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, 1999

                         Commission file number 0-11550

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

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

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

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

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

As of July 31, 1999,  the Registrant had  outstanding  43,696,478  shares of its
$.03 par value Common Stock.

<PAGE>

Part I. Financial Information
Item 1 Financial Statements

<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Balance Sheets
-------------------------------------------------------------------------------------------
                                                                  June 30,     December 31,
                                                                    1999           1998
                                                               ------------    ------------
<S>                                                            <C>             <C>
Assets
   Cash and cash equivalents                                   $  3,156,830    $  3,452,916
   Inventory                                                      2,174,567       1,727,096
   Receivables                                                      513,786         550,057
   Prepaid royalties                                                277,645         259,488
   Prepaid expenses and other current assets                        201,629         206,793
                                                               ------------    ------------
        Total current assets                                      6,324,457       6,196,350

   Fixed assets, net                                              1,209,280       1,181,030
   Prepaid royalties, net of current portion                        287,824         366,152
   Intangible assets, net                                           221,476         244,738
   Other assets                                                      94,710          78,400
                                                               ------------    ------------
        Total assets                                           $  8,137,747    $  8,066,670
                                                               ============    ============
Liabilities and Shareholders' Equity
   Accounts payable                                            $    342,405    $    936,899
   Accrued expenses                                                 631,254         679,737
   Accrued wages and other compensation                             519,948         456,575
   Advances against future sales                                  1,954,000       1,836,231
   Note payable                                                     537,134            --
                                                               ------------    ------------
        Total current liabilities                                 3,984,741       3,909,442

   Advances against future sales, net of current portion          2,025,459       2,591,023
   Other liabilities                                                100,000         100,000
                                                               ------------    ------------
        Total liabilities                                         6,110,200       6,600,465
                                                               ------------    ------------
   Shareholders' equity
   Preferred  stock, $.03 par value, 1,250,000 shares
    authorized Series C convertible, 200 and 1,500
    shares outstanding, respectively (liquidation preference
      of $200,000 and $1,500,000 respectively)                            6              45
   Common stock, $.03 par value; 60,000,000 shares
      authorized, 43,249,186 and 39,800,112 shares issued
      and outstanding (excluding  $551 in 1999 and 1998,
      held in Treasury) in 1999 and 1998, respectively            1,298,315       1,193,452
     Paid in capital in excess of par                            80,847,369      78,051,783
     Accumulated deficit                                        (80,118,143)    (77,779,075)
                                                               ------------    ------------
        Total shareholders' (deficit) equity                      2,027,547       1,466,205
                                                               ------------    ------------
   Commitments and contingencies

        Total liabilities and shareholders' equity             $  8,137,747    $  8,066,670
                                                               ============    ============
</TABLE>

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


                                       2
<PAGE>

<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>
                                                               Three Months Ended June 30,
                                                                  1999            1998
                                                              ------------    ------------
Revenues
    Product sales                                             $    858,834    $    893,156
    License fee                                                       --           350,000
                                                              ------------    ------------
                                                                   858,834       1,243,156
Cost of Goods Sold                                                 209,537         339,852
                                                              ------------    ------------
    Gross Margin                                                   649,297         903,304
                                                              ------------    ------------
Expenses
    Research and development, net                                  818,658       1,006,915
    Selling, general and administrative                            694,367         627,602
    Patents                                                         55,488          62,702
    Depreciation and amortization                                   86,776          53,376
                                                              ------------    ------------
       Total operating expenses                                  1,655,289       1,750,595
                                                              ------------    ------------
Loss from operations                                            (1,005,992)       (847,291)
                                                              ------------    ------------
Other income (expense):
    Interest income                                                 29,445          91,583
    Other income (expense), net                                    (10,543)         (3,595)
    Interest expense                                                (6,509)          3,566
                                                              ------------    ------------
    Other income, net                                               12,393          91,554
                                                              ------------    ------------
Net loss                                                          (993,599)       (755,737)

