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, 1998

                         Commission file number 0-11550


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

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

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

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



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



As of August 3,1998,  the Registrant had  outstanding  37,270,949  shares of its
$.03 par value Common Stock.


<PAGE>



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

<TABLE>
<CAPTION>
                                                                     June 30,      December 31,
                                                                       1998            1997
                                                                   ------------    ------------
<S>                                                                <C>             <C>         
Assets
   Cash and cash equivalents                                       $  5,524,614    $  4,423,389
   Product sales and grants receivable, net                             810,503         237,655
   Inventory                                                          1,785,999       1,804,627
   Prepaid royalties                                                    232,545         143,333
   Prepaid expenses and other current assets                            162,009         171,299
                                                                   ------------    ------------
        Total current assets                                          8,515,670       6,780,303

   Fixed assets, net                                                    784,466         703,428
   Prepaid royalties, net of current portion                            413,414         573,334
   Intangible assets, net                                               283,508         291,262
   Other assets                                                          74,379          73,514
                                                                   ------------    ------------

        Total assets                                               $ 10,071,437    $  8,421,841
                                                                   ------------    ------------


Liabilities and Shareholders' Equity
   Long term debt, current portion                                       24,520          55,253
   Accounts payable                                                     610,988       2,576,968
   Accrued expenses                                                     794,434         809,869
   Accrued wages and other compensation                                 556,726         401,285
   Advances against future sales                                      1,643,967       1,000,000
                                                                   ------------    ------------
        Total current liabilities                                     3,630,635       4,843,375

   Advances against future sales, net of current portion              2,940,269       4,000,000
   Other liabilities                                                    100,000         100,000
                                                                   ------------    ------------
        Total liabilities                                             6,670,904       8,943,375
                                                                   ------------    ------------

   Shareholders' equity
   Preferred  stock, $.03 par value, 1,250,000 shares authorized
    Series B convertible, with a $1,000 liquidation preference,
        0 and 2,755 shares outstanding, respectively                                         83
    Series C convertible, with a $1,000 liquidation preference,
        4,500 and 0 shares outstanding, respectively                        135
   Common stock, $.03 par value; 60,000,000 shares authorized,
       37,055,886 and 34,391,638  shares issued and outstanding
       (excluding $551 in 1998 and 1997, held in Treasury)
       in 1998 and 1997, respectively                                 1,118,128       1,031,197
     Paid in capital in excess of par                                77,558,332      70,516,913
     Accumulated deficit                                            (75,276,062)    (72,069,727)
                                                                   ------------    ------------
        Total shareholders' equity (deficit)                          3,400,533        (521,534)
                                                                   ------------    ------------


        Total liabilities and shareholders' equity                 $ 10,071,437    $  8,421,841
                                                                   ------------    ------------
</TABLE>

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

<PAGE>

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

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                           June 30,        June 30,
                                                             1998            1997
                                                         ------------    ------------
<S>                                                      <C>             <C>          
Revenues
   Product sales                                         $    893,156            --
   License fee                                                350,000            --
                                                         ------------    ------------
                                                         $  1,243,156            --

Cost of Goods Sold                                            339,852            --
                                                         ------------    ------------

   Gross Margin                                               903,304            --

Expenses
   Research and development, net                            1,006,915       1,626,872
   Selling, general and administration                        627,602         467,061
   Patents                                                     62,702          99,614
   Depreciation and amortization                               53,376          71,850
                                                         ------------    ------------

      Total operating expenses                              1,750,595       2,265,397
                                                         ------------    ------------

Loss from operations                                         (847,291)     (2,265,397)

Other income (expenses):
   Interest income                                             91,583         143,827
   Other income (expenses), net                                (3,595)        (16,085)
   Interest expense                                             3,566            --
                                                         ------------    ------------
   Other income, net                                           91,554         127,742
                                                         ------------    ------------


Net loss                                                 ($   755,737)   ($ 2,137,655)

