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

               Quarterly Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                    For the quarter ended September 30, 2001

                         Commission file number 0-11550

                               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)

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

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    .
                                      ---    ---

As of November 1, 2001, the Registrant had outstanding  55,356,307 shares of its
$.03 par value Common Stock.


<PAGE>


Part I.  Financial Information
Item 1   Financial Statements


Pharmos Corporation
(Unaudited)
Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                            September 30,         December 31,
                                                                                                 2001                 2000
                                                                                            -------------        -------------
<S>                                                                                         <C>                  <C>
     Assets
        Cash and cash equivalents                                                           $  17,878,769        $  22,480,777
        Inventories                                                                               473,930              796,550
        Receivables                                                                             1,736,771            1,188,502
        Prepaid royalties                                                                              --                6,591
        Restricted cash                                                                         4,106,813                   --
        Prepaid expenses and other current assets                                                 358,100              281,109
                                                                                            -------------        -------------
             Total current assets                                                              24,554,383           24,753,529

        Fixed assets, net                                                                       1,857,171            1,681,390
        Prepaid royalties, net of current portion                                                 143,000              143,000
        Intangible assets, net                                                                    116,798              151,690
        Restricted cash                                                                                --            4,035,414
        Other assets                                                                               18,086               18,086
                                                                                            -------------        -------------

             Total assets                                                                   $  26,689,438        $  30,783,109
                                                                                            =============        =============


     Liabilities and Shareholders' Equity
        Accounts payable                                                                    $     875,929        $     458,504
        Accrued expenses                                                                        1,290,209            1,162,098
        Accrued wages and other compensation                                                      970,787              768,975
        Convertible debentures, net                                                             7,493,170                   --
        Advances against future sales                                                                  --              619,702
                                                                                            -------------        -------------
             Total current liabilities                                                         10,630,095            3,009,279

        Advances against future sales, net of current portion                                   1,000,000            1,000,000
        Convertible debentures, net                                                                    --            6,580,872
        Other liabilities                                                                         100,000              100,000
                                                                                            -------------        -------------
             Total liabilities                                                                 11,730,095           10,690,151
                                                                                            -------------        -------------

        Commitments and contingencies

        Shareholders' equity
        Common stock, $.03 par value;  80,000,000 shares  authorized,
            55,074,648 and 54,063,897  shares  issued and  outstanding
            (excluding  $551 in 2001 and 2000, held in Treasury)
            in 2001 and 2000, respectively                                                      1,652,238            1,621,916
          Deferred compensation                                                                   (97,313)                  --
          Paid in capital                                                                     111,012,622          108,965,351
          Accumulated deficit                                                                 (97,608,204)         (90,494,309)
                                                                                            -------------        -------------
             Total shareholders' equity                                                        14,959,343           20,092,958
                                                                                            -------------        -------------


             Total liabilities and shareholders' equity                                     $  26,689,438        $  30,783,109
                                                                                            =============        =============
</TABLE>


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


                                       2
<PAGE>

Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         Three Months Ended September 30,
                                                               2001           2000
                                                          ------------    ------------
<S>                                                       <C>             <C>
Revenues
    Product sales                                         $  1,712,646    $  1,661,735
    License fee                                                     --         100,000
                                                          ------------    ------------
    Total Revenues                                           1,712,646       1,761,735

Cost of Goods Sold                                             403,340         580,202
                                                          ------------    ------------

Gross Margin                                                 1,309,306       1,181,533
                                                          ------------    ------------

Expenses
    Research and development, net                            2,169,132       1,362,475
    Selling, general and administrative                        686,587         999,987
    Patents                                                     68,368          46,536
    Depreciation and amortization                              169,524         167,620
                                                          ------------    ------------

       Total operating expenses                              3,093,611       2,576,618
                                                          ------------    ------------

Loss from operations                                        (1,784,305)     (1,395,085)

Other income (expense)
    Interest income                                            194,396         314,905
    Other income (expense), net                                 18,419          (9,192)
    Interest expense                                          (425,556)       (441,787)
                                                          ------------    ------------
    Other expense, net                                        (212,741)       (136,074)
                                                          ------------    ------------

Net loss                                                  ($ 1,997,046)   ($ 1,531,159)
                                                          ============    ============

Net loss per share
    - basic and diluted                                   ($       .04)   ($       .03)
                                                          ============    ============


Weighted average shares outstanding - basic and diluted     54,872,472      52,986,170
                                                          ============    ============
</TABLE>


