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, 1998

                         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)

                         33 Wood Avenue South, Suite 466
                                Iselin, NJ 08830
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (732) 603-3526

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 October 14, 1998, the Registrant had outstanding  39,040,772 shares of its
$.03 par value Common Stock.


<PAGE>





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

<TABLE>
<CAPTION>
                                                                  September 30,   December 31,
                                                                      1998            1997
                                                                  ------------    ------------
<S>                                                               <C>             <C>         
Assets
    Cash and cash equivalents                                     $  4,299,791    $  4,423,389
    Product sales and grants receivable, net                           372,074         237,655
    Inventory                                                        1,869,285       1,804,627
    Prepaid royalties                                                  203,571         143,333
    Prepaid expenses and other current assets                          217,269         171,299
                                                                  ------------    ------------
         Total current assets                                        6,961,990       6,780,303

    Fixed assets, net                                                1,036,349         703,428
    Prepaid royalties, net of current portion                          435,934         573,334
    Intangible assets, net                                             279,631         291,262
    Other assets                                                        76,989          73,514
                                                                  ------------    ------------

         Total assets                                             $  8,790,893    $  8,421,841
                                                                  ============    ============

Liabilities, Redeemable Convertible Preferred Stock and
Shareholders' Equity
    Long term debt, current portion                               $     11,260    $     55,253
    Accounts payable                                                   572,507       2,576,968
    Accrued expenses                                                   874,548         809,869
    Accrued wages and other compensation                               500,444         401,285
    Advances against future sales                                    1,439,557       1,000,000
                                                                  ------------    ------------
         Total current liabilities                                   3,398,316       4,843,375

    Advances against future sales, net of current portion            3,082,716       4,000,000
    Other liabilities                                                  100,000         100,000
                                                                  ------------    ------------
         Total liabilities                                           6,581,032       8,943,375
                                                                  ------------    ------------

    Redeemable  Convertible  Preferred  Stock  Series C
    Redeemable  Convertible Preferred Stock, with a
    $1,000 liquidation preference, 2,500 and 0 shares
    outstanding, respectively                                        2,044,483
                                                                  ------------    ------------

    Shareholders' equity (deficit)
    Preferred  stock,  $.03 par  value,  1,250,000 shares
     authorized  Series B convertible, with a $1,000
     liquidation preference, 0 and 2,755 shares
     outstanding, respectively                                                              83
    Common stock, $.03 par value; 60,000,000 shares authorized,
        38,655,962 and 34,391,638 shares issued and outstanding
        (excluding $551 in 1998 and 1997, held in Treasury)
        in 1998 and 1997, respectively                               1,159,678       1,031,197
      Paid in capital in excess of par                              75,547,399      70,516,913
      Accumulated deficit                                          (76,541,699)    (72,069,727)
                                                                  ------------    ------------
         Total shareholders' equity (deficit)                          165,378        (521,534)
                                                                  ------------    ------------


    Total liabilities, redeemable convertible preferred
     stock and shareholders' equity (deficit)                     $  8,790,893    $  8,421,841
                                                                  ============    ============
</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,    September 30,
                                                             1998            1997
                                                         ------------     ------------
<S>                                                       <C>             <C>         
Revenues
    Product sales                                             $90,743
    License fee                                                 1,663
                                                         ------------    ------------
                                                              $92,406            --

Cost of Goods Sold                                             32,447            --
                                                         ------------    ------------

    Gross Margin                                               59,959            --

Expenses
    Research and development, net                             675,807       1,236,604
    Selling, general and administration                       552,466         528,984
    Patents                                                    55,675          56,027
    Depreciation and amortization                              64,002          72,898
                                                         ------------    ------------

       Total operating expenses                             1,347,950       1,894,513
                                                         ------------    ------------

Loss from operations                                       (1,287,991)     (1,894,513)

Other income (expenses):
    Interest income, net                                       87,450         100,072
    Other income (expenses), net                               (1,603)         (8,056)
                                                         ------------    ------------
    Other income (expense), net                                85,847          92,016
                                                         ------------    ------------

Net loss before extraordinary gain                         (1,202,144)     (1,802,497)

    Extraordinary gain from forgiveness of debt,
    (see note 4), net of $0 in income taxes                      --           416,249
                                                         ------------    ------------

