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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Mark One

|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

or

|      |                                                                                                                                                          
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OR 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________



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Commission File Number: 333-34120

ISTA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|DELAWARE
(State or other jurisdiction of
incorporation or organization) |  | 33-0511729
(IRS Employer Identification No.)

15279 ALTON PARKWAY #100, IRVINE, CA 92618
(Address of principal executive offices)

(949) 788-6000
(Registrants telephone number, including area code)

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.

[X]   Yes    [   ]   No


The number of shares of the registrants common stock, $.001 par value,
outstanding as of July 31, 2002 was 16,892,636.

1



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TABLE OF CONTENTS



|                             |                                                                                              |                                                                |  |  |  |  |  | 
|---------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1 Financial Statements                                                                 
|                             |                                                                                              | Condensed Consolidated Balance Sheets                         
|                             |                                                                                              | Condensed Consolidated Statements of Operations               
|                             |                                                                                              | Condensed Consolidated Statements of Cash Flows               
|                             |                                                                                              | Notes to Unaudited Condensed Consolidated Financial Statements
|                             | Item 2 Managements Discussion And Analysis Of Financial Condition And Results Of Operations
|                             | Item 3 Quantitative and Qualitative Disclosures about Market Risk                           
|PART II  OTHER INFORMATION  
|                             | Item 1 Legal Proceedings                                                                    
|                             | Item 2 Change in Securities and Use of Proceeds                                             
|                             | Item 3 Defaults upon Senior Securities                                                      
|                             | Item 4 Submission of Matters to a Vote of Security Holders                                  
|                             | Item 5 Other Information                                                                    
|                             | Item 6 Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|INDEX TO EXHIBITS           
|EXHIBIT 10.1                
|EXHIBIT 10.2                
|EXHIBIT 99.1                



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##### Table of Contents



Table of Contents

|        |  |                                                                                       |                                                                                                                                                                                                |    |        
|------- |  | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | -------
|        |  |                                                                                       |                                                                                                                                                                                                |    | Page No
|PART I  |  | FINANCIAL INFORMATION                                                                 |                                                                                                                                                                                                |   
|       
|Item 1  |  | Financial Statements                                                                  |                                                                                                                                                                                                | 3 
|       
|        |  |                                                                                       | Condensed Consolidated Balance Sheets   December 31, 2001 and June 30, 2002 (unaudited)                                                                                                       |    | 3      
|       
|        |  |                                                                                       | Condensed Consolidated Statements of Operations (unaudited)   Three and Six
Month Periods Ended June 30, 2002 and 2001 and for the Period from February 13, 1992 (inception)
to June 30, 2002 |    | 4      
|       
|        |  |                                                                                       | Condensed Consolidated Statements of Cash Flows (unaudited)   Six Month
Periods Ended June 30, 2002 and 2001 and for the Period from
February 13, 1992 (inception) to June 30, 2002           |    | 5      
|       
|        |  |                                                                                       | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                                 |    | 6      
|       
|Item 2  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                                                                                | 7 
|       
|Item 3  |  | Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                                                                                                                | 16
|       
|PART II |  | OTHER INFORMATION                                                                     |                                                                                                                                                                                                |   
|       
|Item 1  |  | Legal Proceedings                                                                     |                                                                                                                                                                                                | 17
|       
|Item 2  |  | Change in Securities and Use of Proceeds                                              |                                                                                                                                                                                                | 17
|       
|Item 3  |  | Defaults upon Senior Securities                                                       |                                                                                                                                                                                                | 18
|       
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                                                                                | 18
|       
|Item 5  |  | Other Information                                                                     |                                                                                                                                                                                                | 18
|       
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                                                                | 18
|       
|        |  | Signatures                                                                            |                                                                                                                                                                                                | 19
|       
|        |  | Index to Exhibits                                                                     |                                                                                                                                                                                                | 20