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


                                       3
<PAGE>


Pharmos Corporation
(Unaudited)
Consolidated Statements of Operations
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         Nine Months Ended September 30,
                                                               2001           2000
                                                          ------------    ------------
<S>                                                       <C>             <C>
Revenues
    Product sales                                         $  4,218,441    $  3,740,152
    License fee                                                 80,000         100,000
                                                          ------------    ------------
    Total Revenues                                           4,298,441       3,840,152

Cost of Goods Sold                                           1,268,589       1,337,893
                                                          ------------    ------------

Gross Margin                                                 3,029,852       2,502,259
                                                          ------------    ------------

Expenses
    Research and development, net                            6,127,604       3,733,144
    Selling, general and administrative                      2,817,717       2,838,476
    Patents                                                    195,306         128,433
    Depreciation and amortization                              492,811         376,838
                                                          ------------    ------------

       Total operating expenses                              9,633,438       7,076,891
                                                          ------------    ------------

Loss from operations                                        (6,603,586)     (4,574,632)

Other income (expense)
    Interest income                                            742,684         739,345
    Other income (expense), net                                 24,561          (2,370)
    Interest expense                                        (1,277,553)       (438,578)
                                                          ------------    ------------
    Other (expense) income, net                               (510,308)        298,397
                                                          ------------    ------------

Net loss                                                  ($ 7,113,894)   ($ 4,276,235)
                                                          ============    ============

Net loss per share
    - basic and diluted                                   ($       .13)   ($       .08)
                                                          ============    ============


Weighted average shares outstanding - basic and diluted     54,470,720      51,506,739
                                                          ============    ============
</TABLE>

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


                                       4
<PAGE>

Pharmos Corporation
(Unaudited)
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Nine Months Ended September 30,
                                                                     2001            2000
                                                                ------------    ------------
<S>                                                             <C>             <C>
Cash flows from operating activities
  Net loss                                                      ($ 7,113,894)   ($ 4,276,235)
   Adjustments to reconcile net loss to net
    cash flow used in operating activities
       Depreciation and amortization                                 492,811         376,838
       Amortization of Debt Discount and Issuance costs              912,296              --
       Non-cash compensation charge - consultant compensation        122,993              --
  Changes in operating assets and liabilities
       Inventory                                                     322,620         723,328
       Receivables                                                  (548,269)       (292,468)
       Prepaid expenses and other current assets                     (76,991)        (88,368)
       Advanced royalties                                              6,591         202,363
       Accounts payable                                              417,425        (380,555)
       Accrued expenses                                              128,111         160,799
       Accrued wages                                                 201,812         173,354
                                                                ------------    ------------

       Total adjustments                                           1,979,399         875,291
                                                                ------------    ------------

  Net cash flows used in operating activities                     (5,134,495)     (3,400,944)

Cash flows from investing activities
     Purchases of fixed assets, net                                 (633,699)       (550,440)
                                                                ------------    ------------

  Net cash flows used in investing activities                       (633,699)       (550,440)
                                                                ------------    ------------

Cash flows from financing activities
    Advances against future sales                                   (619,702)     (1,429,199)
    Proceeds from issuance of common stock
         and exercise of warrants, net                             2,429,826      22,219,549
    Proceeds from issuance of convertible debentures, net                 --       6,178,324
    Pricing adjustment for private placement, net                   (572,539)             --
   Proceeds from exercise of equity credit line                           --       2,145,905
    Increase in restricted cash                                      (71,399)     (4,006,294)
   Decrease in notes payable                                              --        (338,128)
                                                                ------------    ------------

Net cash provided by financing activities                          1,166,186      24,770,157

Net increase (decrease) in cash and cash equivalents              (4,602,008)     20,818,773

Cash and cash equivalents at beginning of year                    22,480,777       2,918,554
                                                                ------------    ------------

Cash and cash equivalents at end of period                      $ 17,878,769    $ 23,737,327
                                                                ============    ============

Supplemental disclosure:
Interest Paid                                                   $    240,000              $-
                                                                ============    ============
</TABLE>

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


                                       5
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
     been prepared in accordance with generally accepted  accounting  principles
     for interim financial information pursuant to the instructions to Form 10-Q
     and Article 10 of Regulation S-X.  Accordingly,  they do not include all of
     the information  and footnotes  required by generally  accepted  accounting
     principles for complete financial statements. In the opinion of management,
     all  adjustments,  consisting  of  normal  recurring  accrual  adjustments,
     considered necessary for a fair presentation have been included.  Operating
     results for the  three-month  and  nine-month  periods ended  September 30,
     2001,  are not  necessarily  indicative of the results that may be expected
     for the year ended December 31, 2001.