Net loss                                                   (1,202,144)     (1,386,248)

Less: Dividend embedded in convertible preferred stock           --          (651,895)
         Preferred stock dividends                            (62,500)        (62,500)
                                                         ------------    ------------

Net loss applicable to common shareholders                ($1,264,644)    ($2,100,643)
                                                         ============    ============

Net loss per share applicable
    to common stockholders - basic and diluted                 ($0.03)         ($0.06)
                                                         ------------    ------------


Weighted average shares outstanding                        37,405,455      32,853,545
                                                         ------------    ------------
</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,    September 30,
                                                             1998            1997
                                                         ------------     ------------
<S>                                                        <C>             <C>        
Revenues
    Product sales                                            $983,899
    License fee                                               351,663
                                                         ------------    ------------
                                                            1,335,562            --

Cost of Goods Sold                                            372,299            --
                                                         ------------    ------------

    Gross Margin                                              963,263            --

Expenses
    Research and development, net                           2,738,259       4,189,687
    Selling, general and administration                     1,712,941       2,059,948
    Patents                                                   168,007         188,029
    Depreciation and amortization                             167,717         215,318
                                                         ------------    ------------

       Total operating expenses                             4,786,924       6,652,982
                                                         ------------    ------------

Loss from operations                                       (3,823,661)     (6,652,982)

Other income (expenses):
    Interest income, net                                      260,445         286,461
    Other income (expenses), net                               27,412          (9,647)
                                                         ------------    ------------
    Other income (expense), net                               287,857         276,814
                                                         ------------    ------------

Net loss before extraordinary gain                         (3,535,804)     (6,376,168)

    Extraordinary gain from forgiveness of debt,
    (see note 4), net of $0 in income taxes                      --           416,249
                                                         ------------    ------------

Net loss                                                   (3,535,804)     (5,959,919)

Less: Dividend embedded in convertible preferred stock       (642,648)     (1,927,169)
         Preferred stock dividends                           (231,399)       (149,375)
                                                         ------------    ------------

Net loss applicable to common shareholders                ($4,409,851)    ($8,036,463)
                                                         ============    ============

Net loss per share applicable
    to common stockholders - basic and diluted                 ($0.12)         ($0.25)
                                                         ------------    ------------

Weighted average shares outstanding                        36,621,907      31,852,139
                                                         ------------    ------------
</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,  September 30,
                                                          1998           1997
                                                       -----------    -----------
<S>                                                    <C>            <C>         
Cash flows from operating activities
  Net loss                                             ($3,535,804)   ($5,959,919)
                                                       -----------    -----------
  Adjustments to reconcile net loss to net
    cash flow used in operating activities
       Depreciation and amortization                       167,717        215,318
  Changes in operating assets and liabilities
       Inventory                                           (64,658)
       Product sales and grants receivable                (134,419)       158,518
       Prepaid expenses and other current assets           (45,970)        (5,815)
       Advanced royalties                                   77,162       (143,333)
       Other assets                                         (3,475)       118,388
       Accounts payable                                 (2,004,461)      (473,486)
       Accrued expenses & other liabilities                 64,679      1,079,006
       Accrued wages                                        99,159       (116,521)
                                                       -----------    -----------

       Total adjustments                                (1,844,266)       832,075
                                                       -----------    -----------

  Net cash flows used in operating activities           (5,380,070)    (5,127,844)
                                                       -----------    -----------

Cash flows from investing activities
     Purchases of fixed assets, net                       (489,007)       (94,998)
                                                       -----------    -----------

  Net cash flows used in investing activities             (489,007)       (94,998)
                                                       -----------    -----------

Cash flows from financing activities
     Proceeds from issuances of common stock
         and exercise of warrants, net                   1,678,333         67,500
     Proceeds from issuances of preferred stock, net     4,588,866      5,740,000
     Advances against future sales, net                   (477,727)     1,000,000
     Increase (decrease) in loans payable                  (43,993)      (200,562)
                                                       -----------    -----------

  Net cash flows provided by financing activities        5,745,479      6,606,938
                                                       -----------    -----------

Net increase (decrease) in cash and cash equivalents      (123,598)     1,384,096

Cash and cash equivalents at beginning of year           4,423,389      5,132,906
                                                       -----------    -----------

Cash and cash equivalents at end of period              $4,299,791     $6,517,002
                                                       -----------    -----------
</TABLE>


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


                                       5
<PAGE>


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 nine month period
ended September 30, 1998, are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998.

