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 June 30, 1997

                         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)

                               2 Innovation Drive
                             Alachua, Florida 32615
                    (Address of principal executive offices)

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

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 August 5, 1997, the Registrant had  outstanding  32,378,881  shares of its
$.03 par value Common Stock.



<PAGE>


Pharmos Corporation
(Unaudited)

<TABLE>
<CAPTION>
Consolidated Balance Sheets
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      June 30,          December 31,
                                                                                                        1997                1996
                                                                                                   ------------        ------------
<S>                                                                                                <C>                 <C>         
Assets
         --------------------------------------------------------------------------------
     Cash and cash equivalents                                                                     $  7,978,163        $  5,132,906
     R & D reimbursements receivable                                                                    234,776             359,019
     Prepaid expenses and other current assets                                                          337,925             247,363
                                                                                                   ------------        ------------
          Total current assets                                                                        8,550,864           5,739,288

     Fixed assets, net                                                                                  552,911             629,413
     Prepaid royalties                                                                                  716,667             573,334
     Intangible assets, net                                                                             314,524             337,786
     Other assets                                                                                       162,094             188,472
                                                                                                   ------------        ------------
          Total assets                                                                             $ 10,297,060        $  7,468,293
                                                                                                   ============        ============
     ------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
     Accounts payable                                                                              $    755,009        $    847,415
     Accrued expenses and other liabilities                                                           1,258,058             451,136
     Accrued wages and other compensation                                                               288,870             357,981
     Current portion of long term debt                                                                  127,406             115,244
                                                                                                   ------------        ------------
          Total current liabilities                                                                   2,429,343           1,771,776
          -------------------------------------------------------------------------------
     Advances against future sales                                                                    5,000,000           4,000,000
     Long term debt                                                                                      99,137             157,133
     Other liabilities                                                                                   46,485              51,119
                                                                                                   ------------        ------------
          Total liabilities                                                                           7,574,965           5,980,028
                                                                                                   ------------        ------------
     ------------------------------------------------------------------------------------
Shareholders' Equity

     Preferred stock, $.03 par value, 1,250,000 shares authorized.

     Series A convertible, with a $1,000 liquidation preference, 475 and
     1,900 shares outstanding, respectively                                                                  14                  57
     Series B convertible, with a $1,000 liquidation preference, 6,000
     and 0 shares outstanding, respectively                                                                 180                  --

     Common stock, $.03 par value; 50,000,000 shares authorized, 32,068,627 and
     30,727,525 shares issued, and 32,050,271 and
     30,709,169 shares outstanding, respectively                                                        962,058             921,825

     Paid in capital in excess of par                                                                69,763,986          62,668,886

     Accumulated deficit                                                                            (68,003,592)        (62,101,952)
                                                                                                   ------------        ------------
                                                                                                      2,722,646           1,488,816
     Less: Common stock held in treasury, at par                                                           (551)               (551)
                                                                                                   ------------        ------------
          Total shareholders' equity                                                                  2,722,095           1,488,265
                                                                                                   ------------        ------------
          Total liabilities and shareholders' equity                                               $ 10,297,060        $  7,468,293
                                                                                                   ============        ============
                                                                  
</TABLE>

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


                                        2


<PAGE>






Pharmos Corporation
(Unaudited)

<TABLE>
<CAPTION>
Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Three Months Ended

                                                                                                   June 30,              June 30,
                                                                                                     1997                  1996

     --------------------------------------------------------------------------------
Expenses

<S>                                                                                              <C>                   <C>         
    Research and development, net                                                                $  1,482,657          $  1,450,961
                                                                                                 ------------          ------------
    Drug substance purchase                                                                              --                    --
    Patents                                                                                            99,614                69,016
    General and administrative                                                                        611,276               563,972
    Depreciation and amortization                                                                      71,850                76,749
                                                                                                 ------------          ------------
                                                                                                    2,265,397             2,160,698
     --------------------------------------------------------------------------------            ------------          ------------
Loss from operations                                                                               (2,265,397)           (2,160,698)
                                                                                                 ------------          ------------