    Less: Dividend embedded in convertible preferred stock                         (52,400)
    Preferred stock dividends                                       (5,178)        (62,500)
                                                              ------------    ------------
Net loss applicable to common shareholders                    ($   998,777)   ($   870,637)
                                                              ============    ============
Net loss per share applicable
    to common stockholders - basic and diluted                ($       .02)   ($       .02)
                                                              ============    ============
Weighted average shares outstanding                             42,367,356      36,887,559
                                                              ============    ============
</TABLE>

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


                                       3
<PAGE>

<TABLE>
<CAPTION>
Pharmos Corporation
(Unaudited)
Condensed Consolidated Statements of Operations
-----------------------------------------------------------------------------------------

                                                               Six Months Ended June 30,
                                                                 1999             1998
                                                             ------------    ------------
<S>                                                          <C>             <C>
Revenues
    Product sales                                            $  1,191,211    $    893,156
    License fee                                                      --           350,000
                                                             ------------    ------------
                                                                1,191,211       1,243,156
Cost of Goods Sold                                                298,795         339,852
                                                             ------------    ------------
    Gross Margin                                                  892,416         903,304
                                                             ------------    ------------
Expenses
    Research and development, net                               1,752,332       2,062,452
    Selling, general and administrative                         1,245,303       1,160,475
    Patents                                                        91,393         112,332
    Depreciation and amortization                                 168,111         103,715
                                                             ------------    ------------
       Total operating expenses                                 3,257,139       3,438,974
                                                             ------------    ------------
Loss from operations                                           (2,364,723)     (2,535,670)
                                                             ------------    ------------
Other income (expense):
    Interest income                                                63,145         197,657
    Other income (expense), net                                   (22,686)         10,769
    Interest expense                                              (11,912)         (6,416)
                                                             ------------    ------------
    Other income, net                                              28,547         202,010
                                                             ------------    ------------
Net loss                                                       (2,336,176)     (2,333,660)

    Less: Dividend embedded in convertible preferred stock                       (642,648)
    Preferred stock dividends                                     (22,007)       (168,899)
                                                             ------------    ------------
Net loss applicable to common shareholders                   ($ 2,358,183)   ($ 3,145,207)
                                                             ============    ============
Net loss per share applicable
    to common stockholders - basic and diluted               ($       .06)   ($       .09)
                                                             ============    ============
Weighted average shares outstanding                            41,281,450      36,222,174
                                                             ============    ============
</TABLE>

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


                                       4
<PAGE>

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

                                                     Six Months Ended June 30,
                                                         1999           1998
                                                     -----------    -----------
Cash flows from operating activities
  Net loss                                           ($2,336,176)   ($2,333,660)
                                                     -----------    -----------
  Adjustments to reconcile net loss to net
    cash flow used in operating activities
       Depreciation and amortization                     168,111        103,715
  Changes in operating assets and liabilities
       Inventory                                        (447,471)        18,628
       Receivables                                        36,271       (572,848)
       Prepaid expenses and other current assets           5,164          9,290
       Advanced royalties                                 60,171         70,708
       Other assets                                      (16,309)          (865)
       Accounts payable                                 (594,494)    (1,965,979)
       Accrued expenses                                  (48,483)       (15,435)
       Advances against future sales, net               (447,795)      (415,764)
       Accrued wages                                      63,373        155,441
                                                     -----------    -----------
       Total adjustments                              (1,221,462)    (2,613,109)
                                                     -----------    -----------
  Net cash flows used in operating activities         (3,557,638)    (4,946,769)
                                                     -----------    -----------
Cash flows from investing activities
     Purchases of fixed assets, net                     (173,099)      (177,000)
                                                     -----------    -----------
  Net cash flows used in investing activities           (173,099)      (177,000)
                                                     -----------    -----------
Cash flows from financing activities
     Proceeds from issuances of common stock
         and exercise of warrants, net                                1,620,438
     Proceeds from issuances of preferred stock, net                  4,635,289
     Proceeds from exercise of equity credit line      2,897,517
     Increase (decrease) in loans payable                537,134        (30,733)
                                                     -----------    -----------
  Net cash flows provided by financing activities      3,434,651      6,224,994
                                                     -----------    -----------
Net increase (decrease) in cash and cash equivalents    (296,086)     1,101,225

