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, 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 October 29, 1997, the Registrant had outstanding  34,118,368 shares of its
$.03 par value Common Stock.

<PAGE>

Pharmos Corporation
(Unaudited)

Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        September 30,     December 31,
                                                                             1997             1996
<S>                                                                     <C>               <C>         
Assets
  Cash and cash equivalents                                             $  6,517,002      $  5,132,906
  R & D reimbursements receivable                                            200,501           359,019
  Prepaid expenses and other current assets                                  253,178           247,363
                                                                        ------------      ------------
    Total current assets                                                   6,970,681         5,739,288
  Fixed assets, net                                                          543,986           629,413
  Prepaid royalties                                                          716,667           573,334
  Intangible assets, net                                                     302,893           337,786
  Other assets                                                                70,084           188,472
                                                                        ------------      ------------
    Total assets                                                        $  8,604,311      $  7,468,293
                                                                        ============      ============
Liabilities and Shareholders' Equity
  Accounts payable                                                      $    373,927      $    847,415
  Accrued expenses and other liabilities                                   1,534,776           451,136
  Accrued wages and other compensation                                       241,460           357,981
  Current portion of long term debt                                           57,299           115,244
                                                                        ------------      ------------
    Total current liabilities                                              2,207,462         1,771,776
  Advances against future sales                                            5,000,000         4,000,000
  Long term debt                                                              14,516           157,133
  Other liabilities                                                           46,485            51,119
                                                                        ------------      ------------
    Total  liabilities                                                     7,268,463         5,980,028
                                                                        ------------      ------------
Shareholders' Equity
  Preferred stock, $.03 par value, 1,250,000 shares authorized 

  Series A convertible, with a $1,000 liquidation preference, 0 and
  1,900 shares outstanding, respectively                                          --                57
  Series B convertible, with a $1,000 liquidation preference, 3,500
  and 0 shares outstanding, respectively                                         105                --
  Common stock, $.03 par value; 50,000,000 shares authorized,
  33,981,969 and 30,727,525 shares issued, and 33,963,613 and
  30,709,169 shares outstanding, respectively                              1,019,459           921,825
  Paid in capital in excess of par                                        70,494,710        62,668,886
  Accumulated deficit                                                    (70,177,875)      (62,101,952)
                                                                        ------------      ------------
                                                                           1,336,399         1,488,816
  Less: Common stock held in treasury, at par                                   (551)             (551)
                                                                        ------------      ------------
    Total shareholders' equity                                             1,335,848         1,488,265
                                                                        ------------      ------------
    Total liabilities and shareholders' equity                          $  8,604,311      $  7,468,293
                                                                        ============      ============
</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,
                                                                            1997              1996
<S>                                                                     <C>               <C>         
Expenses
  Research and development, net                                         $  1,092,389      $  1,386,219
  Drug substance purchase (see note 2)                                        28,800                --
  Patents                                                                     56,027            66,118
  General and administrative                                                 644,399           545,289
  Depreciation and amortization                                               72,898            77,357
                                                                        ------------      ------------
                                                                           1,894,513         2,074,983
                                                                        ------------      ------------
Loss from operations                                                      (1,894,513)       (2,074,983)
                                                                        ------------      ------------
  Interest income, net of interest and other expense of $13,879 and
  $13,773, respectively                                                       92,016            48,460
                                                                        ------------      ------------
Net loss before extraordinary gain                                        (1,802,497)       (2,026,523)
  Extraordinary gain from forgiveness of debt (see note 2), net of
  $0 in income taxes                                                         416,249                --
                                                                        ------------      ------------
Net loss                                                                ($ 1,386,248)     ($ 2,026,523)
                                                                        ------------      ------------

Dividend embedded in convertible preferred stock  (see note 5)          ($   651,895)               --
                                                                        ------------      ------------

Net loss applicable to common stockholders                              ($ 2,038,143)     ($ 2,026,523)
                                                                        ============      ============