     Interest income, net of interest and other expense of $62,359 and
     $26,082, respectively                                                                            127,742                98,145
     --------------------------------------------------------------------------------            ------------          ------------
Net loss                                                                                         ($ 2,137,655)         ($ 2,062,553)
     --------------------------------------------------------------------------------            ------------          ------------

Dividend embedded in convertible preferred stock (see note 5)                                      (1,275,274)                 --

Net loss applicable to common stockholders                                                       ($ 3,412,929)         ($ 2,062,553)
                                                                                                 ============          ============
                                                                                                 ------------          ------------

Loss per share applicable to common stockholders                                                 ($       .11)         ($       .07)
                                                                                                 ============          ============

Weighted average shares outstanding                                                                31,671,717            29,219,969
                                                                                                 ------------          ------------
     --------------------------------------------------------------------------------
</TABLE>

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

                                        3



<PAGE>



Pharmos Corporation
(Unaudited)

<TABLE>
<CAPTION>
Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Six Months Ended

                                                                                                     June 30,            June 30,

                                                                                                       1997                  1996
     ------------------------------------------------------------------------------------
<S>                                                                                              <C>                   <C>         
Expenses
     Research and development, net                                                               $  2,664,257          $  2,589,699
     Drug substance purchase (see note 2)                                                             569,981                  --
     Patents                                                                                          132,002               121,386
     General and administrative                                                                     1,249,809             1,101,111
     Depreciation and amortization                                                                    142,420               163,082
                                                                                                 ------------          ------------ 
                                                                                                    4,758,469             3,975,278
                                                                                                 ------------          ------------ 
     ------------------------------------------------------------------------------------
Loss from operations                                                                               (4,758,469)           (3,975,278)
                                                                                                 ------------          ------------ 
     Interest income, net of interest and other expense of $66,758 and
     $44,680, respectively                                                                            184,798               158,148
                                                                                                 ------------          ------------ 
     ------------------------------------------------------------------------------------
Net loss                                                                                         ($ 4,573,671)         ($ 3,817,130)
                                                                                                 ------------          ------------ 
     ------------------------------------------------------------------------------------

Dividend embedded in convertible preferred stock (see note 5)                                    ($ 1,275,274)                  --

Net loss applicable to common stockholders                                                       ($ 5,848,945)         ($ 3,817,130)
                                                                                                 ============          ============ 

Net loss per share applicable to common stockholders                                             ($       .19)         ($       .13)
                                                                                                 ============          ============ 
     ------------------------------------------------------------------------------------
Weighted average shares outstanding                                                                31,344,772            29,215,036
                                                                                                 ------------          ------------ 
</TABLE>

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

                                        4



<PAGE>






Pharmos Corporation
(Unaudited)

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Six Months Ended

                                                                                                June 30,                 June 30,

                                                                                                  1997                     1996
     --------------------------------------------------------------------------
<S>                                                                                            <C>                      <C>         
Cash flows from operating activities

Net loss                                                                                       ($4,573,671)             ($3,817,130)
                                                                                               -----------              -----------

Adjustments to reconcile net loss to net cash flow
provided by (used in) operating activities
     Depreciation and amortization                                                                 142,420                  163,082
     --------------------------------------------------------------------------

Changes in operating assets and liabilities
     Prepaid expenses and other current assets                                                      60,059                 (193,042)
     Accounts payable                                                                              (92,404)                 108,181
     Accrued expenses, wages and other liabilities                                                 733,177                 (222,846)
     Prepaid royalties                                                                            (143,333)                (573,334)
     Advances against future sales                                                               1,000,000                2,122,859
                                                                                               -----------              -----------
          Total adjustments                                                                      1,699,919                1,404,900
                                                                                               -----------              -----------
     --------------------------------------------------------------------------

Net cash flows used in operating activities                                                     (2,873,752)              (2,412,230)
                                                                                               -----------              -----------

Cash flows from investing activities
     (Purchases) disposal of fixed assets, net                                                     (42,656)                 (47,701)
                                                                                               -----------              -----------
     --------------------------------------------------------------------------