Cash and cash equivalents at beginning of year         3,452,916      4,423,389
                                                     -----------    -----------
Cash and cash equivalents at end of period           $ 3,156,830    $ 5,524,614
                                                     ===========    ===========

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


                                       5
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
     been prepared in accordance with generally accepted  accounting  principles
     for interim financial information pursuant to the instructions to Form 10-Q
     and Article 10 of Regulation S-X.  Accordingly,  they do not include all of
     the information  and footnotes  required by generally  accepted  accounting
     principles for complete financial statements. In the opinion of management,
     all  adjustments,  consisting  of  normal  recurring  accrual  adjustments,
     considered necessary for a fair presentation have been included.  Operating
     results for the three-month and six-month  periods ended June 30, 1999, are
     not necessarily indicative of the results that may be expected for the year
     ended December 31, 1999.

1. The Company

     Pharmos   Corporation   (the   "Company")  is  a   pharmaceutical   company
     specializing in the modification of existing molecules through  proprietary
     techniques to reduce undesirable side effects and/or enhance efficacy.  The
     Company is developing  pharmaceuticals  in various fields  including:  site
     specific drugs for ophthalmic  indications,  neuroprotective  agents with a
     novel  mechanism  of action for the  treatment  of central  nervous  system
     ("CNS")   disorders,   newly  designed   molecules  to  treat  cancer,  and
     emulsion-based products for topical and systemic applications.  The Company
     has administrative  offices in Iselin,  New Jersey and conducts  operations
     through its wholly owned subsidiary, Pharmos, Ltd., in Rehovot, Israel.

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

2. Liquidity and Business Risks

     While the Company has  generated  revenue  through the sale of its approved
     products  in the  market,  it  has  incurred  operating  losses  since  its
     inception.  At June 30, 1999, the Company has an  accumulated  deficit of $
     80,118,143.  Such losses have resulted  principally  from costs incurred in
     research and development and from general and administrative  expenses. The
     Company  has  funded  its  operations  through  the  use of  cash  obtained
     principally from third party financing.  Management  believes that cash and
     cash  equivalents  of $ 3.2  million  as of June 30,  1999,  combined  with
     anticipated  cash inflows from  revenues  derived from sales of Lotemax and
     Alrex and the equity line of credit  obtained on December  10, 1998 will be
     sufficient to support  operations  through 2000. As of June 30, 1999, $ 6.4
     million remained available under the equity line of credit.

     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>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements

3. Significant Accounting Policies

Revenue recognition

     Sales  revenue is recognized  upon shipment of products to customers,  less
     allowances for estimated returns and discounts.  License fees and royalties
     are recognized  when earned in accordance  with the underlying  agreements.
     Revenue for contracted  research and development  services is recognized as
     performed. Revenue from these contracts is recognized as costs are incurred
     (as defined in the  contract),  generally  direct labor and  supplies  plus
     agreed overhead rates. Any advance payments on contracts are deferred until
     the related services are performed.

     All of the  Company's  revenues  from  product  sales are derived  from one
     Customer.