Net loss per share applicable to common stockholders before
extraordinary gain                                                      ($       .07)     ($       .07)
Extraordinary gain per share applicable to common stockholders                   .01                --
                                                                        ------------      ------------
Net Loss per share applicable to common stockholders                    ($       .06)     ($       .07)
                                                                        ============      ============

Weighted average common shares outstanding                                32,853,545        29,219,969
                                                                        ------------      ------------
</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,
                                                                            1997               1996
                                                                        ------------      ------------
<S>                                                                     <C>               <C>         
Expenses
  Research and development, net                                         $  3,757,042      $  3,975,918
  Drug substance purchase (see note 2)                                       598,385                --

  Patents                                                                    188,029           187,504
  General and administrative                                               1,894,208         1,646,400
  Depreciation and amortization                                              215,318           240,439
                                                                        ------------      ------------
                                                                           6,652,982         6,050,261
                                                                        ------------      ------------
Loss from operations                                                      (6,652,982)       (6,050,261)
                                                                        ------------      ------------
  Interest income, net of interest and other expense of $80,637 and
  $58,453, respectively                                                      276,814           206,608
                                                                        ------------      ------------
Net loss before extraordinary gain                                        (6,376,168)       (5,843,653)
                                                                        ------------      ------------
  Extraordinary gain from forgiveness of debt (see note 2), net of
  $0 in income taxes                                                         416,249                --
                                                                        ------------      ------------
Net loss                                                                ($ 5,959,919)     ($ 5,843,653)
                                                                        ------------      ------------

Dividend embedded in convertible preferred stock (see note 5)           ($ 1,927,169)               --
                                                                        ------------      ------------

Net loss applicable to common stockholders                              ($ 7,887,088)     ($ 5,843,653)
                                                                        ------------      ============

Net loss per share applicable to common stockholders before
extraordinary gain                                                      ($       .26)     ($       .20)
Extraordinary gain per share applicable to common stockholders                   .01                --
                                                                        ------------      ------------
Net loss per share applicable to common stockholders                    ($       .25)     ($       .20)
                                                                        ============      ============

Weighted average common  shares outstanding                               31,852,139        29,216,698
                                                                        ------------      ------------
</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,
                                                                    1997             1996
                                                                -----------      -----------
<S>                                                             <C>              <C>         
Cash flows from operating activities
Net loss                                                        ($5,959,919)     ($5,843,653)
                                                                -----------      -----------
Adjustments to reconcile net loss to net cash flow
provided by operating activities
  Depreciation and amortization                                     215,318          240,439

Changes in operating assets and liabilities
  R&D reimbursements receivable, prepaid expenses and other         271,091         (103,328)
  assets
  Accounts payable                                                 (473,486)           2,136
  Accrued expenses, accrued  wages and other liabilities            962,485         (205,095)
  Prepaid royalties                                                (143,333)        (573,334)
  Advances against future sales                                   1,000,000        2,122,859
                                                                -----------      -----------
    Total adjustments                                             1,832,075        1,483,677
                                                                -----------      -----------
Net cash flows used in operating activities                      (4,127,844)      (4,359,976)
                                                                -----------      -----------

Cash flows from investing activities
  Purchases of fixed assets, net                                    (94,998)         (63,322)
                                                                -----------      -----------
Net cash flows used in investing activities                         (94,998)         (63,322)
                                                                -----------      -----------

Cash flows from financing activities
  Proceeds from issuance of Preferred Stock, net                                   1,882,000
  Proceeds from exercise of warrants                                 67,500           51,000
  Decrease in loans payable, net                                   (200,562)         (83,870)
                                                                -----------      -----------
Net cash flows provided by financing                              5,606,938        1,849,130
                                                                -----------      -----------
Net increase (decrease) in cash and cash equivalents              1,384,096       (2,574,168)

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

Cash and cash equivalents at end of period                      $ 6,517,002      $ 4,868,623
                                                                ===========      ===========
</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
     development and commercialization of proprietary products based on rational
     design of drugs 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.  On September 3, 1997, the FDA issued
     an "approvable  letter" in response to the Company's  Lotemax(TM)  NDA. The
     letter  states  that  Lotemax(TM)  is  approvable  subject  to the  Company
     satisfactorily addressing several remaining issues.