Net cash flows provided by (used in) investing activities                                          (42,656)                 (47,701)
                                                                                               -----------              -----------

Cash flows from financing activities
     Proceeds from issuance of Preferred Stock, net                                              5,740,000                       --
     Proceeds from exercise of warrants                                                             67,500                   51,000
     Decrease in loans payable, net                                                                (45,835)                 (68,178)
                                                                                               -----------              -----------
     --------------------------------------------------------------------------

Net cash flows provided by (used in) financing                                                   5,761,665                  (17,178)
                                                                                               -----------              -----------

Net increase (decrease) in cash and cash equivalents                                             2,845,257               (2,477,109)

     --------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                                 5,132,906                7,442,791
                                                                                               -----------              -----------

     --------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                     $ 7,978,163              $ 4,965,682
                                                                                               ===========              ===========
</TABLE>

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

                                       5

<PAGE>






Pharmos Corporation
(Unaudited)

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

1.   The Company

     Pharmos Corporation (the "Company") is an emerging  pharmaceutical  company
     incorporated  under the laws of the state of Nevada  and is  engaged in the
     discovery,  design, development and commercialization of pharmaceuticals to
     meet  significant  therapeutic  needs  in major  markets.  The  Company  is
     developing pharmaceuticals in various fields including: site specific drugs
     for ophthalmic indications, neuroprotective agents for treatment of central
     nervous system ("CNS") disorders, newly designed molecules to treat cancer,
     and  emulsion-based  products  for topical and systemic  applications.  The
     Company uses a variety of patented and proprietary  technologies to improve
     the efficacy and/or safety of drugs. The Company's compounds are in various
     stages of development,  from preclinical to advanced  clinical trials.  The
     Company has  submitted  two separate New Drug  Applications  ("NDA") to the
     U.S. Food & Drug Administration  ("FDA"):  Lotemax(TM) for the treatment of
     several ocular inflammatory  diseases and LE-A, a product for the treatment
     of seasonal  allergic  conjunctivitis.  The Company conducts  operations in
     Alachua, Florida and through its wholly-owned subsidiary, Pharmos, Ltd., in
     Rehovot, Israel.

2.   Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
     been prepared in accordance with generally accepted  accounting  principles
     for interim financial  information and 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 six-month  period ended June 30, 1997, are not  necessarily
     indicative of the results that may be expected for the year ended  December
     31, 1997.

     These financial statements and notes should be read in conjunction with the
     Company's  audited  financial  statements and notes thereto included in the
     Company's Annual Report on Form 10-K for the year ended December 31, 1996.

     In the first quarter of 1997, the Company,  in  anticipation of approval by
     the FDA of  either  or  both  of the  NDAs  submitted  (see  note 1) and in
     accordance with its obligations under the Marketing Agreements (see note 4)
     to supply  Bausch & Lomb with certain  specified  quantities  of the active
     drug substance  ("Loteprednol  etabonate"),  purchased  bulk  quantities of
     Loteprednol  etabonate  in the amount of $569,981.  However,  until the FDA
     approves either of the Company's NDAs that use  Loteprednol  etabonate (see
     note 3), the Company has taken a valuation  allowance  of $569,981  against
     these purchases to the lower of cost or market value as there are currently
     no alternative uses for such quantities of this drug substance.

                                       6



<PAGE>


Pharmos Corporation
(Unaudited)

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

3.   Liquidity and Business Risks

     The Company currently has no sources of recurring revenues and has incurred
     operating losses since its inception.  At June 30, 1997, the Company has an
     accumulated deficit of $68,003,592  (unaudited).  Such losses have resulted
     principally  from costs  incurred  in  research  and  development  and from
     general and  administrative  expenses.  The Company expects those operating
     losses will  continue as product  development,  clinical  testing and other
     normal  operations  continue.  The Company  currently  funds its operations
     through the use of cash obtained  principally  from third party  financing.
     Management  believes that cash and cash  equivalents  of $8.0 million as of
     June 30, 1997,  combined  with  anticipated  cash  inflows from  investment
     income and research &  development  grants,  will be  sufficient to support
     operations  into the first  quarter of 1998.  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.