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  research  and
     development through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot,
     Israel.

     The Company's main product in development,  dexanabinol, is in a Phase III,
     860-patient  clinical  trial for the  treatment of severe  traumatic  brain
     injury currently  underway in Europe and Israel. New chemical entities from
     its library of synthetic,  non-psychotropic cannabinoid compounds are being
     studied for possible  efficacy in stroke,  pain,  multiple  sclerosis,  and
     other neurological and anti-inflammatory conditions.

     The Company  received  approval for three  separate  New Drug  Applications
     ("NDA") from the U.S. Food and Drug  Administration  ("FDA") in 1998. 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 September 30, 2001, the Company has an accumulated deficit of
     $97,608,204.  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 $17.9 million as of September 30, 2001,  combined with
     the cash received of approximately $25 million during October 2001 from the
     sale of the Company's  ophthalmic business (see Note 7), will be sufficient
     to support the Company's continuing  operations through at least the middle
     of 2004.  Additionally,  as of September  30, 2001,  $1.7 million  remained
     available under the Company's equity line of credit.

     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

     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.


                                       6
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


     The Company's revenues are principally derived from one customer.

     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.

     Reclassifications

     Certain  amounts for 2000 have been  reclassified  to conform to the fiscal
     2001  presentation.  Such  reclassifications  did not have an impact on the
     Company's financial position or results of operations.

     New Accounting Pronouncements

     In July 2001,  the FASB issued  Statement No. 141  "Business  Combinations"
     ("SFAS 141") and Statement No. 142 "Goodwill and Other  Intangible  Assets"
     ("SFAS  142").  SFAS 141  states  that  the use of the  pooling-of-interest
     method is prohibited  for business  combinations  initiated  after June 30,
     2001.  SFAS 142 is effective for fiscal years  beginning after December 15,
     2001 and applies to all goodwill and other intangible  assets recognized in
     an entity's  statement of financial  position at that date,  regardless  of
     when those  assets were  initially  recognized.  The  Company is  currently
     evaluating  the  provisions  of  SFAS  141  and  SFAS  142  and has not yet
     determined the effects of these changes on the Company's financial position
     or results of operations.

4. Collaborative Agreements

     In 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 1996 ("the New Territories Agreement").

     Through  September 30, 2001,  Bausch and Lomb has provided the Company with
     $5 million in cash advances  against future sales,  of which  approximately
     $1.0 million is outstanding at September 30, 2001. 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.

     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 September 30, 2001 and December
     31, 2000 were $1,360,977 and $870,043, respectively.

     In October 2001,  the Company sold its ophthalmic  business,  including the
     Company's rights under the above agreements to Bausch & Lomb (see Note 7).

5. Common Stock Transactions

     During the third quarter of 2001,  the Company issued 140,738 shares of its
     common stock upon the exercise of warrants,  and received  consideration of
     $308,071.

     During the third quarter of 2001,  the Company issued 542,299 shares of the
     common  stock of the Company and issued  warrants to purchase up to 285,587
     shares  of the  Company's  common  stock  (at a price  of $2.18  per  share
     exercisable  through  February  2002),  to  one  of  the  investors  in the
     September  2000 private  placement  of  convertible  debentures  and common
     stock. Under the terms of the private Placement, the investor had the right
     to purchase these additional shares. The Company received  consideration of
     $1,896,749.

     During the second  quarter of 2001, the Company issued 38,750 shares of its
     common stock upon the exercise of warrants,  and received  consideration of
     $50,863.

     During the first  quarter of 2001,  the Company  paid  $572,539  and issued


                                       7
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


     182,964  shares  (valued  at  $400,325  at the date of issue) of the common
     stock  of the  Company  to the  investors  in the  September  2000  private
     placement of convertible  debentures and common stock.  The payment of cash
     and stock were the options chosen by the Company and represent  adjustments
     to the pricing based upon the Company's  stock price during the  adjustment
     period. Under the terms of the agreements, no further adjustments are due.

     During the first quarter of 2001,  the Company issued 106,000 shares of its
     common stock upon the exercise of warrants,  and received  consideration of
     $185,500.

     During the first nine  months of 2001,  the Company  modified  the terms of
     certain  incentive and  nonqualified  stock options granted to three of the
     Company's former employees who entered into consulting  relationships  with
     the  Company.  Accordingly,  the Company  expensed  $122,993 as  consultant
     compensation  for the value of the  currently  vested  options and recorded
     $97,313 as deferred compensation for the value of the unvested options.