Less: Dividend embedded in convertible preferred stock   ($    52,400)   ($ 1,119,164)
        Preferred stock dividends                        ($    62,500)   ($    68,625)
                                                         ------------    ------------

Net loss applicable to common shareholders               ($   870,637)   ($ 3,325,444)
                                                         ============    ============

Net loss per share applicable
    to common stockholders - basic and diluted           ($      0.02)   ($      0.10)
                                                         ------------    ------------


Weighted average shares outstanding                        36,887,559      31,671,717
                                                         ------------    ------------
</TABLE>


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

<PAGE>

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

<TABLE>
<CAPTION>
                                                               Six Months Ended
                                                           June 30,        June 30,
                                                             1998            1997
                                                         ------------    ------------
<S>                                                      <C>             <C>          
Revenues
   Product sales                                         $    893,156            --
   License fee                                                350,000            --
                                                         ------------    ------------
                                                         $  1,243,156            --

Cost of Goods Sold                                            339,852            --
                                                         ------------    ------------

   Gross Margin                                               903,304            --

Expenses
   Research and development, net                            2,062,452       2,952,687
   Selling, general and administration                      1,160,475       1,531,360
   Patents                                                    112,332         132,002
   Depreciation and amortization                              103,715         142,420
                                                         ------------    ------------

      Total operating expenses                              3,438,974       4,758,469
                                                         ------------    ------------

Loss from operations                                       (2,535,670)     (4,758,469)

Other income (expenses):
   Interest income                                            197,657         186,389
   Other income (expenses), net                                10,769          (1,591)
   Interest expense                                            (6,416)           --
                                                         ------------    ------------
   Other income, net                                          202,010         184,798
                                                         ------------    ------------


Net loss                                                 ($ 2,333,660)   ($ 4,573,671)

Less: Dividend embedded in convertible preferred stock   ($   642,648)   ($ 1,275,274)
        Preferred stock dividends                        ($   168,899)   ($    86,875)
                                                         ------------    ------------

Net loss applicable to common shareholders               ($ 3,145,207)   ($ 5,935,820)
                                                         ============    ============

Net loss per share applicable
    to common stockholders - basic and diluted           ($      0.09)   ($      0.19)
                                                         ------------    ------------


Weighted average shares outstanding                        36,222,174      31,344,772
                                                         ------------    ------------
</TABLE>


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

<PAGE>

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

<TABLE>
<CAPTION>
                                                           Six Months Ended
                                                        June 30,       June 30,
                                                          1998           1997
                                                       -----------    -----------
<S>                                                    <C>            <C>        
Cash flows from operating activities
  Net loss                                             ($2,333,660)   ($4,573,671)
                                                       -----------    -----------
  Adjustments to reconcile net loss to net
    cash flow used in operating activities
       Depreciation and amortization                       103,715        142,420
  Changes in operating assets and liabilities
       Inventory                                            18,628
       Product sales and grants receivable                (572,848)
       Prepaid expenses and other current assets             9,290         60,059
       Advanced royalties                                   70,708       (143,333)
       Other assets                                           (865)
       Accounts payable                                 (1,965,979)       (92,404)
       Accrued expenses                                    (15,435)       733,177
       Accrued wages                                       155,441
                                                       -----------    -----------

       Total adjustments                                (2,197,345)       699,919
                                                       -----------    -----------

  Net cash flows used in operating activities           (4,531,005)    (3,873,752)
                                                                      -----------

Cash flows from investing activities
     Purchases of fixed assets, net                       (177,000)       (42,656)
                                                       -----------    -----------

  Net cash flows used in investing activities             (177,000)       (42,656)
                                                       -----------    -----------

Cash flows from financing activities
     Proceeds from issuance of common stock
         and exercise of warrants, net                   1,620,438         67,500
     Proceeds from issuance of preferred stock, net      4,635,289      5,740,000
     Advances against future sales, net                   (415,764)     1,000,000
     Increase (decrease) in loans payable                  (30,733)       (45,835)
                                                       -----------    -----------