     The  Company  conducts  operations  in  Alachua,  Florida  (see note 6) 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  nine-month  period  ended  September  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 nine months 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


                                       6
<PAGE>

Pharmos Corporation
(Unaudited)

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


     certain  specified  quantities of the active drug  substance  ("loteprednol
     etabonate"),  purchased bulk quantities of loteprednol  etabonate and a key
     reagent in the amount of $598,385.  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 $598,385 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.

     In the third quarter,  the Company reached an agreement with the University
     of Florida  (the  "University")  to terminate a 1992  licensing  agreement.
     Under the terms of the  agreement,  the Company has  returned the rights to
     technologies the Company previously ceased  developing,  and the University
     has forgiven $416,249 in debts owed by the Company.

3.   Liquidity and Business Risks

     The Company currently has no sources of recurring revenues and has incurred
     operating  losses since its  inception.  At September 30, 1997, the Company
     has an  accumulated  deficit of $70,177,875  (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 $6.5
     million as of September 30, 1997,  combined with  anticipated  cash inflows
     from  investment  income  and  research  &  development   grants,  will  be
     sufficient to support  operations  well 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.


                                       7
<PAGE>

Pharmos Corporation
(Unaudited)

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


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
     September  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
     September  30,  1997  are  reflected  as  a  long  term  liability  in  the
     accompanying balance sheet.

     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
     September   30,   1997,   the  Company   has   accrued   $600,000  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 nine month period ended  September  30, 1997
     and  1996,  R&D  expense  reimbursements  from  Bausch  & Lomb,  net of the
     Company's R&D expense obligations to B&L, were ($188,394) and $401,368, and
     ($419,826)  and  $1,081,112,   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 1,030,000 shares of common stock at an exercise price of $1.59 per share
     to 15  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


                                       8
<PAGE>

Pharmos Corporation
(Unaudited)

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


     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).

     In March 1997,  the Company  issued  warrants to purchase an  aggregate  of
     75,000 shares of common stock at an exercise price of $1.66 per share to an
     employee of the Company.  Such warrants become exercisable in increments of
     25% each on March 1, 1998,  March 1, 1999, March 1, 2000 and March 1, 2001.
     All of  such  warrants  expire  on  March  1,  2007.  Upon  termination  of
     employment, all warrants held by such employee 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).

     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  issued  warrants to purchase an aggregate of 239,473
     shares of common  stock at an exercise  price of $1.38 per share 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.


                                       9
<PAGE>

Pharmos Corporation
(Unaudited)

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


     During the third quarter of 1997,  the Company issued  1,828,185  shares of
     its common stock upon conversion of 2,975 shares of the Company's  Series A
     and  Series B  convertible  preferred  stock.  The  shares  were  issued at
     conversion  prices  ranging  from $1.23 per share to $2.04 per  share.  The
     Company also issued  85,157  shares of common stock in payment of dividends
     on the Series A and Series B convertible preferred stock. As of the date of
     such issuances, these dividends are valued at $136,140.

     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 September 30, 1997,  cumulative dividends in arrears on the Company's
     outstanding  Series A and Series B convertible  preferred  stock are $0 and
     $12,153,  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 September 30,
     1997,  the Company  recorded a preferred  stock dividend of $651,895 on the
     outstanding  shares  of  Series  A and B  convertible  preferred  stock  in
     connection with the conversion discount.


6.   Subsequent Events

     The Company  announced on October 6, 1997 the  relocation  of its corporate
     headquarters to Iselin, New Jersey and the closure of its Alachua,  Florida
     facility by year-end.  The remaining R&D and regulatory activities required
     to  support  Lotemax(TM),   LE-Allergy  and  LE-T  will  be  maintained  by
     transferring  responsibilities  to  Bausch & Lomb  Pharmaceuticals,  to the
     Pharmos  R&D site in Israel and by  continuing  employment  of key  Florida
     personnel on a consulting  basis.  The Company has taken a $100,000  charge
     against  earnings  in the third  quarter  in  estimate  of the costs of the
     relocation and closure.