6. Segment and Geographic Information

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

     Geographic  information for the three and nine months ending  September 30,
     2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                Three months ended             Nine months ended
                                   September 30,                 September 30,
                                2001           2000           2001           2000
                                ----           ----           ----           ----
<S>                         <C>            <C>            <C>            <C>
          Net revenues
            United States   $ 1,712,646    $ 1,761,735    $ 4,298,441    $ 3,840,152
            Israel                   --             --             --             --
                            -----------    -----------    -----------    -----------
                            $ 1,712,646    $ 1,761,735    $ 4,298,441    $ 3,840,152
                            ===========    ===========    ===========    ===========
          Net loss
            United States   ($1,880,750)   ($1,432,454)   ($6,735,463)   ($4,000,498)
            Israel             (116,296)       (98,705)      (378,431)      (275,737)
                            -----------    -----------    -----------    -----------
                            ($1,997,046)   ($1,531,159)   ($7,113,894)   ($4,276,235)
                            ===========    ===========    ===========    ===========
</TABLE>

7. Subsequent Event

     In  October  2001,  Bausch & Lomb  purchased  all  rights to the  Company's
     loteprednol  etabonate (LE) ophthalmic  business for cash and assumption of
     certain ongoing obligations. The Company received approximately $25 million
     in cash for its rights to Lotemax(R)  and Alrex(R),  prescription  products
     that  are  made  and  marketed  by  Bausch  & Lomb  under a 1995  Marketing
     Agreement  with the Company.  The Company  will not have any product  sales
     beginning in the fourth quarter of 2001.

     Bausch  & Lomb  also is  acquiring  future  extensions  of LE  formulations
     including LE-T, a product  currently in Phase III clinical trial.  Bausch &
     Lomb  will pay the  Company  approximately  $14  million,  with the  actual
     payment  price  based  on


                                       8
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


     the date of FDA approval of this new  combination  therapy.  An  additional
     milestone  payment of up to $10 million could be paid to the Company to the
     extent sales of the new product exceed an agreed-upon forecast in the first
     two years. The Company continues to participate in the clinical development
     of LE-T and,  consistent  with the Company's 1995 Marketing  Agreement with
     Bausch  & Lomb,  will  contribute  up to 50% of the  first  $3  million  of
     clinical costs and 100% thereafter.

     As a result of this  transaction,  the  Company  incurred  transaction  and
     royalty costs of approximately $2 million. The Company also compensated the
     LE patent owner  approximately $2.7 million ($1.2 million of this amount is
     to be paid in October  2002) from the  proceeds  of the sale of Lotemax and
     Alrex in return for his consent to the  Company's  assignment of its rights
     under the  license  agreement  to Bausch & Lomb.  Additionally,  the patent
     owner  will  receive a  portion  of the  proceeds  payable  to the  Company
     following  FDA  approval  of LE-T,  as well as a portion  of its  milestone
     payment.


                                       9
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Results of Operations

Quarters ended September 30, 2001 and 2000

Product sales revenue  totaled  $1,712,646  for the quarter ended  September 30,
2001, a 3% increase from  $1,661,735  for the quarter ended  September 30, 2000.
Product sales  increases  reflect market share gains and a change in the product
mix for the Company's Lotemax and Alrex ophthalmic products.

Cost of goods sold for the quarter ended  September  30, 2001 totaled  $403,340,
decreasing 30% from $580,202 for the quarter ended September 30, 2000. The lower
cost of goods sold is principally due to the lower cost of Drug  Substance.  The
lower cost of Drug Substance  reflects the change in product mix as sales of the
Company's Alrex product increased  substantially over the year ago period. Alrex
utilizes less of the Company's Drug Substance than Lotemax.

Total operating  expenses  increased $516,993 or 20%, from $2,576,618 in 2000 to
$3,093,611  in 2001.  The  increase is primarily  due to increased  research and
development costs partially offset by lower general and administrative expenses.

Net  research  and  development  expenses  increased  by $806,657  or 59%,  from
$1,362,475  in 2000 to  $2,169,132  in 2000.  The  increase  in R&D  expense  is
primarily due to increased  expenditures,  including increased employee staffing
levels, 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 decreased by $313,400 or 32%, from
$999,987 in 2000 to $686,587 in 2001.  The decrease is primarily  due to a shift
of  resources  from   administrative   functions  to  research  and  development
functions, as well as lower investor relation spending.