Inventories

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

Reclassifications

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

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

     Through  June 30,  1999,  Bausch and Lomb has  provided the Company with $5
     million in cash advances against future sales, of which  approximately $4.0
     million was  outstanding  at June 30, 1999. An additional $1 million is due
     from Bausch & Lomb upon the receipt of regulatory  approval for LE-T in the
     United  States.  Bausch  & Lomb is  entitled  to  recoup  the  advances  by
     withholding  certain amounts against  payments for future  purchases of the
     active drug substance,  based on the advances made,  until all the advances
     have been repaid. The Company may be obligated to repay such advances if it
     is unable to supply Bausch & Lomb with certain specified  quantities of the
     active drug substance.  The portion of advances  expected to be recouped by
     Bausch and Lomb during the following  twelve months,  based on management's
     estimate of product sales to Bausch & Lomb, has been presented as a current
     liability in the  accompanying  balance sheet at June 30, 1999 and December
     31, 1998.

     Bausch  & Lomb  also  collaborates  in the  development  of LE-T 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.


                                       7
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements

5. Common and Preferred Stock Transactions

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

     During  1998,  the Company  issued  2,299,957  shares of common  stock upon
     conversion of 3,500 shares of its Series C convertible preferred stock.

     During the first  quarter of 1999,  the Company  issued  858,585  shares of
     common stock upon conversion of its Series C convertible preferred stock.

     During the second  quarter of 1999,  the Company  issued  334,339 shares of
     common stock upon conversion of its Series C convertible preferred stock.

     During July 1999,  the Company  issued  153,201 shares of common stock upon
     conversion of its Series C  convertible  preferred  stock.  These July 1999
     transactions completed the conversion of the Series C convertible preferred
     stock, leaving no preferred stock outstanding at the end of July 1999.

     As of June 30, 1999 and  December  31,  1998,  cumulative  dividends on the
     Company's  outstanding  Series C convertible  preferred stock were $195,678
     and  $173,671,  respectively.  The dividends are payable in common stock of
     the Company at the fair market value on the date of conversion.

     In  connection  with the  issuances  of the  Series A, B and C  convertible
     preferred stock, the Company was required to recognize, in its earnings per
     share  ("EPS")  calculation,  the  value of the  conversion  discount  as a
     dividend to the preferred stockholders. The dividend has been recognized in
     the EPS  calculation  on a pro rata basis over the  period  beginning  with
     issuance  to the  earliest  date that  conversion  can occur.  The  Company
     recorded a preferred stock dividend of $ 0 and $52,400 for the three months
     ended June 30, 1999 and 1998,  respectively,  and $ 0 and  $642,648 for the
     six months ended June 30, 1999 and 1998,  respectively,  on the outstanding
     shares of  convertible  preferred  stock in connection  with the conversion
     discount.

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


                                       8
<PAGE>

Pharmos Corporation
Notes to Condensed Consolidated Financial Statements

     During the first quarter of 1999, under terms of the Credit Agreement,  the
     Company  issued 933,233 shares of its Common Stock and warrants to purchase
     86,162  shares of its Common  Stock to the Investor  for  consideration  of
     $1,158,000,  net of fees. The warrants have exercise  prices ranging from $
     1.41 to $ 1.99 per share and expire in the first quarter of 2002.

     During the second quarter of 1999, under terms of the Credit Agreement, the
     Company  issued  1,369,279  shares  of its  Common  Stock and  warrants  to
     purchase   114,311   shares  of  its  Common  Stock  to  the  Investor  for
     consideration  of $1,737,000 net of fees. The warrants have exercise prices
     ranging from $ 1.56 to $ 2.38 per share and expire in the second quarter of
     2002.

6. Segment and Geographic Information

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

     Geographic  information  for the three and six months  ending June 30, 1999
     and 1998 are as follows:

                  Three months ended June 30,   Six months ended June 30,
                  ---------------------------   -------------------------
                      1999           1998           1999           1998
                      ----           ----           ----           ----
Net revenues
  United States   $   858,834    $   893,156    $ 1,191,211    $   893,156
  Israel
                         --             --             --             --
                  -----------    -----------    -----------    -----------
                  $   858,834    $   893,156    $ 1,191,211    $   893,156
                  ===========    ===========    ===========    ===========
Net loss
  United States   ($  986,511)   ($  753,257)   ($2,294,996)   ($2,331,123)
  Israel               (7,088)        (2,480)       (41,210)        (2,537)
                  -----------    -----------    -----------    -----------
                  ($  993,599)   ($  755,737)   ($2,336,176)   ($2,333,660)
                  ===========    ===========    ===========    ===========


7. Note Payable

     On April 1,  1999,  the  Company  issued a  one-year  note to  finance  the
     purchase  of  certain  drug  substance  inventory.  The note is  payable in
     installments and bears interest at 8% per annum.