1.   The Company

Pharmos  Corporation  (the "Company") is a pharmaceutical  company  incorporated
under the laws of the State of Nevada and is engaged in the design,  development
and  commercialization  of  novel  pharmaceutical  products  in  various  fields
including:  site  specific  drugs for  ophthalmic  indications,  neuroprotective
agents for treatment of central  nervous  system ("CNS")  disorders,  anticancer
compounds designed to improve efficacy while avoiding CNS and other related side
effects,  and drug delivery systems,  submicron  emulsions ("SME") and emulsomes
for topical and  systemic  applications.  The Company uses a variety of patented
and proprietary technologies to improve the efficacy and/or safety of drugs. Two
of the  Company's  compounds  are being  actively  marketed  while others are in
various stages of development,  from preclinical to advanced clinical trials. On
March 9,  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 received two approvals, one
for the  treatment of steroid  responsive  inflammatory  indications,  including
uveitis and the other for post-operative  inflammation.  Alrex has been approved
for the treatment of seasonal allergic  conjunctivitis.  In conjunction with its
development  efforts,  the Company has in the past also undertaken  research and
development  contracts.  The  Company's  administrative  offices  are located in
Iselin,  New Jersey and  conducts  research and  development  through its wholly
owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.

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  inception.  At
September  30,  1998,  the Company  has an  accumulated  deficit of  $76,541,699
(unaudited).  This deficit is primarily the result of costs incurred in research
and  development  and from selling,  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 $4.3  million as of  September  30,  1998,  combined  with  anticipated  cash
inflows,  including  revenues  expected to be derived  from sales of Lotemax and
Alrex will be sufficient to support  operations into the second quarter of 1999.
The  Company's  success  depends upon many factors that are beyond the Company's
immediate   control,   including   market   acceptance  of  Lotemax  and  Alrex,
competition,  and the  ability to obtain  additional  financing.  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 to obtain the additional
financing  necessary to complete the  development of its product  candidates and
bring them to  commercial  markets.  There can be no  assurance  that Lotemax or
Alrex will achieve  market  acceptance or that the Company will be successful in
obtaining additional financing or commercializing its product candidates.


                                       6
<PAGE>


3.   Significant Accounting Policies

Revenue

Revenue from license fees and royalties are recognized when earned in accordance
with the  underlying  agreements.  Sales revenue is recognized  upon shipment of
products.

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 1997 have been  reclassified  to conform to the fiscal 1998
presentation.  Such  reclassifications  did not have an impact on the  Company's
financial position or results of operations.

Recent Accounting Standards

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income" ("SFAS 130")

On June 30, 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 130.  This  statement  establishes  standards  for  reporting and display of
comprehensive income and its components (revenues,  expenses,  gains and losses)
in a full set of general-purpose financial statement. SFAS No. 130 requires that
an enterprise (a) classify items of other  comprehensive  income by their nature
in a  financial  statement  and (b)  display  the  accumulated  balance of other
comprehensive   income   separately   from  retained   earnings  and  additional
paid-in-capital in the equity section of a statement of financial position.

This statement is effective for fiscal years  beginning after December 15, 1997.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes is  required.  The adoption of SFAS No. 130 did not have a
material impact on the Company.

Statement of Financial  Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise" ("SFAS 131")

In June of 1997,  the FASB issued SFAS No. 131.  This  statement  requires  that
public business  enterprises report certain information about operating segments
in complete  sets of financial  statements  of the  enterprise  and in condensed
financial  statements of interim periods to shareholders.  It also requires that
enterprises  report certain  information about their products and services,  the
geographic areas in which they operate and their major customers. This statement
is effective for fiscal years  beginning  after  December 15, 1997. The adoption
did not have a significant impact on the Company.