Other expense,  net, increased by $76,667,  from $136,074 in 2000 to $212,741 in
2001.  Interest  expense was similar in both periods,  however,  lower  interest
income, resulting from lower average cash balances and lower interest rates, was
the primary reason for the increase in net expense.

Nine Months ended September 30, 2001 and 2000

Product sales revenue totaled $4,218,441 for the nine months ended September 30,
2001, a 13% increase  from  $3,740,152  for the nine months ended  September 30,
2000.  Product sales  increases  reflect  market share gains and a change in the
product mix for the Company's Lotemax and Alrex ophthalmic products.

Cost of  goods  sold  for the nine  months  ended  September  30,  2001  totaled
$1,268,589,  decreasing 5% from  $1,337,893 for the nine months ended  September
30, 2000. The lower cost of goods sold is  principally  due to the lower cost of
Drug  Substance  related to the change in product  mix.  The decrease in Cost of
goods  sold was  partially  offset  by higher  license  expense  resulting  from
increased product sales.

Total operating expenses increased $2,556,547 or 36%, from $7,076,891 in 2000 to
$9,633,438  in 2001.  The  increase is  principally  due to higher  research and
development expenses, and, to a lesser extent, increased depreciation expense.

Net research and  development  expenses  increased by  $2,394,460  or 64%,  from
$3,733,144  in 2000 to


                                       10
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements


$6,127,604  in 2001.  The increase in R&D expense is primarily  due to increased
expenditures,  including  increased  employee  staffing  levels,  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.

Depreciation  and  amortization  expenses  increased by $115,973,  or 31%,  from
$376,838 in 2000 to $492,811 in 2001, reflecting increased  depreciation expense
relating to laboratory equipment purchases.

Other income / expense,  net, decreased by $808,705,  from income of $298,397 in
2000 to expense of  $510,308 in 2001.  The primary  cause of this change was the
interest  expense,  including  the  amortization  of debt  discount and issuance
costs, related to the Convertible  Debentures issued by the Company in September
2000.

Liquidity and Capital Resources

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
September 30, 2001, the Company has an accumulated  deficit of $97,608,204.  The
Company  has  financed  its  operations  with public and  private  offerings  of
securities,  advances and other funding  pursuant to a marketing  agreement with
Bausch & Lomb,  research  contracts,  license  fees,  royalties  and sales,  and
interest income.

The  Company  had  working  capital of $13.9  million,  including  cash and cash
equivalents of $17.9 million,  as of September 30, 2001.  During the nine months
ended September 30, 2001, the Company received $2.4 million from the exercise of
previously  outstanding  warrants and options to purchase the  Company's  common
stock. Management believes that cash and cash equivalents of $17.9 million as of
September 30, 2001, combined with the cash received of approximately $25 million
during October 2001 from the sale of the Company's ophthalmic business,  will be
sufficient to support the Company's  continuing  operations through at least the
middle of 2004.  Additionally,  as of September 30, 2001, $1.7 million  remained
available under the Company's  equity line of credit.  The Company  continues 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 is  required  to  continue  the  development  of its
products and bring them to commercial markets.

Statements made in this document related to the  development,  commercialization
and market expectations of its drug products,  to the establishment of corporate
collaborations, and to the Company's operational projections are forward-looking
and are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Such statements  involve risks and  uncertainties  which may
cause  results to differ  materially  from those set forth in these  statements.
Among the factors that could result in a  materially  different  outcome are the
inherent   uncertainties   accompanying  new  product  development,   action  of
regulatory  authorities and the results of further trials.  Additional economic,
competitive, governmental, technological, marketing and other factors identified
in Pharmos'  filings with the  Securities and Exchange  Commission  could affect
such results.


                                       11
<PAGE>

                                     Part II

                                Other Information

Item 1   Legal Proceedings                                             NONE

Item 2   Changes in Securities                                         NONE

Item 3   Defaults upon Senior Securities                               NONE

Item 4   Submissions of Matters to Vote of Security Holders            NONE

Item 5   Other Information                                             NONE

Item 6   Exhibits and Reports on Form 8-K                              NONE


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<PAGE>


                                 SIGNATURE PAGE

Pursuant  to the  requirements  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



Dated: November 13, 2001
                                            by: /s/ Robert W. Cook
                                               ---------------------------------
                                                Robert W. Cook
                                                Executive Vice President and
                                                Chief Financial Officer
                                                (Principal Accounting and
                                                Financial Officer)


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