                                       9
<PAGE>

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

Results of Operations

Quarters ended June 30, 1999 and 1998

Product  sales  revenue  totaled $ 858,834 for the  quarter  ended June 30, 1999
compared  to $ 893,156  for the  quarter  ended  June 30,  1998.  Product  sales
commenced in the second  quarter of 1998,  following the March 1998 FDA approval
of the Company's Lotemax and Alrex ophthalmic products. A substantial portion of
the product sales for the quarter ended June 30, 1998  represented a stocking of
our customer's  distribution  channels and was not  representative of the actual
product prescription demand for the period.  Additionally,  the Company recorded
license  revenue of $ 350,000 for the quarter ended June 30, 1998.  This license
revenue  represented  a  non-recurring  payment in exchange  for the transfer of
certain drug technology.

Cost of goods  sold for the  quarter  ended  June 30,  1999  totaled  $  209,537
compared to $ 339,852 for the quarter ended June 30, 1998. The decline  reflects
volume and product mix differences,  as well as the timing of certain  licensing
expenses.  Cost of goods sold includes the cost of the active drug substance and
licensing costs.

Total  operating  expenses  decreased  $95,305 or 5%, from $1,750,594 in 1998 to
$1,655,289 in 1999. The decrease is primarily due lower research and development
expenses,   offset  by  increased  general  and   administrative   expenses  and
depreciation expense.

Net  research and  development  expenses  decreased by $ 188,257 or 19%,  from $
1,006,915 in 1998 to $ 818,658 in 1999. The decrease in R&D expense is primarily
due to the absence of regulatory costs associated with Lotemax and Alrex,  which
were approved by the FDA in March 1998.

General and administrative  expenses increased by $ 66,765 or 11%, from $627,602
in 1998 to $694,367 in 1999. The increase is primarily due to higher spending on
investor  relations  activities  offset  by  reduced  facilities  costs  for the
Company's New Jersey offices.

Patent expenses  decreased by $ 7,214, or 12%, from $ 62,702 in 1998 to $ 55,488
in 1999. This decrease is due principally to the timing of various patent costs.

Depreciation  and  amortization  expenses  increased  by $33,400,  or 63%,  from
$53,376 in 1998 to $86,776 in 1999,  reflecting  increased  depreciation expense
relating to laboratory equipment purchases in 1998.

Other  income,  net,  decreased by $ 79,161,  or 86%, from $ 91,554 in 1998 to $
12,393 in 1999.  Interest  income  decreased  as a result of lower  average cash
balances.

Six months ended June 30, 1999 and 1998

Product sales revenue totaled $ 1,191,211 for the six months ended June 30, 1999
compared to $ 893,156 for the six months  ended June 30,  1998.  The 1999 period
includes  product sales for all six months while the 1998 period  includes sales
only for the second  quarter of 1998,  following  the March 1998 FDA approval of
the Company's Lotemax and Alrex ophthalmic products.  Additionally,  the Company
recorded  license revenue of $ 350,000 for the quarter ended June 30, 1998. This
license revenue represented a non-recurring payment in exchange for the transfer
of certain drug technology.

Cost of goods sold for the six  months  ended  June 30,  1999  totaled $ 298,795
compared  to $ 339,852  for the six months  ended  June 30,  1998.  The  decline
reflects  volume and product mix  differences,  as well as the timing of certain
licensing  expenses.  Cost of goods sold  includes  the cost of the active  drug
substance and licensing costs.


