38 per share and expire by December 2002.

     1998 Transactions

     In May 1998,  the  Company,  under  provisions  of the 1997  Incentive  and
     Non-Qualified  Stock Option Plan,



                                      F-14
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements

     issued options to employees, directors, consultants and other key personnel
     for the  purchase  of  500,000  shares of common  stock.  The  options  are
     exercisable  over a ten-year  period and will expire on May 18,  2008.  The
     options will vest in four annual  installments of 25% each on May 18, 1999,
     2000, 2001 and 2002, respectively.  The options are exercisable at a strike
     price of $2.781 per share, which represents the closing market value of the
     common stock on the date the options were awarded.

     During the first quarter of 1998,  the Company issued  1,704,978  shares of
     its common stock upon conversion of 2,755 shares of the Company's  Series B
     convertible  preferred stock. The shares were issued with conversion prices
     ranging  from $1.41 per share to $1.78 per share.  The Company  also issued
     34,904  shares of common  stock in  payment  of  dividends  of the Series B
     convertible  preferred  stock.  As of the  date  of such  issuances,  these
     dividends were valued at $54,771.

     On  February  4, 1998,  the  Company  completed  a private  placement  with
     institutional  investors of Series C Redeemable Convertible Preferred Stock
     ("Series C convertible  preferred  stock") and warrants to purchase 650,000
     shares of common stock, generating gross proceeds of $5 million. The Series
     C convertible preferred stock carries a 5% premium payable in common stock,
     and is convertible  into common shares of the Company 60 days subsequent to
     the date of  issuance.  For the  period  ending  180 days after the date of
     issuance,  the  conversion  price is the lower of 90% of the average of the
     low trade prices of the Common Stock for the five consecutive  trading days
     ending on the day  immediately  prior to the conversion date (the "Variable
     Conversion  Price") or $2.89 per share.  Until converted into common stock,
     the Series C convertible preferred stock has no voting rights. The warrants
     issued to the investor and the finders are  exercisable  at prices  ranging
     from $2.28 to $2.67 per share,  commencing  one year after the  closing for
     four and five year periods. Under certain circumstances, the holders of the
     Series C convertible  preferred  stock were  initially  able to require the
     Company  to  redeem  the  outstanding  shares of the  Series C  convertible
     preferred  stock.  In December 1998,  the Company  received a waiver of the
     redemption  features from the holder of the Series C convertible  preferred
     stock.

     During  1998,  the Company  issued  2,230,010  shares of common  stock upon
     conversion of 3,500 shares of its Series C convertible  preferred stock and
     69,947  shares of common  stock in  payment  of  dividends  on the Series C
     convertible preferred stock.

     As of December  31, 1998 and 1997,  cumulative  dividends in arrears on the
     Company's  outstanding  Series B and C  convertible  preferred  stock  were
     $173,671 and $42,666,  respectively.  The  dividends  are payable in common
     stock of the Company.

     During 1998, the Company issued 970,728 shares of its common stock upon the
     exercise of warrants, and received consideration of $1,678,334.

     In  connection  with the  issuances  of the  Series A, B and C  convertible
     preferred stock,  the Company was required to recognize,  in it's per share
     amounts  ("EPS")  calculation,  the value of the  conversion  discount as a
     dividend to the preferred stockholders. The dividend has been recognized in
     the EPS  calculation  on a pro rata basis over the  period  beginning  with
     issuance  to the  earliest  date that  conversion  can occur.  The  Company
     recorded a preferred  stock  dividend of $642,648  and  $1,952,767  for the
     years ended December  31,1998 and 1997,  respectively,  on the  outstanding
     shares of  convertible  preferred  stock in connection  with the conversion
     discount.