  Net cash flows provided by financing activities        5,809,230      6,761,665
                                                       -----------    -----------

Net increase (decrease) in cash and cash equivalents     1,101,225      2,845,257

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

Cash and cash equivalents at end of period             $ 5,524,614    $ 7,978,163
                                                       -----------    -----------
</TABLE>


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

<PAGE>

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information  pursuant to the instructions to Form 10-Q and Article 10
of Regulation S-X.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management, all adjustments,  consisting
of  normal  recurring  accrual  adjustments,  considered  necessary  for a  fair
presentation  have been  included.  Operating  results for the six month  period
ended June 30, 1998, are not  necessarily  indicative of the results that may be
expected for the year ended December 31, 1998.

1.   The Company

Pharmos Corporation (the "Company") is a bio-pharmaceutical company incorporated
under  the  laws of the  State  of  Nevada  and is  engaged  in the  design  and
development of novel pharmaceutical  products in various fields including:  site
specific drugs for ophthalmic indications,  neuroprotective agents for treatment
of central  nervous system ("CNS")  disorders,  systemic drugs designed to avoid
CNS related side effects,  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.  Some of the
Company's  compounds  are being  actively  marketed  while others are in various
stages of development, from preclinical to advanced clinical trials. On March 9,
1998, the Company  received  approval for three  separate New Drug  Applications
("NDA") from the U.S. Food and Drug Administration ("FDA"). These approvals were
for  Lotemax(TM)  and Alrex(TM).  Lotemax  received two  approvals,  one for the
treatment of several ocular inflammatory indications,  including uveitis and the
other for post-operative inflammation. Alrex has been approved for the treatment
of  seasonal  allergic  conjunctivitis.  In  conjunction  with  its  development
efforts,  the Company has also undertaken research and development  contracts in
the past and has sold fine chemicals to the pharmaceutical  research  community.
The  Company's  administrative  offices  are  located in Iselin,  New Jersey and
conducts  operations  through its wholly owned  subsidiary,  Pharmos,  Ltd.,  in
Rehovot, Israel.

2.   Liquidity and Business Risks

While  the  Company  has  generated  revenue  through  the sale of its  approved
products in the market,  it has incurred  operating losses since  inception.  At
June  30,  1998,  the  Company  has  an   accumulated   deficit  of  $75,276,062
(unaudited).  This deficit is primarily the result of costs incurred in research
and development and from general and  administrative  expenses.  The Company had
funded its operations  through the use of cash obtained  principally  from third
party  financing.  Management  believes that cash and cash  equivalents  of $5.5
million as of June 30, 1998,  combined with anticipated cash inflows,  including
revenues  expected  to be  derived  from  sales of  Lotemax  and  Alrex  will be
sufficient  to  support  operations  through  the  first  quarter  of 1999.  The
Company's  success  depends  upon many  factors  that are beyond  the  Company's
immediate   control,   including   market   acceptance  of  Lotemax  and  Alrex,
competition,  and the  ability to obtain  additional  financing.  The Company is
continuing  to  actively  pursue  various  funding  options,   including  equity
offerings,   strategic  corporate  alliances,   business  combinations  and  the
establishment of research and development  partnerships to obtain the additional
financing  necessary to complete the  development of its product  candidates and
bring them to  commercial  markets.  There can be no  assurance  that Lotemax or
Alrex will achieve  market  acceptance or that the Company will be successful in
obtaining additional financing or commercializing its product candidates.