     As described in Note 1, the Company has  submitted  two NDAs to the FDA. It
     is possible  that FDA approval  for these  product  candidates  will not be
     granted on a timely  basis or at all.  Any delay in  obtaining  approval or
     failure to obtain such approvals would  materially and adversely affect the
     Company's business, financial position and results of operations.

4.   Collaborative Agreements

     The  Company  has  entered  into  marketing   agreements   (the  "Marketing
     Agreements") granting Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb")
     rights to market Lotemax(TM),  the Company's lead product candidate,  on an
     exclusive basis in the United States and in certain territories outside the
     U.S.  The  Marketing   Agreements   also  cover  the  Company's  two  other
     Loteprednol  etabonate  based  products,  which are referred to as LE-A and
     LE-T.  Under the  Marketing  Agreements,  Bausch & Lomb will  purchase  the
     active drug substance (Loteprednol etabonate) from the Company and, through
     June 30, 1997,  has  provided the Company with $5 million in cash  advances
     against future sales.

     Bausch & Lomb will be entitled to credits  against future  purchases of the
     active drug substance  based on the advances and future  advances until 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. Advances received through June 30,
     1997 are  reflected as a long term  liability in the  accompanying  balance
     sheet.


                                        7


<PAGE>


Pharmos Corporation 
(Unaudited)

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

     Bausch  & Lomb  collaborates  in the  development  of  products  by  making
     available  amounts  up to 50% of the  Company's  Phase III  clinical  trial
     costs.  The Company has also agreed to reimburse  Bausch & Lomb for certain
     R&D expenses  related to the development of the Company's  products.  As of
     June 30, 1997, the Company has accrued $400,000 in such reimbursements. The
     Company  is also  contingently  liable  to  reimburse  Bausch & Lomb for an
     additional  $400,000 of R&D  expenses  that are to be deducted  from future
     purchases of the active drug substance.

     For the three  month  period and six month  period  ended June 30, 1997 and
     1996, R&D expense reimbursements from Bausch & Lomb, net of  the  Company's
     R & D expense obligations to  Bausch & Lomb, were  ($246,515) and $546,637,
     and  ($231,432) and  $679,744,  respectively.  The net  reimbursements  are
     included  in   research  and   development  expense  in  the   accompanying
     consolidated statement of operations.

5.   Common & Preferred Stock Transactions

     On February 12, 1997, the Company issued  warrants to purchase an aggregate
     of 1,055,000 shares of common stock at an exercise price of $1.59 per share
     to 17  employees  of the  Company.  Such  warrants  become  exercisable  in
     increments  of 25% each on February 12, 1998,  February 12, 1999,  February
     12, 2000 and February 12, 2001. All of such warrants expire on February 12,
     2007.  Also, on February 12, 1997, the Company issued  warrants to purchase
     an  aggregate  of 100,000  shares of common  stock at an exercise  price of
     $1.59 per share to the Company's  five outside  directors.  These  warrants
     become  exercisable on the same basis as the warrants  issued to employees,
     but  expire on  February  12,  2003.  Upon  termination  of  employment  or
     termination  as a director,  all warrants held by such employee or director
     will expire,  except that any warrant that was  exercisable  on the date of
     termination may, to the extent then exercisable,  be exercised within three
     months  thereafter (or one year thereafter if the termination is the result
     of death or permanent disability of such employee or director).

     On March 31, 1997,  the Company  completed a private  placement of Series B
     Convertible  Preferred  Stock and warrants to purchase  common stock,  with
     institutional  investors  generating  gross  proceeds  of $6  million.  The
     preferred stock carries a 5% dividend rate payable in cash or common stock,
     at the option of the Company,  and is convertible into common shares of the
     Company based on the share price at the time of conversion  less  discounts
     ranging from 17% to 20%. Until  converted into common stock,  the preferred
     stock has no voting rights.  The 159,000  warrants  issued to the investors
     are  exercisable  at a price of $1.75 per share,  commencing one year after
     the closing for a three year period.  The  investors  were granted  limited
     rights  to  approve  certain  financing  by the  Company  for 180 days from
     closing. The Company has issued

                                        8



<PAGE>


Pharmos Corporation
(Unaudited)

Notes to Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

     239,473  warrants to certain  parties who assisted in the completion of the
     private  placement.  The  warrants  vest March 31,  1998 and will expire in
     2008.