     The Company has entered into a Private Equity Line of Credit Agreement (the
     "Credit Agreement") as of December 10, 1998, and as amended on December 18,
     1998, with Dominion  Capital Fund, Ltd. (the  "Investor").  Pursuant to the
     terms of the Credit Agreement,  the Company may, from time to time during a
     specified  term,  cause the  Investor  to purchase  up to an  aggregate  of
     $10,000,000  of the Company's  common stock,  par value $.03 per share (the
     "Common  Stock").  The price  per  share of Common  Stock to be paid by



                                      F-15
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     the Investor is to be determined at the time of each purchase  according to
     a specified  formula  which is based upon the average  closing bid price of
     the Common Stock on the principal trading exchange or market for the Common
     Stock (the "Principal  Market") over a prescribed,  five-day  period.  With
     each  purchase of Common  Stock,  the Investor is also to receive  warrants
     exercisable  for a number of shares of Common Stock equal to ten percent of
     the number of shares of Common  Stock  purchased  at an exercise  price per
     share  equal to 125% of the  closing  bid price of the Common  Stock on the
     Principal Market on a specified date.

     During  1998,  under  terms of the Credit  Agreement,  the  Company  issued
     397,907  shares of its Common Stock and warrants to purchase  39,937 shares
     of its Common Stock to the Investor for  consideration of $383,887,  net of
     fees.  The warrants have exercise  prices ranging from $ 1.95 to $ 2.11 per
     share and expire in December 2001.

10.  Warrants

     Some of the warrants issued in connection with various equity financing and
     related  transactions  during  1991  through  2000  contain   anti-dilution
     provisions requiring  adjustment,  if at a later 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,  2000 as  adjusted  for the events  which have  triggered
     anti-dilution provisions contained in the respective warrant agreements:
<TABLE>
<CAPTION>

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

<S>                                                         <C>             <C>
      April 1995                 April 2005                   341,600       $ 2.75
                                 April 2005                    10,000       $  .78
      February 1997              February 2007                 45,000       $ 1.59
                                 February 2007                434,000       $ 1.59
      March 1997                 March 2001                   106,000       $ 1.75
                                 March 2008                   171,052       $ 1.38
      March 1997                 March 2007                    10,000       $ 1.66
      January 1998               October 2005                   7,000       $ 2.22
      February 1998              January 2003                 531,081       $ 2.51
                                 January 2003                 157,185       $ 2.18
      November 1999              November 2004                  4,000       $ 1.19
      December 1999              December 2004                  4,000       $ 1.19
      January 2000               January 2005                   4,000       $ 1.19
      February 2000              February 2005                  4,000       $ 1.19
      March 2000                 March 2005                     4,000       $ 1.19
      April 2000                 April 2005                     4,000       $ 1.19
      May 2000                   May 2005                       4,000       $ 1.19
      June 2000                  June 2005                      4,000       $ 1.19
                                 June 2003                     12,574       $ 5.00
      July 2000                  July 2005                      4,000       $ 1.19
      August 2000                August 2005                    4,000       $ 1.19
      September 2000             September 2001               547,945       $ 3.65
                                 September 2005                95,843       $ 4.56
                                 September 2005                92,086       $ 4.34
                                 September 2005               379,856       $ 6.08
                                                            ---------       ------
      Total shares and average
           exercise price                                   2,981,222       $ 3.05
                                                            =========       ======
</TABLE>


                                      F-16
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


11.  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  approved by the
     Company's Board of Directors:

<TABLE>
<CAPTION>

                                                    Under       Weighted Average
                                                   Option         Exercise Price
                                                   ------         --------------

<S>                                              <C>                     <C>
     Options outstanding at 12/31/97              426,419                $ 2.21

     Granted                                      627,917                $ 2.63
     Exercised                                     (6,000)               $ 1.94
     Cancelled                                    (34,000)               $ 2.27
                                                ----------               ------
     Options Outstanding at 12/31/98            1,014,336                $ 2.47

     Granted                                      312,000                $ 1.25
     Cancelled                                    (14,000)               $ 2.05
                                                  --------               ------
     Options Outstanding at 12/31/99            1,312,336                $ 2.19
                                                 ---------               ------
     Granted                                      449,252                $ 4.03
     Exercised                                   (214,167)               $ 2.31
     Cancelled                                    (27,583)               $ 2.65
                                                ----------               ------
     Options Outstanding at 12/31/00            1,519,838                $ 2.71
                                                ==========               ======
     Options exercisable at 12/31/00              602,836                $ 2.29
                                                ==========               ======
     Options exercisable at 12/31/99              581,836                $ 2.32
                                                ==========               ======
     Options exercisable at 12/31/98              382,086                $ 2.24
                                                ==========               ======
</TABLE>