                                       7
<PAGE>


4.   Collaborative Agreements

In June 1995, the Company  entered into a marketing  agreement  (the  "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to market
Lotemax, Alrex and a combination of loteprednol etabonate and the anti-infective
tobramycin ("LE-T") on an exclusive basis in the United States following receipt
of FDA approval. A second agreement,  ("the New Territories Agreement"),  signed
December  12,1996,  extends  Bausch & Lomb's rights to market these  products in
Europe,  Canada and other selected  countries pending regulatory  approval.  The
Marketing   Agreement   also  covers  the   Company's   two  other   loteprednol
etabonate-based  products,  Alrex and a combination of loteprednol etabonate and
the anti-infective tobramycin ("LE-T"). Under the Marketing Agreement,  Bausch &
Lomb will purchase the active drug substance  (loteprednol  etabonate)  from the
Company. Through September 30, 1998, Bausch & Lomb has provided the Company with
$5 million in cash advances  against future sales, of which  approximately  $4.5
million is outstanding at September 30, 1998. Another $1 million is due upon the
receipt of regulatory approval for LE-T in the United States. An additional $1.6
million in advances against future sales of Bausch & Lomb will be payable to the
Company following receipt of regulatory  clearance in certain markets outside of
the United States. Bausch & Lomb is entitled to credits against future purchases
or sales 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 over the upcoming twelve month period,  based on management's  estimate
of  product  sales to Bausch & Lomb in 1998 and 1999,  has been  presented  as a
current  liability in the  accompanying  balance sheet at September 30, 1998 and
December 31, 1997.

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.

As part of its September, 1997 agreement with the University of Florida Research
Foundation (the "University"),  the Company received a non-recurring license fee
of $350,000  during the quarter  ended June 30,1998 in exchange for the transfer
of certain drug technology.  Under terms of the agreement,  the Company,  during
the quarter  ended  September  30, 1997,  returned  rights to  technologies  the
Company  previously ceased  developing,  and the University  forgave $416,249 in
debts owed by the Company.

5.   Common and Preferred Stock Transactions

In January 1998, the  shareholders  of the Company  approved the increase in the
number of authorized  shares of common stock from  50,000,000 to 60,000,000  and
adopted the 1997  Incentive  and  Non-Qualified  Stock  Option  Plan,  which has
reserved for issuance up to 600,000  shares of common stock upon the exercise of
stock options to be granted to employees,  directors,  consultants and other key
personnel.

In September 1998, the  shareholders of the Company  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 600,000 to 1,000,000.

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


                                       8
<PAGE>


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 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 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 may require the Company to redeem the outstanding  shares of the
Series C Convertible Preferred Stock.

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 $68,624.

During the second  quarter of 1998,  the Company also issued  215,063  shares of
common stock upon conversion of 500 shares of its Series C Convertible Preferred
Stock.

During the third quarter of 1998, the Company issued  1,357,013 shares of common
stock upon  conversion  of 2,000  shares of its Series C  Convertible  Preferred
Stock.

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

As of September  30,  1998,  cumulative  dividends  in arrears on the  Company's
outstanding Series C Convertible Preferred Stock are $162,775. The dividends are
payable in common stock of the Company.

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.  During the quarter ended  September 30, 1998, the Company
recorded a preferred  stock  dividend  of $0  ($651,895  for the  quarter  ended
September 30, 1997) on the outstanding shares of convertible  preferred stock in
connection with the conversion discount.


                                       9
<PAGE>


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

Results of Operations

Quarters ended September 30, 1998 and 1997

Product  sales  commenced  in May,  1998,  and revenue  totaled  $90,743 for the
quarter ($0 for the quarter  ended  September  30,  1997).  Third  quarter sales
revenue reflects reorders from product  wholesalers and distributors  subsequent
to the filling of initial  orders  during the second  quarter,  and  represented
about half of actual Lotemax and Alrex sales during the quarter.  Inventory draw
down at wholesalers  and  distributors is expected to continue during the fourth
quarter of 1998,  after which the Company  believes its sales  revenue will more
closely track the level of product sales.

Cost of goods sold for the quarter ended  September 30, 1998 totaled $32,447 ($0
for the quarter ended September 30, 1997).  Cost of goods sold includes a higher
than  anticipated  level of production  costs  incurred in the initial stages of
commercial production.