7.   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.


                                       10
<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 September 30, 1997 and 1996

Total operating expenses decreased  $180,470,  or 9%, from $2,074,983 in 1996 to
$1,894,513  in 1997  primarily  due to a decrease  in research  and  development
costs,  and patent costs  partially  offset by bulk  material  purchases for the
manufacture  of  loteprednol  etabonate  ("LE"),  the active  drug-substance  of
Lotemax(TM),  and an increase in general and administrative expenses.  Excluding
the drug substance  purchase,  operating expenses decreased by $209,270,  or 10%
from $2,074,983 in 1996 to $1,865,713 in 1997.

Net research and  development  expenses  decreased  by  $293,830,  or 21%,  from
$1,386,219 in 1996 to $1,092,389 in 1997. The completion of the clinical  trials
associated  with the Company's NDA  submissions for LE resulted in a decrease in
R&D expense. The company significantly  increased  participation in approved R&D
reimbursement  programs  which  contributed  to a  reduction  in R & D  expense.
Increased costs for toxicology  studies for the LET program (a combination of LE
and  Tobramycin)  and  Dexanabinol,   as  well  as  activities  to  advance  the
manufacturing of LE, partially offset the decrease in R & D expense.

In the current quarter,  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 LE ( the active  drug-substance),  purchased bulk  quantities of a
key  reagent  essential  to the  manufacture  of LE in the  amount  of  $28,800.
However,  until the FDA approves  either of the Company's  NDAs that use LE, the
Company has taken a valuation  allowance of $28,800  against these  purchases to
lower of cost or market  value as there are  currently no  alternative  uses for
such quantities of this reagent.

Patent expenses decreased by $10,091, or 15%, from $66,118 in 1996 to $56,027 in
1997.  This  decrease  is due to the  timing of  completion  of  certain  patent
applications.

General and administrative  expense increased by $99,110,  or 18%, from $545,289
in 1996 to  $644,399  in 1997.  On October  6, 1997 the  Company  announced  the
relocation  of its corporate  headquarters  to New Jersey and the closure of its
Florida  facility by year-end  and as a result,  the Company  accrued a one-time
charge of $100,000.

Depreciation and amortization  expenses decreased by $4,459, or 6%, from $77,357
in 1996 to $72,898 in 1997,  reflecting reduced depreciation expense relating to
the Alachua, Florida operation.


                                       11
<PAGE>

Pharmos Corporation
(Unaudited)


Interest  and other  income,  net of interest and other  expenses,  increased by
$46,708,  or 96%,  from  $48,460 in 1996 to $95,168 in 1997.  Interest and other
income,  net,  increased  as a  result  of  higher  average  cash  balances  and
translation  gains as a result of the  fluctuation of the Israeli Shekel against
the US Dollar.

On  September 8, 1997,  the Company  signed an  agreement  terminating  the 1992
licensing  agreement  with the  University of Florida and returned the rights to
technologies the Company previously ceased developing. The termination agreement
included a waiver of $416,249 in outstanding debts due the University.


Nine Months ended September 30, 1997 and 1996

Total operating expenses increased $602,721,  or 10%, from $6,050,261 in 1996 to
$6,652,982  in 1997  primarily  due to the  purchase of drug  substance  for the
manufacture of ("LE"),  the active  drug-substance  of  Lotemax(TM),  as well as
increases in general and administrative expenses, off-set by a decrease in R & D
expense. Excluding the drug substance purchase,  operating expenses increased by
$4,336, or less than 1% from $6,050,261 in 1996 to $6,054,597 in 1997.

Net  research  and  development  expenses  decreased  by  $218,876,  or 6%, from
$3,975,918 in 1996 to $3,757,042 in 1997. The completion of the clinical  trials
associated  with the Company's NDA  submissions for LE resulted in a decrease in
R&D expense, as did increased participation in approved R&D programs.  Increased
costs for  toxicology  studies  for the LET  program  (a  combination  of LE and
Tobramycin) and Dexanabinol,  as well as for regulatory  filings , combined with
significant  activities together with Bausch & Lomb  Pharmaceuticals  ("BLP") to
advance the manufacturing of LE, partially offset the decrease in R & D expense.