Additional  information with respect to the outstanding  incentive stock options
as of December 31, 2000 is as follows:

<TABLE>
<CAPTION>

                              Options Outstanding                              Options Exercisable
                   ----------------------------------------------    -------------------------------------
                                     Weighted
                                      Average        Weighted
Range of Exercise    Options         Remaining        Average                             Weighted Average
     Prices        Outstanding   Contractual Life  Exercise Price     Options Exercisable  Exercise Price
-----------------------------------------------------------------    -------------------------------------
<S>                  <C>             <C>            <C>                    <C>               <C>
 $ 1.25 - $ 2.78     1,070,586       6.8 years      $   2.29               602,836           $   2.29
      $4.03            449,252       9.4 years      $   4.03                 --                   --
                   -------------------------------------------       -------------------------------------
                     1,519,838       7.9 years      $   2.71               602,836           $   2.29
</TABLE>

     All  incentive  stock option  grants during 2000 were made from the Pharmos
     Corporation  1997  Incentive  and  Non-Qualified  Stock Option Plan.  As of
     December 31, 2000, no shares  remained  available  for issuance  under this
     plan.



                                      F-17
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


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

<TABLE>
<CAPTION>
<S>                                                     <C>                   <C>
     Options outstanding at 12/31/97                    407,182               $ 2.67

     Exercised                                          (6,667)               $ 1.94
     Granted                                           136,250                $ 1.74
                                                       -------                ------

     Options Outstanding at 12/31/98                   536,765                $ 2.47

     Granted                                            80,000                $ 1.25
                                                        ------                ------

     Options Outstanding at 12/31/99                   616,765                $ 2.31
                                                       -------                ------

     Granted                                           190,748                $ 3.81
     Exercised                                        (283,333)               $ 2.23
     Cancelled                                         (20,000)               $ 1.25
                                                       --------               ======

     Options Outstanding at 12/31/00                   504,180                $ 2.97
                                                       =======                ======

     Options exercisable at 12/31/00                   287,807                $ 2.77
                                                       =======                ======

     Options exercisable at 12/31/99                   616,765                $ 2.31
                                                       =======                ======

     Options exercisable at 12/31/98                   445,932                $ 2.62
                                                       =======                ======
</TABLE>

Additional  information  with  respect  to the  outstanding  nonqualified  stock
options as of December 31, 2000 is as follows:

<TABLE>
<CAPTION>

                              Options Outstanding                              Options Exercisable
                   ----------------------------------------------    -------------------------------------
                                     Weighted
                                      Average        Weighted
Range of Exercise    Options         Remaining        Average                             Weighted Average
     Prices        Outstanding   Contractual Life  Exercise Price     Options Exercisable  Exercise Price
-----------------------------------------------------------------    -------------------------------------
<S>                  <C>           <C>              <C>                  <C>                <C>
 $ 1.25 - $ 2.50     300,182       4.4 years        $ 2.10               230,807            $ 2.26
 $ 4.00 - $ 4.03     165,748       9.5 years        $ 4.02                18,750            $ 4.00
     $ 5.20           38,250       1.3 years        $ 5.20                38,250            $ 5.20
                     --------------------------------------------    -------------------------------------
                     504,180       6.2 years        $ 2.97               287,807            $ 2.77
</TABLE>

     All stock option grants during 2000 were made from the Pharmos  Corporation
     1997  Incentive  and  Non-Qualified  Stock Option Plan.  As of December 31,
     2000, no shares remained available for issuance under this plan.

     During 2000, the Company adopted the Pharmos Corporation 2000 Incentive and
     Non-Qualified  Stock  Option  Plan,  which  authorizes  the  grant of up to
     1,500,000  shares of the  Company's  common stock at the  discretion of the
     Company's Board of Directors.

     During 2000, the Company modified the terms of certain  nonqualified  stock
     options granted to two of the Company's  former  Directors who entered into
     consulting  relationships with the Company. The modifications  included the
     immediate vesting of the nonqualified options and, accordingly, the Company
     expensed the value


                                      F-18
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements

     of these options as consultant compensation for the year ended December 31,
     2000.