                                       10
<PAGE>

Total operating  expenses  decreased $ 181,835 or 5%, from $3,438,974 in 1998 to
$3,257,139 in 1999. The decrease is primarily due lower research and development
expenses,   offset  by  increased  general  and   administrative   expenses  and
depreciation expense.

Net research and  development  expenses  decreased  by  $310,120,  or 15%,  from
$2,062,452  in 1998 to  $1,752,332  in 1999.  The  decrease  in R&D  expense  is
primarily due the absence of development  and regulatory  costs  associated with
Lotemax and Alrex, which were approved by the FDA in March 1998.

General and administrative expenses increased by $ 84,828 or 7%, from $1,160,475
in 1998 to $1,245,303 in 1999. The increase is primarily due to higher  spending
on investor  relations  activities  offset by reduced  facilities  costs for the
Company's New Jersey offices.

Patent  expenses  decreased  by $ 20,939,  or 19%,  from $ 112,332  in 1998 to $
91,393 in 1999. This decrease is due principally to the timing of various patent
costs.

Depreciation  and  amortization  expenses  increased  by $64,396,  or 62%,  from
$103,715 in 1998 to $ 168,111 in 1999, reflecting increased depreciation expense
relating to laboratory equipment purchases in 1998.

Other income,  net, decreased by $ 173,463,  or 86%, from $ 202,010 in 1998 to $
28,547 in 1999.  The decline is principally  due to lower  interest  income as a
result of lower  average  cash  balances  and less  favorable  foreign  exchange
transactions.

Liquidity and Capital Resources

The Company  had no sources of  recurring  revenues  until the  commencement  of
product  sales in April  1998,  and has  incurred  operating  losses  since  its
inception.  At June 30,  1999,  the  Company  has an  accumulated  deficit  of $
80,118,143.  The Company has  financed  its  operations  with public and private
offerings  of  securities,  advances and other  funding  pursuant to a marketing
agreement with BLP, research contracts,  license fees,  royalties and sales, and
interest income.

The  Company  had  working  capital of $ 2.3  million,  including  cash and cash
equivalents  of $ 3.2  million,  as of June 30, 1999.  On February 4, 1998,  the
Company  completed  a  private  placement  of  convertible  preferred  stock and
warrants that generated $5 million in gross proceeds.  On December 10, 1998, the
Company obtained a $10 million equity line of credit with a single institutional
investor. As of June 30, 1999, $ 6.4 million remained available under the equity
line of credit.

Management  believes  that the  equity  line of credit,  existing  cash and cash
equivalents  combined with anticipated cash inflows from investment  income, R&D
grants and proceeds  from sales of the drug  substance  for Lotemax and Alrex to
BLP will be  sufficient  to support  operations  through  2000.  The  Company is
continuing to actively  pursue various  funding  options,  including  additional
equity offerings,  strategic corporate alliances,  business combinations and the
establishment of product related research and development limited  partnerships,
to obtain the  additional  financing  that would be  required  to  continue  the
development of its products and bring them to commercial markets.  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.  There can be no  assurance  that the
Company will be successful in obtaining  additional financing or commercializing
its product candidates, or that Lotemax or Alrex will achieve market acceptance.

Statements made in this document related to the  development,  commercialization
and market expectations of its drug products,  to the establishment of corporate
collaborations, and to the Company's operational projections are forward-looking
and are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Such statements  involve risks and  uncertainties  which may
cause  results to differ  materially  from those set forth in these  statements.
Among the factors that could result in a  materially


                                       11
<PAGE>

different  outcome  are the  inherent  uncertainties  accompanying  new  product
development, action of regulatory authorities and the results of further trials.
Additional economic,  competitive,  governmental,  technological,  marketing and
other factors  identified in Pharmos'  filings with the  Securities and Exchange
Commission could affect such results.