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1 Financial Statements




ISTA Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |         |        | 
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ----------- | ------ | ------------ | ----- | ------- | ------ | 
|                                               |                                                                                                                                                                                                                   |                                                      |       | June 30,    |        | December 31,
|                                               |                                                                                                                                                                                                                   |                                                      |       | 2002        |        | 2001        
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |             
|                                               |                                                                                                                                                                                                                   |                                                      |       | (Unaudited) |        |              |       |        
|ASSETS                                         |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|Current assets:                                |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               | Cash and cash equivalents                                                                                                                                                                                         |                                                      | $     | 1,336       |        |              | $     | 12,348  |       
|                                               | Short-term investments                                                                                                                                                                                            |                                                      |       | 4,003       |        |              |       | 3,254   |       
|                                               | Advance payments  clinical trials                                                                                                                                                                                |                                                      |       | 40          |        |              |       | 40      |       
|                                               | Other current assets                                                                                                                                                                                              |                                                      |       | 254         |        |              |       | 451     |       
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               |                                                                                                                                                                                                                   | Total current assets                                 |       |             | 5,633  |              |       |         | 16,093 | 
|Property and equipment, net                    |                                                                                                                                                                                                                   |                                                      | 949   |             |        |              | 819   |        
|Deposits and other assets                      |                                                                                                                                                                                                                   |                                                      | 44    |             |        |              | 44    |        
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               |                                                                                                                                                                                                                   | Total Assets                                         |       | $           | 6,626  |              |       | $       | 16,956 | 
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|Current liabilities:                           |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               | Accounts payable                                                                                                                                                                                                  |                                                      | $     | 2,024       |        |              | $     | 891     |       
|                                               | Accrued compensation and related expenses                                                                                                                                                                         |                                                      |       | 305         |        |              |       | 799     |       
|                                               | Accrued expenses  clinical trials                                                                                                                                                                                |                                                      |       | 496         |        |              |       | 770     |       
|                                               | Other accrued expenses                                                                                                                                                                                            |                                                      |       | 776         |        |              |       | 1,554   |       
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               |                                                                                                                                                                                                                   | Total current liabilities                            |       |             | 3,601  |              |       |         | 4,014  | 
|Deferred rent                                  |                                                                                                                                                                                                                   |                                                      | 17    |             |        |              | 2     |        
|Deferred income                                |                                                                                                                                                                                                                   |                                                      | 4,860 |             |        |              | 5,000 |        
|Stockholders (deficit) equity:                |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               | Common stock, $.001 par value; 100,000,000 shares authorized at
June 30, 2002 and December 31, 2001; 16,857,325 and 15,598,840
shares issued and outstanding at June 30, 2002 and December 31,
2001, respectively |                                                      |       | 17          |        |              |       | 16      |       
|                                               | Additional paid in capital                                                                                                                                                                                        |                                                      |       | 111,102     |        |              |       | 111,026 |       
|                                               | Deferred compensation                                                                                                                                                                                             |                                                      |       | (2,209      | )      |              |       | (3,643  | )     
|                                               | Accumulated other comprehensive income                                                                                                                                                                            |                                                      |       | (37         | )      |              |       | (22     | )     
|                                               | Deficit accumulated during the development stage                                                                                                                                                                  |                                                      |       | (110,725    | )      |              |       | (99,437 | )     
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               |                                                                                                                                                                                                                   | Total stockholders (deficit) equity                 |       |             | (1,852 | )            |       |         | 7,940  | 
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        
|                                               |                                                                                                                                                                                                                   | Total Liabilities and Stockholders (Deficit) Equity |       | $           | 6,626  |              |       | $       | 16,956 | 
|                                               |                                                                                                                                                                                                                   |                                                      |       |             |        |              |       |        

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##### Table of Contents






ISTA Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |        | 
|--------------------------------------------------------------------- | -------------------------- | - | ------------------ | ----- | ---------------- | - | ----------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- |  | - | --------------- | ------ | 
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   | From the Period
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   | From           
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   | February 13,   
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   | 1992           
|                                                                      |                            |   | Three Months Ended |       | Six Months Ended |   | (Inception)
|                                                                      |                            |   | June 30,           |       | June 30,         |   | Through    
|                                                                      |                            |   |                    |       |                  |   | June 30,   
|                                                                      |                            |   | 2002               |       | 2001             |   | 2002        |       | 2001 |   | 2002   
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |        
|Revenue                                                               |                            | $ | 70                 |       |                  | $ | 0           |       |      | $ | 140     |       |  | $ | 0       |       |  | $ | 140             |       
|Operating expenses:                                                   |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|                                                                      | Research and development   |   |                    | 4,470 |                  |   |             | 3,643 |      |   |         | 7,392 |  |   |         | 7,572 |  |   |                 | 66,104 | 
|                                                                      | General and administrative |   |                    | 2,249 |                  |   |             | 1,659 |      |   |         | 4,166 |  |   |         | 3,154 |  |   |                 | 27,695 | 
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Total operating expenses                                              |                            |   | 6,719              |       |                  |   | 5,302       |       |      |   | 11,558  |       |  |   | 10,726  |       |  |   | 93,799          |       
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Loss from operations                                                  |                            |   | (6,649             | )     |                  |   | (5,302      | )     |      |   | (11,418 | )     |  |   | (10,726 | )     |  |   | (93,659         | )     
|Interest income                                                       |                            |   | 43                 |       |                  |   | 383         |       |      |   | 130     |       |  |   | 647     |       |  |   | 2,544           |       
|Interest expense                                                      |                            |   | 0                  |       |                  |   | (25         | )     |      |   | 0       |       |  |   | (25     | )     |  |   | (320            | )     
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Net loss                                                              |                            |   | (6,606             | )     |                  |   | (4,944      | )     |      |   | (11,288 | )     |  |   | (10,104 | )     |  |   | (91,435         | )     
|Deemed dividend for preferred stockholders                            |                            |   |                   |       |                  |   |            |       |      |   |        |       |  |   |        |       |  |   | (19,245         | )     
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Net loss attributable to common stockholders                          |                            | $ | (6,606             | )     |                  | $ | (4,944      | )     |      | $ | (11,288 | )     |  | $ | (10,104 | )     |  | $ | (110,680        | )     
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Net loss per common share, basic and diluted                          |                            | $ | (0.39              | )     |                  | $ | (0.32       | )     |      | $ | (0.68   | )     |  | $ | (0.65   | )     |  |   |                 |       
|                                                                      |                            |   |                    |       |                  |   |             |       |      |   |         |       |  |   |         |       |  |   |                 |       
|Shares used in computing net loss per
common share, basic and diluted |                            |   | 16,813             |       |                  |   | 15,554      |       |      |   | 16,718  |       |  |   | 15,499  |       |  |   |                 |       