     The Company applies Accounting  Principles Board Opinion No. 25, Accounting
     for Stock Issued to Employees,  and related  interpretations  in accounting
     for its plans.  As all  options  and  warrants  granted to  employees  were
     granted with exercise prices equal to the fair value of the common stock on
     the respective grant dates, no compensation expense has been recognized for
     its stock-based compensation plans. Had compensation cost for the Company's
     stock option plans been  determined  based upon the fair value at the grant
     date  for  awards  under  these  plans   consistent  with  the  methodology
     prescribed  under  Statement of  Financial  Accounting  Standards  No. 123,
     Accounting for  Stock-Based  Compensation,  the Company's net loss and loss
     per share would have been increased by approximately  $798,000, or $.02 per
     share in 2000 and $560,000,  or $.01 per share in 1999 and $478,000 or $.01
     per share in 1998 before  deducting  the value of stock  options  that were
     canceled in 1995.  The weighted  average fair value of options and warrants
     granted to employees,  officers,  and directors  from 1998 through 2000 are
     estimated at $ 0.783 to $2.697 on the date of grant using the Black-Scholes
     option-pricing  model with the following  assumptions:  dividend  yield 0%,
     volatility of 78% in 2000 and 50% in 1999 and 1998, risk-free interest rate
     of 5.89% in 2000 and 6.5% in 1999 and 1998,  assumed forfeiture rate of 3%,
     and an expected life of 1 to 5 years.

12.  Income Taxes

     No  provision  for income  taxes was  recorded  for the three  years  ended
     December 31, 2000 due to net operating losses incurred.  Net operating loss
     carryforwards  for U.S. tax purposes of  approximately  $66,000,000  expire
     from 2001 through 2020.

     The Company's  gross deferred tax assets of $28,300,000  and $23,800,000 at
     December 31, 2000 and 1999,  respectively,  represented  primarily  the tax
     effect of both the net operating loss carryforwards,  deferred research and
     development costs and research and development tax credit carryforwards. As
     a result of previous business  combinations and changes in stock ownership,
     substantially   all  of  these  net   operating   losses   and  tax  credit
     carryforwards are subject to significant  restriction with regard to annual
     utilization. A full valuation allowance has been established with regard to
     the gross deferred tax assets.

13.  Commitments and Contingencies

     Leases

     The Company leases research and office facilities in Israel and New Jersey.
     The  facilities  in  Israel  are  used in the  operation  of the  Company's
     research  and  administration  activities.  The New Jersey  facility  which
     serves as the  corporate  headquarters  is leased under an agreement  which
     expires in February 2004. The research and  development  facility in Israel
     is leased under an agreement which expires in May 2002.

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

     At December 31, 2000, the future minimum lease  commitments with respect to
     non-cancelable  operating  leases with initial  terms in excess of one year
     are as follows:

                                             Lease
                                           Commitments
                                           -----------

                         2001                $ 419,787
                         2002                  272,060
                         2003                  164,053
                         2004                   35,044
                                             ---------
                                             $ 890,944
                                             =========


                                      F-19
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


     Rent expense during 2000, 1999 and 1998 amounted to $329,246,  $323,469 and
     $292,035  respectively.  Rent expense in 2000,  1999 and 1998 is net of $0,
     $86,454 and $146,950 of sublease income, respectively.

     Consulting contracts and employment agreements

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

     Dividend restrictions

     Dividends may be paid by the Company's  subsidiary,  Pharmos Limited,  only
     out of retained  earnings as  determined  for Israeli  statutory  purposes.
     There are no retained  earnings in Israel  available  for  distribution  as
     dividends  as of December  31,  2000,  1999 or 1998.  The Company  does not
     intend to pay a cash dividend in the foreseeable future.

14.  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 $26,570, $11,333 and $5,504 in 2000,
     1999 and 1998, respectively.

15.  Estimated Fair Value of Financial Instruments

     The  carrying  amounts  of cash  and cash  equivalents,  grants  and  other
     receivables,  accounts  payable,  accrued expenses and convertible debt are
     reasonable estimates of their fair values. The estimated fair values of all
     other financial instruments  approximate,  or are not materially different,
     than their carrying values.