<PAGE>



3.   Significant Accounting Policies

Revenue

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

Inventories

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

Reclassifications

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

Recent Accounting Standards

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

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

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

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

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


<PAGE>



4.   Collaborative Agreements

In June 1995, the Company  entered into a marketing  agreement  (the  "Marketing
Agreement") with Bausch & Lomb Pharmaceuticals, Inc. ("Bausch & Lomb") to market
Lotemax,  on an exclusive  basis in the United States  following  receipt of FDA
approval.   The  Marketing   Agreement  also  covers  the  Company's  two  other
loteprednol  etabonate-based  products,  Alrex and a combination  of loteprednol
etabonate  and the  anti-infective  tobramycin  ("LE-T").  Under  the  Marketing
Agreement,  Bausch & Lomb will purchase the active drug  substance  (loteprednol
etabonate) from the Company.  Through June 30, 1998, Bausch & Lomb have provided
the Company with $5 million in cash advances against future sales. An additional
$1million is due upon the receipt of regulatory  approval for LE-T in the United
States.  Bausch & Lomb will be entitled to credits  against future  purchases or
sales of the active drug  substance  based on the advances  made,  until all the
advances  have been repaid.  The Company may be obligated to repay such advances
if it is unable to supply Bausch & Lomb with certain specified quantities of the
active drug substance. The portion of advances expected to be recouped by Bausch
and Lomb over the upcoming twelve month period,  based on management's  estimate
of  product  sales to Bausch & Lomb in 1998 and 1999,  has been  presented  as a
current  liability  in the  accompanying  balance  sheet  at June  30,  1998 and
December 31, 1997.

Bausch & Lomb  also  collaborates  in the  development  of  products  by  making
available  amounts up to 50% of the Phase III clinical trial costs.  The Company
has  retained  certain  conditional  co-marketing  rights to all of the products
covered by the Marketing Agreement.

As part of its September, 1997 agreement with the University of Florida Research
Foundation,  the Company received a non-recurring license fee of $350,000 during
the quarter  ended June  30,1998 in exchange  for the  transfer of certain  drug
technology.

5.   Common and Preferred Stock Transactions

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

In  May  1998,  the  Company,   under  provisions  of  the  1997  Incentive  and
Non-Qualified  Stock  Option  Plan,  issued  options  to  employees,  directors,
consultants and other key personnel for the purchase of 500,000 shares of common
stock. The options are exercisable over a ten-year period and will expire on May
18, 2008. The options will vest in four annual  installments  of 25% each on May
18,  1999,2000,2001  and 2002,  respectively.  The options are  exercisable at a
strike price of $2.781 per share,  which  represents the closing market value of
the common stock on the date the options were awarded.

On  February  4,  1998,   the  Company   completed  a  private   placement  with
institutional  investors of Series C Convertible Preferred Stock and warrants to
purchase  650,000  shares of  common  stock,  generating  gross  proceeds  of $5
million.  The preferred stock carries a 5% premium payable in common stock,  and
is convertible  into common shares of the Company 60 days subsequent to the date
of  issuance.  For the period  ending 180 days after the date of  issuance,  the
conversion  price is 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"). Following such period,
the conversion  price is the lower of the Variable  Conversion Price and 120% of
the average of the closing bid prices of the Common  Stock for the trading  days
beginning  on the date  which is 151 days,  and  ending on the date which is 180
days,  following the date of issuance.  Until  converted into common stock,  the
preferred  stock has no voting rights.  The warrants  issued to the investor and
the finders are  exercisable  at prices  ranging  from $2.28 to $2.67 per share,
commencing one year after the closing for four and five year periods.

During the first quarter of 1998,  the Company  issued  1,704,978  shares of its
common  stock  upon  conversion

<PAGE>

of 2,755 shares of the  Company's  Series B  Convertible  Preferred  Stock.  The
shares were issued with conversion  prices ranging from $1.41 per share to $1.78
per share.  The Company also issued  34,904 shares of common stock in payment of
dividends of the Series B Convertible  Preferred  stock.  As of the date of such
issuances, these dividends were valued at $68,624.

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

During the first half of 1998,  the Company  issued 942,728 shares of its common
stock upon the exercise of warrants, and received consideration of $1,620,439.

As  of  June  30,  1998,  cumulative  dividends  in  arrears  on  the  Company's
outstanding Series C convertible preferred stock are $100,275. The dividends are
payable in common stock of the Company.