     During the first quarter of 1997,  the Company issued 330,884 shares of its
     common  stock  upon  conversion  of 440  shares of the  Company's  Series A
     convertible  preferred stock.  The shares were issued at conversion  prices
     ranging  from $1.27 per share to $1.46 per share.  The Company  also issued
     25,457  shares of common  stock in  payment  of  dividends  on the Series A
     convertible  preferred  stock.  As of the  date  of such  issuances,  these
     dividends are valued at $33,282.

     During the second quarter of 1997, the Company issued 929,404 shares of its
     common  stock  upon  conversion  of 985  shares of the  Company's  Series A
     convertible  preferred stock.  The shares were issued at conversion  prices
     ranging  from $0.93 per share to $1.37 per share.  The Company  also issued
     17,857  shares of common  stock in  payment  of  dividends  on the Series A
     convertible  preferred  stock.  As of the  date  of such  issuances,  these
     dividends are valued at $19,414.

     During the first quarter of 1997,  the Company  issued 37,500 shares of its
     common stock upon exercise of warrants to purchase  shares of the Company's
     common stock at $1.80 per share.

     As of June 30,  1997,  cumulative  dividends  in arrears  on the  Company's
     outstanding  Series A and Series B convertible  preferred stock are $23,373
     and  $74,795,  respectively.  The  dividends  are payable in either cash or
     common stock at the option of the Company.

     In  connection  with  the  issuances  of  the  Series  A and B  convertible
     preferred  stock,  the  Company  was  required  to  recognize  in  the  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 date that conversion can occur. During the quarter ended June 30, 1997,
     the  Company  recorded a preferred  stock  dividend  of  $1,275,274  on the
     outstanding  shares  of  Series  A and B  convertible  preferred  stock  in
     connection with the conversion discount.

6.   Legal Proceedings

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

                                        9

<PAGE>


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

The  following  discussion  should  be read in  conjunction  with the  Condensed
Consolidated Financial Statements and Notes thereto.

Results of Operations

Quarter ended June 30, 1997 and 1996

Total operating expenses increased  $104,699,  or 5%, from $2,160,698 in 1996 to
$2,265,397  in 1997  primarily  due to an increase in research  and  development
costs, general and administrative expenses and patent costs.

Net  research  and  development  expenses  increased  by  $31,696,  or 2%,  from
$1,450,961  in 1996 to  $1,482,657  in 1997.  The increase in R&D expense is due
mainly to increases in regulatory  filing fees and R&D activities to advance the
manufacturing  of drug  substance,  partially  offset by a decrease  in clinical
trial costs associated with the Company's NDA submissions.

Patent expenses increased by $30,598, or 44%, from $69,016 in 1996 to $99,614 in
1997 due to patent filings in various foreign countries.

General and administrative expense increased by $47,304, or 8%, from $563,972 in
1996 to $611,276 in 1997, due to certain administrative costs.

Depreciation and amortization  expenses decreased by $4,899, or 6%, from $76,749
in 1996 to $71,850 in 1997,  reflecting reduced depreciation expense relating to
the Alachua, Florida operation.

Interest  income,  net of interest and other expense,  increased by $29,597,  or
30%, from $98,145 in 1996 to $127,742 in 1997.  Interest  income  increased as a
result of higher  average cash  balances  partially  offset by  increased  other
expenses.