                                      F-20
<PAGE>

Pharmos Corporation
Notes to Consolidated Financial Statements


16.  Segment and Geographic Information

     In 1998, the Company  adopted SFAS 131,  "Disclosures  about Segments of an
     Enterprise and Related  Information".  SFAS 131  establishes  standards for
     reporting  information regarding operating segments and related disclosures
     about products and services, geographic areas and major customers.

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

     Geographic  information  for the years ending  December 31, 2000,  1999 and
     1998 are as follows:

                      2000               1999              1998
                      ----               ----              ----
Net revenues
  United States     $  5,098,504      $ 3,279,397      $ 1,539,941
  Israel                      --               --               --
                    ------------      -----------      -----------
                    $  5,098,504      $ 3,279,397      $ 1,539,941
                    ============      ===========      ===========
Net loss
  United States    ($  7,597,846)    ($ 4,343,289)    ($ 4,480,022)
  Israel                (386,356)        (274,901)        (183,325)
                    ------------      -----------      -----------
                   ($  7,984,202)    ($ 4,618,190)    ($ 4,663,347)
                    ============      ===========      ===========
Total assets
  United States     $ 28,073,517      $ 5,728,624      $ 6,478,552
  Israel               2,709,592        2,062,670        1,588,118
                    ------------      -----------      -----------
                    $ 30,783,109      $ 7,791,294      $ 8,066,670
                    ============      ===========      ===========



17. Quarterly Information (Unaudited)

<TABLE>
<CAPTION>

           Year ended
       December 31, 2000         1st Quarter          2nd Quarter          3rd Quarter           4th Quarter
       -----------------         -----------         -----------           -----------           -----------
<S>                              <C>                  <C>                  <C>                   <C>
     Revenues                    $   663,580          $ 1,414,837          $ 1,761,735           $ 1,258,352

     Gross Margin                    383,051              937,675            1,181,533               720,290

     Operating Expenses            2,425,064            2,075,209            2,576,618             2,892,988

     Loss from Operations         (2,042,013)          (1,137,534)          (1,395,085)           (2,172,698)

     Other Income (Expense),
     net                             146,869              287,602             (136,074)*          (1,535,269)*
     Net loss  applicable  to
     common shareholders         $(1,895,144)         $  (849,932)         $(1,531,159)*         $(3,707,967)*

     Net loss per share          $      (.04)         $      (.02)         $      (.03)          $      (.07)
</TABLE>

*- Other Income (Expense), net and the Net Loss for the third and fourth quarter
of 2000 include the amortization of the Beneficial  Conversion  Feature from the
Private Placement as discussed in Note 8.


                                      F-21
<PAGE>
Pharmos Corporation
Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>


          Year ended
       December 31, 1999                1st Quarter         2nd Quarter          3rd Quarter          4th Quarter
       -----------------                -----------         -----------          -----------          -----------
<S>                                    <C>                  <C>                  <C>                  <C>
         Revenues                      $   332,377          $   858,834          $   833,118          $ 1,255,068

         Gross Margin                      243,119              649,297              567,469              824,895

         Operating Expenses              1,601,850            1,655,289            1,585,698            2,156,299

         Loss from Operations           (1,358,731)          (1,005,992)          (1,018,229)          (1,331,404)

         Other Income, net                  16,154               12,393               45,944               21,675

         Net loss                       (1,342,577)            (993,599)            (972,285)          (1,309,729)
         Preferred stock
         dividends                         (16,829)              (5,178)                (246)                  --
         Net loss applicable to
         common shareholders           $(1,359,406)         $  (998,777)         $  (972,531)         $(1,309,729)

         Net loss per share            $      (.03)         $      (.02)         $      (.02)         $      (.03)
 </TABLE>


18.  Subsequent event

     During January 2001, the Company paid $572,539 and issued 182,964 shares of
     the  common  stock  of the  Company  to the  investors  in the  convertible
     debenture  described  in Note 8. The  payment  of cash and  stock  were the
     option chosen by the Company and represent adjustments to the pricing based
     upon the  Company's  stock price during the  adjustment  period.  Under the
     terms of the agreements, no further adjustments are due.



                                      F-22
<PAGE>