In the first nine  months of 1997,  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 BLP with certain specified  quantities
of the active  drug-substance,  the Company  purchased bulk quantities of LE, as
well as a key reagent critical to the manufacturing process of LE, in the amount
of $598,385.  However,  until the FDA approves either of the Company's NDAs that
use LE, the Company has taken a valuation  allowance of $598,385  against  these
purchases to lower of cost or market value as there are currently no alternative
uses for such quantities of the drug substance or the reagent.

Patent  expenses  increased by $525,  or less than 1%, from  $187,504 in 1996 to
$188,029 in 1997.

General  and  administrative  expenses  increased  by  $247,808,  or  15%,  from
$1,646,400  in 1996 to  $1,894,208  in 1997.  On  October  6,  1997 the  Company
announced the  relocation of its  corporate  headquarters  to New Jersey and the
closure of its Florida facility by year-end and as a result, the Company accrued
a one-time charge of $ 100,000.


                                       12
<PAGE>

Pharmos Corporation
(Unaudited)


Depreciation  and  amortization  expenses  decreased  by $25,121,  or 10%,  from
$240,439 in 1996 to $215,318 in 1997,  reflecting reduced  depreciation  expense
relating to the Alachua, Florida operation.

Interest  and other  income,  net of interest  and other  expense,  increased by
$73,358,  or 36%, from $206,608 in 1996 to $279,966 in 1997.  Interest and other
income,  net,  increased  as a  result  of  higher  average  cash  balances  and
translation  gains as a result of the  fluctuation of the Israeli Shekel against
the US Dollar.

On  September 8, 1997,  the Company  signed an  agreement  terminating  the 1992
licensing  agreement  with the  University of Florida and returned the rights to
technologies the Company previously ceased developing. The termination agreement
included a waiver of $416,249 in outstanding debts due the University.


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 $4.8  million,  including  cash and cash
equivalents  of $6.5 million,  as of September 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 well
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 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 September 30, 1997, the Company  recorded a
preferred stock dividend of $651,895 on the outstanding shares of Series A and B
convertible preferred stock in connection with the conversion discount.


                                       13
<PAGE>

Pharmos Corporation
(Unaudited)


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  September  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.


                                       14
<PAGE>

Pharmos Corporation
(Unaudited)


                                     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

          On  September  3,  1997,  the FDA  issued an  "approvable  letter"  in
          response to the  Company's NDA for  LotemaxTM  (loteprednol  etabonate
          ophthalmic suspension 0.5%). The approvable letter is the FDA's formal
          response to the Lotemax NDA,  which was submitted by the Company.  The
          letter  states that  LotemaxTM  is  approvable  subject to the Company
          satisfactorily addressing several remaining issues.

          The Company on September 8, 1997 terminated a 1992 licensing agreement
          with the University of Florida,  returning the rights to  technologies
          the Company  previously ceased developing.  The termination  agreement
          includes  the  waiver  of  $416,249  in  debts of the  Company  to the
          University.

          The  Company  announced  on  October  6,  1997 the  relocation  of its
          corporate  headquarters  to Iselin,  New Jersey and the closure of its
          Alachua,   Florida  facility  by  year-end.   The  remaining  R&D  and
          regulatory activities required to support Lotemax(TM),  LE-Allergy and
          LE-T will be maintained by transferring  responsibilities  to Bausch &
          Lomb  Pharmaceuticals,  to the  Pharmos  R&D  site  in  Israel  and by
          continuing employment of key Florida personnel on a consulting basis.


Item 6    Exhibits and Reports on Form 8-K

          Reports on Form 8-K

          The Company's  Current Report on Form 8-K,  dated  September 16, 1997,
          filed pursuant to Section 13 of the Exchange Act.

          Exhibits                                                      NONE


                                       15
<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 14, 1997                By:
                                             ----------------------------------
                                                  Shaun Marcus
                                                  Vice President - Finance
                                                  (Principal Accounting Officer)

                                       16