Six Months ended June 30, 1997 and 1996

Total operating expenses increased $783,191,  or 20%, from $3,975,278 in 1996 to
$4,758,469  in 1997  primarily  due to the  purchase of drug  substance  for the
manufacture of Lotemax(TM),  as well as increases in general and  administrative
expenses  and research  and  development  costs.  Excluding  the drug  substance
purchase,  operating  expenses  increased by $213,210,  or 5% from $3,975,278 in
1996 to $4,188,488 in 1997.

Net  research  and  development  expenses  increased  by  $74,558,  or 3%,  from
$2,589,699  in 1996 to  $2,664,257  in 1997.  The increase in R&D expense is due
mainly to increases in regulatory  filing fees and R&D activities to advance the
manufacturing  of drug  substance,  partially  offset by a decrease  in clinical
trial costs with the Company's NDA submissions.

                                       10

<PAGE>


In 1997, the Company,  in  anticipation of approval by the FDA of either or both
of the NDAs submitted and in accordance with its obligations under the Marketing
Agreements  to supply  Bausch & Lomb with certain  specified  quantities  of the
active drug-substance, purchased bulk quantities of Loteprednol etabonate in the
amount of $569,981. However, until the FDA approves either of the Company's NDAs
that use Loteprednol  etabonate,  the Company has taken a valuation allowance of
$569,981  against these  purchases to lower of cost or market value as there are
currently no alternative uses for such quantities of this drug substance.

Patent expenses  increased by $10,616,  or 9%, from $121,386 in 1996 to $132,002
in 1997.  This increase is due to patent  filings in various  foreign  countries
partially  offset by the fact that the  Company  has  retained  in-house  patent
counsel to undertake work previously executed by external patent attorneys.

General  and  administrative  expenses  increased  by  $148,698,  or  14%,  from
$1,101,111 in 1996 to $1,249,809 in 1997, due to certain administrative costs.

Depreciation  and  amortization  expenses  decreased  by $20,662,  or 13%,  from
$163,082 in 1996 to $142,420 in 1997,  reflecting reduced  depreciation  expense
relating to the Alachua, Florida operation.

Interest  income,  net of interest and other expense,  increased by $26,650,  or
17%, from $158,148 in 1996 to $184,798 in 1997.  Interest income  increased as a
result of higher  average cash  balances  partially  offset by  increased  other
expenses.

Liquidity and Capital Resources

The Company  currently  has no sources of  recurring  revenues  and has incurred
operating losses since its inception and has financed its operations with public
and private  offerings of  securities,  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 $6.1  million,  including  cash and cash
equivalents of $8.0 million, as of June 30, 1997. On March 31, 1997, the Company
completed a private  placement of convertible  preferred stock and warrants that
generated $6 million in gross proceeds.  Management  believes that existing cash
and cash  equivalents  combined with  anticipated  cash inflows from  investment
income and R&D grants will be  sufficient to support  operations  into the first
quarter of 1998. Management believes that additional funding will be required to
fund  operations  until,  if  ever,   profitable  operations  can  be  achieved.
Therefore, 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 product candidates and bring them to commercial markets.

In connection  with the  issuances of the Series A and B  convertible  preferred
stock, the

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<PAGE>


Company recognized in the EPS calculation,  in compliance with the SECs position
on accounting for conversion discounts embedded in preferred stock, 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 date that conversion can occur. During the
quarter ended June 30, 1997, the Company  recorded a preferred stock dividend of
$1,275,274 on the  outstanding  shares of Series A and B convertible  preferred
stock in connection with the conversion discount.

Pursuant to the U.S.  Marketing  agreement  with Bausch & Lomb and following the
NDA submission  for LE-A,  the Company  received in March 1997, an additional $1
million in advances against future sales of the active drug substance (needed to
manufacture  the drug),  $143,333 of which was  advanced to the license  holder.
Cumulative  advances  from  Bausch & Lomb as of June 30,  1997 total $5 million.
Bausch & Lomb will be  entitled to recoup the  advances  by way of credits  from
future sales of  Lotemax(TM)  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>






  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                 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: August 14, 1997                           by: /s/ Shaun Marcus
                                                      -------------------
                                                  Shaun Marcus
                                                  Vice President - Finance
                                                  (Principal Accounting Officer)


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