As part of the Company's  efforts to achieve market  recognition  and acceptance
for its FDA approved products,  the Company's marketing partner,  Bausch & Lomb,
distributed  large numbers of product  samples to its  customers.  These samples
were in addition  to the drug  product  sold by Bausch & Lomb to its  customers.
Management believes that the distribution of samples is critically  important to
the long term  acceptance  and use of the drug  products but may have an adverse
short-term  impact  on the  level  of  future  sales of  these  products.  

Total operating  expenses  decreased $546,563 or 29%, from $1,894,513 in 1997 to
$1,347,950 in 1998. The net decrease in operating expenses is primarily due to a
decrease in research and development expenses.

Net  research  and  development  expenses  decreased  by $560,797  or 45%,  from
$1,236,604 in 1997 to $675,807 in 1998. The decrease in R&D expense is primarily
due to the  closure of the  company's  R&D  facilities  in Florida in the fourth
quarter of 1997,  lower research and  development  expenditures on the opthalmic
drug  products  following  receipt of FDA approval in the first quarter of 1998,
and lower  clinical trial expenses in the third quarter of 1998 at the Company's
Israel facility.

Depreciation and amortization expenses decreased by $8,896, or 12%, from $72,898
in 1997 to $64,002 in 1998,  reflecting reduced depreciation expense relating to
the Alachua, Florida operation.

Other income,  net,  decreased by $6,169, or 7%, from $92,016 in 1997 to $85,847
in 1998. Interest income decreased as a result of lower average cash balances.

Nine months ended September 30, 1998 and September 30, 1997

During the nine months ended September 30, 1998, the Company  reported  revenues
from sale of product for the first time.  Product  sales  commenced in May,1998,
and revenue  totaled  $983,899 for the period ($0 for the period ended September
30, 1997). Additionally, the Company recorded license income of $350,000 for the
nine month ended  September 30, 1998 ($0 for the nine months ended September 30,
1997). The license income was generated from a non-recurring payment received by
the Company in exchange for the transfer of certain drug technology.

Cost of goods sold for the nine months ended September 30, 1998 totaled $372,299
($0 for the nine months ended September 30, 1997). Cost of goods sold includes a
higher than anticipated level of direct production costs incurred in the initial
stages of commercial production.

As part of the Company's  efforts to achieve market  recognition  and acceptance
for its FDA approved products,  the Company's marketing partner,  Bausch & Lomb,
distributed  large numbers of product  samples to its  customers.  These samples
were in addition  to the drug  product  sold by Bausch & Lomb to its  customers.
Management believes that the distribution of samples is critically  important to
the long term  acceptance  and use of the drug  products but may have an adverse
short-term impact on the level of future sales of these products.

Total operating expenses decreased $1,866,058 or 28%, from $6,652,982 in 1997 to
$4,786,924 in 1998. The net 

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<PAGE>

decrease in operating  expenses is  primarily  due to a decrease in research and
development  expenses.  

Net research and  development  expenses  decreased by  $1,451,428  or 35%,  from
$4,189,687  in 1997 to  $2,738,259  in 1998.  The  decrease  in R&D  expense  is
primarily due to the closure of the  company's R&D  facilities in Florida in the
fourth  quarter of 1997,  and a lower than  anticipated  level of  research  and
development expenditure in the Company's Israel facility.

Selling, general and administrative expenses decreased by $347,007 or 17 %, from
$2,059,948 in 1997 to $1,712,941 in 1998. The decrease is primarily due to costs
incurred  by the Company  during the first nine  months of 1997 under  marketing
agreements  to  supply  Bausch  & Lomb  with  certain  specified  quantities  of
loteprednol etabonate ("LE"). Certain quantities of LE, totaling $598,385,  were
purchased during the first nine months of 1997 for use in testing, manufacturing
and various marketing  activities,  and were charged to results of operations in
1997. In March 1998, the Company,  together with Bausch & Lomb  Pharmaceuticals,
Inc.,  announced the receipt of approval  from the Food and Drug  Administration
(FDA) to manufacture and market Lotemax and Alrex.

Patent  expenses  decreased by $20,022 or 11%, from $188,029 in 1997 to $168,007
in 1998. This decrease is due in part to management's  decision not to renew its
patent protection on certain patents owned by a third party.