In connection with the issuances of the Series A, B and C convertible  preferred
stock, the Company was required to recognize, in the EPS calculation,  the value
of the  conversion  discount as a dividend to the  preferred  stockholders.  The
dividend has been recognized in the EPS calculation on a pro rata basis over the
period beginning with issuance to the date that conversion can occur. During the
quarter ended June 30, 1998, the Company  recorded a preferred stock dividend of
$52,400  ($1,119,164  for the quarter  ended June 30,  1997) on the  outstanding
shares  of  convertible  preferred  stock  in  connection  with  the  conversion
discount.


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

Results of Operations

Quarters ended June 30, 1998 and 1997

During the quarter ended June 30, 1998, the Company reported  revenues from sale
of product for the first time. Product sales commenced in May,1998,  and revenue
totaled  $893,156  for the  quarter ($0 for the  quarter  ended June 30,  1997).
Additionally,  the Company  recorded  license income of $350,000 for the quarter
ended June 30, 1998 ($0 for the quarter ended June 30, 1997). The license income
was generated from a non-recurring  payment  received by the Company in exchange
for the transfer of certain drug technology.

Cost of goods sold for the quarter ended June 30, 1998 totaled  $339,852 ($0 for
the  quarter  ended June 30,  1997).  Cost of goods sold  includes a higher than
anticipated  level of direct  production costs incurred in the initial stages of
commercial production.

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

Total operating  expenses  decreased $514,800 or 23%, from $2,265,396 in 1997 to
$1,750,596 in 1998. The net decrease in operating expenses is primarily due to a
decrease in research and development expenses,  which was partially offset by an
increase in selling, general and administrative expenses.

Net  research  and  development  expenses  decreased  by $619,957  or 38%,  from
$1,626,872  in 1997 to  $1,006,915  in 1998.  The  decrease  in R&D  expense  is
primarily due to the closure of the  company's R&D  facilities in Florida in the
fourth  quarter of 1997,  and a lower than  anticipated  level of  research  and
development expenditure in the Company's Israel facility.


<PAGE>

Patent expenses  decreased by $36,912 or 37%, from $99,614 in 1997 to $62,702 in
1998.  This  decrease is due in part to  management's  decision not to renew its
patent protection on certain patents owned by a third party.

Selling, general and administrative expenses increased by $160,541 or 34 %, from
$467,061 in 1997 to $627,602 in 1998.  The  increase is  primarily  due to costs
incurred in connection with the FDA approval and marketing of Lotemax and Alrex.
In March 1998, the Company,  together with Bausch & Lomb Pharmaceuticals,  Inc.,
announced the receipt of approval from the Food and Drug Administration (FDA) to
manufacture and market Lotemax and Alrex.

Depreciation  and  amortization  expenses  decreased  by $18,474,  or 26%,  from
$71,850 in 1997 to  $53,376 in 1998,  reflecting  reduced  depreciation  expense
relating to the Alachua, Florida operation.

Other  income,  net,  decreased  by $36,188,  or 28%,  from  $127,742 in 1997 to
$91,554 in 1998.  Interest  income  decreased as a result of lower  average cash
balances.

Six months ended June 30, 1998 and June 30, 1997

During the six months ended June 30, 1998,  the Company  reported  revenues from
sale of product for the first time.  Product  sales  commenced in May,1998,  and
revenue totaled $893,156 for the period ($0 for the period ended June 30, 1997).
Additionally,  the Company recorded license income of $350,000 for the six month
ended June 30,  1998 ($0 for the six months  ended June 30,  1997).  The license
income was generated  from a  non-recurring  payment  received by the Company in
exchange for the transfer of certain drug technology.

Cost of goods sold for the six months ended June 30, 1998  totaled  $339,852 ($0
for the six months ended June 30,  1997).  Cost of goods sold  includes a higher
than anticipated level of direct production costs incurred in the initial stages
of commercial production.