The Year 2000

The Year 2000 computer system issue involves hardware and software programs that
recognize a date using "00" as the year 1900 rather than the year 2000 and could
result in errors or systems failures for many businesses, including the Company.
Recognizing the importance of minimizing the impact of potential  disruptions to
the  Company's  business  resulting  from the year 2000  issue,  the Company has
adopted a plan to review and correct any potential issues which could impact the
Company's  operations.  The plan  addresses  the state of  readiness of internal
computer  systems as well as significant  external third party systems to handle
the risks associated with the year 2000 issue.

Internal  Preparation.  The two major  areas of  concern  for  computer  systems
internal  to the  Company  are the  financial  systems  and the data  collection
systems for the Company's research efforts.

The Company's  financial  records are  maintained on readily  available  generic
programs  purchased  from various  vendors.  These  programs are run on personal
computers  and a network  server for personal  computers.  All of the  Company's
currently  utilized  critical  systems have been  installed or updated since the
beginning of 1998. A required  product  specification  for these new systems was
that the purchased  systems were certified by the vendors as able to handle year
2000 issues properly ("Y2K compliant"). The critical financial systems addressed
include  accounts  payable,  accounts  receivable,  inventory,  cash management,
general ledgers and financial consolidation.

Information  and data critical to the Company's  research  efforts are generally
maintained  on  printed  records,   however;  many  data  summary,   review  and
communication  activities  utilize  programs  run on  personal  computers  and a
network  server for  personal  computers.  The  Company's  critical  systems for
research have been  installed or updated in recent years and are Y2K  compliant.
Additionally,  the Company has a policy requiring  maintenance of updated copies
of  programs  and files  ("back up") in the case of  possible  system  failures,
including year 2000 issue related  failures.  The back up material is maintained
at the Company's  research  facility and an additional  copy is maintained at an
off site location.

The Company currently  believes that its systems are either fully Y2K compliant,
that  appropriate  back up procedures  exist or that the costs of addressing any
possible  year  2000  issues  will not have a  material  adverse  impact  on the
Company's operations or financial position.

Third Party  Preparation.  The Company's has identified its critical third party
relationships  in order to  assess  potential  year 2000  issues  with the third
party's  computer  systems that might  impact the  Company's  operations.  These
critical  relationships  include one customer,  one principal vendor,  financial
institutions  and  various  service  vendors.  The Company  has  surveyed  these
critical  third  parties  and seeking  assurances  that the third  parties  have
addressed  year 2000  issues  involving  systems  important  in the  conduct  of
business with the Company, or that plans are in place to assure that the systems
are Y2K compliant  before the end of 1999.  The Company  completed the survey of
critical third party relationships by the end of the second quarter of 1999. The
Company  plans to address or correct all issues by the end of the third  quarter
of 1999.


                                       12
<PAGE>

Compliance  Costs.  The Company's  expenditures  on its year 2000 issues to date
have been nominal,  and the Company does not anticipate any  significant  future
costs associated with year 2000 issues.

Risks of the Company's  year 2000 issues.  The greatest risks to the Company are
potential  failures  of the  computer  systems  of  the  Company's  third  party
relationships.  The Company  currently  believes that the most likely worst case
scenario concerning the year 2000 issue involves potential business  disruptions
among the financial  institutions with which the Company conducts business. If a
signification  number  of  these  financial  institutions   experience  business
disruptions  due  to a year  2000  issue,  the  Company's  cash  flow  could  be
materially disrupted.

The Company believes that any year 2000 compliance problems of the Company,  its
customers or vendors will not have any material  adverse effect on the Company's
business, results of operations and financial condition.


                                       13
<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


                                       14
<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 9, 1999                         by: /s/ Robert W. Cook
                                              ----------------------
                                              Robert W. Cook
                                              Vice President Finance
                                              and Chief Financial Officer
                                              (Principal Accounting and
                                              Financial Officer)


                                       15