Depreciation  and  amortization  expenses  decreased  by  $47,601  or 22%,  from
$215,318 in 1997 to $167,717 in 1998,  reflecting reduced  depreciation  expense
relating to the Alachua, Florida operation.

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 inception.  The
Company  has  financed  its  operations  with public and  private  offerings  of
securities,  advances and other funding pursuant to marketing and co-development
agreements with Bausch and Lomb, research contracts, license fees, royalties and
sales, and interest income.

The  Company  has  working  capital  of $3.6  million,  including  cash and cash
equivalents  of $4.3 million,  as of September 30, 1998. On February 4, 1998 the
Company completed a $5 million private placement of convertible  preferred stock
and warrants.  Management  believes  that  existing  cash and cash  equivalents,
combined  with  proceeds  generated  from sales of Lotemax and Alrex by Bausch &
Lomb together with additional cash inflows from investment income and R&D grants
will be sufficient to support  operations  into the second  quarter of 1999. The
Company will continue 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 required to continue
the  development  of its  products  and bring them to  commercial  markets.  The
Company's  success  depends  upon many  factors  that are beyond  the  Company's
immediate   control,   including   market   acceptance  of  Lotemax  and  Alrex,
competition, and the ability to obtain financing. There can be no assurance that
Lotemax or Alrex will  achieve  market  acceptance  or that the Company  will be
successful  in  obtaining  additional   financing  or  commercializing   product
candidates.

Pursuant  to the U.S.  Marketing  Agreement  with  Bausch & Lomb the Company has
received  cumulative  advances of $5 million  from Bausch & Lomb as of September
30,  1998.  Bausch & Lomb is entitled  to recoup the  advances by way of credits
from future sales of Lotemax, Alrex and line extension products. 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.


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<PAGE>


Year 2000 Risk

The Company has  completed its  assessment  of the potential  impact of the year
2000  on the  ability  of the  Company's  computerized  information  systems  to
accurately process information that may be date sensitive.  Any of the Company's
programs that  recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or systems failures.  The Company currently believes
that the costs of addressing this issue will not have a material  adverse impact
on the Company's financial  position.  The Company has not been able to complete
an assessment of any year 2000 issues that may effect third  parties,  including
the Company's current and prospective suppliers. The Company plans to devote all
resources  required to resolve any significant  third-party year 2000 compliance
problems in a timely manner.  Any year 2000 compliance  problems of the Company,
its customers or vendors could have a material  adverse  effect on the Company's
business, results of operations and financial condition.



                                       12
<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    Submission of Matters to Vote of Security Holders

          At its Annual Meeting held on September 16, 1998, the  stockholders of
          the Company elected the following  persons as directors of the Company
          (each receiving the votes listed below), to hold office until the next
          annual  meeting of  stockholders  and until their  successors are duly
          elected and  qualified:  Haim Aviv  (27,482,689  votes for and 254,039
          votes withheld);  E. Andrews  Grinstead III (27,362,269  votes for and
          253,789 votes withheld); Marvin Loeb (27,492,939 votes for and 243,789
          votes  withheld);  Stephen  Knight  (27,266,269  votes for and 349,789
          votes  withheld);  David Schlachet  (27,492,939  votes for and 243,789
          votes  withheld);  Mony Ben Dor  (27,372,069  votes and 243,789  votes
          withheld);  and  Georges  Anthony  Marcel  (27,384,939  votes  for and
          351,789 votes withheld). The stockholders of the Company also voted in
          favor  (6,366,540  votes for,  1,095,244  votes  against  and  301,089
          abstentions) of a resolution  approving the issuance of certain shares
          of the Company's  Common Stock upon conversion of the Company's Series
          C Convertible Participating Preferred Stock. Finally, the stockholders
          of the Company voted in favor (26,541,904  votes for,  1,024,821 votes
          against and 178,518 abstentions) of a resolution to adopt an amendment
          to the Company's  1997 Incentive and  Non-Qualified  Stock Option Plan
          increasing the number of shares authorized for issuance under the Plan
          from 600,000 to 1,000,000.

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 4, 1998                        by:  /s/ Robert W. Cook
                                                    ---------------------------
                                                    Robert W. Cook
                                                    Vice President - Finance 
                                                    and Chief Financial Officer


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