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

Total operating expenses decreased $1,319,495 or 28%, from $4,758,469 in 1997 to
$3,438,974 in 1998.  The net decrease in operating  expenses is primarily due to
decreases in both  research and  development  expenses and selling,  general and
administrative expenses.

Net  research  and  development  expenses  decreased  by $890,235  or 30%,  from
$2,952,687  in 1997 to  $2,062,452  in 1998.  The  decrease  in R&D  expense  is
primarily due to the closure of the  company's R&D  facilities in Florida in the
fourth  quarter of 1997,  and a lower than  anticipated  level of  research  and
development expenditure in the Company's Israel facility.

Patent  expenses  decreased by $19,670 or 15%, from $132,002 in 1997 to $112,332
in 1998. This decrease is due in part to management's  decision not to renew its
patent protection on certain patents owned by a third party.

Selling, general and administrative expenses decreased by $370,885 or 24 %, from
$1,531,360 in 1997 to $1,160,475 in 1998. The decrease is primarily due to costs
incurred by the Company during the first half of 1997 under marketing agreements
to  supply  Bausch & Lomb  with  certain  specified  quantities  of  loteprednol
etabonate ("LE").  Certain quantities of LE, totaling  $569,981,  were purchased
during  the first half of 1997 for use in  testing,  manufacturing  and  various
marketing  activities,  and were charged to results of  operations  in 1997.  In
March 1998,  the Company,  together  with Bausch & Lomb  Pharmaceuticals,  Inc.,
announced the receipt of approval from the Food and Drug Administration (FDA) to
manufacture and market Lotemax and Alrex.

Depreciation  and  amortization  expenses  decreased  by  $38,705  or 27%,  from
$142,420 in 1997 to $103,715 in 

<PAGE>

1998,  reflecting reduced depreciation expense relating to the Alachua,  Florida
operation.

Liquidity and Capital Resources

While  the  Company  has  generated  revenue  through  the sale of its  approved
products in the market,  it has incurred  operating losses since inception.  The
Company  has  financed  its  operations  with public and  private  offerings  of
securities,  advances and other funding pursuant to marketing and co-development
agreements with Bausch and Lomb, research contracts, license fees, royalties and
sales, and interest income.

The  Company  has  working  capital  of $4.9  million,  including  cash and cash
equivalents  of $5.5  million,  as of June 30,  1998.  On  February  4, 1998 the
Company completed a $5 million private placement of convertible  preferred stock
and warrants.  Management  believes  that  existing  cash and cash  equivalents,
combined  with  proceeds  generated  from sales of Lotemax and Alrex by Bausch &
Lomb together with additional cash inflows from investment income and R&D grants
will be sufficient to support  operations through the first quarter of 1999. The
Company will continue to actively  pursue  various  funding  options,  including
additional   equity   offerings,   strategic   corporate   alliances,   business
combinations  and the  establishment of product related research and development
limited  partnerships,  to obtain the additional  financing required to continue
the  development  of its  products  and bring them to  commercial  markets.  The
Company's  success  depends  upon many  factors  that are beyond  the  Company's
immediate   control,   including   market   acceptance  of  Lotemax  and  Alrex,
competition, and the ability to obtain financing. There can be no assurance that
Lotemax or Alrex will  achieve  market  acceptance  or that the Company  will be
successful  in  obtaining  additional   financing  or  commercializing   product
candidates.

Pursuant  to the U.S.  Marketing  Agreement  with  Bausch & Lomb the Company has
received  cumulative  advances  of $5 million  from Bausch & Lomb as of June 30,
1998.  Bausch & Lomb will be entitled  to recoup the  advances by way of credits
from future sales of Lotemax, Alrex and line extension products. The Company may
be obligated to repay such advances if it is unable to supply Bausch & Lomb with
certain specified quantities of the active drug substance.


<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




<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 3, 1998                     by: /s/ Robert W. Cook
                                              ------------------
                                              Robert W. Cook
                                              Vice President - Finance and Chief
                                              Financial Officer