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ISTA Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)

|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |       |                |         |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------- | ---------------- | ---- | ---- | ------ | -------- | ----- | -------------- | ------- | -
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |       | For the Period
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |       | From          
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |       | February 13,  
|                                                                                                                |                                                               |                                       |                                                     |        | Six Months Ended |         | 1992 (Inception)
|                                                                                                                |                                                               |                                       |                                                     |        | June 30,         |         | Through         
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         | June 30,        
|                                                                                                                |                                                               |                                       |                                                     |        | 2002             |         | 2001             |      | 2002
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |     
|Operating Activities                                                                                            |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Net loss attributable to common stockholders                                                                    |                                                               | $                                     | (11,288                                             | )      |                  | $       | (10,104          | )    |      | $      | (110,680 | )    
|Deemed dividend for preferred stockholders                                                                      |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 19,245   |      
|Adjustments to reconcile net loss attributable to common
Stockholders to net cash used in operating activities: |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|                                                                                                                |                                                               | Amortization of deferred compensation |                                                     |        | 1,304            |         |                  |      | 792  |        |          |       | 7,715          |        
|                                                                                                                |                                                               | Common stock issued for services      |                                                     |        | 99               |         |                  |      |     |        |          |       | 212            |        
|                                                                                                                |                                                               | Forgiveness of note receivable        |                                                     |        |                 |         |                  |      |     |        |          |       | 162            |        
|                                                                                                                |                                                               | Depreciation and amortization         |                                                     |        | 168              |         |                  |      | 177  |        |          |       | 1,497          |        
|Changes in operating assets and liabilities:                                                                    |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|                                                                                                                | Advanced payments  clinical trials and other current assets  |                                       |                                                     | 197    |                  |         |                  | 377  |      |        |          | (294  | )             
|                                                                                                                | Note receivable from officer                                  |                                       |                                                     |       |                  |         |                  | (5   | )    |        |          | (162  | )             
|                                                                                                                | Accounts payable                                              |                                       |                                                     | 1,133  |                  |         |                  | 379  |      |        |          | 2,024 |               
|                                                                                                                | Accrued compensation and related expenses                     |                                       |                                                     | (494   | )                |         |                  | (251 | )    |        |          | 305   |               
|                                                                                                                | Accrued expenses  clinical trials and other accrued expenses |                                       |                                                     | (1,052 | )                |         |                  | (505 | )    |        |          | 1,396 |               
|                                                                                                                | Deferred rent                                                 |                                       |                                                     | 15     |                  |         |                  | (8   | )    |        |          | 17    |               
|                                                                                                                | Deferred income                                               |                                       |                                                     | (140   | )                |         |                  |     |      |        |          | 4,860 |               
|                                                                                                                | License fee received from Visionex                            |                                       |                                                     |       |                  |         |                  |     |      |        |          | 5,000 |               
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash used in operating activities               |        |                  | (10,058 | )                |      |      | (9,148 | )        |       |                | (68,703 | )
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Investing Activities                                                                                            |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Purchase of marketable investment securities                                                                    |                                                               |                                       | (11,026                                             | )      |                  |         | (9,351           | )    |      |        | (43,180  | )    
|Sale of marketable investment securities                                                                        |                                                               |                                       | 10,258                                              |        |                  |         | 17,129           |      |      |        | 39,168   |      
|Purchase of equipment                                                                                           |                                                               |                                       | (298                                                | )      |                  |         | (135             | )    |      |        | (2,438   | )    
|Deposits and other assets                                                                                       |                                                               |                                       |                                                    |        |                  |         | 72               |      |      |        | (44      | )    
|Proceeds from refinancing under capital leases                                                                  |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 827      |      
|Cash acquired from Visionex transaction                                                                         |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 4,403    |      
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash (used in) provided by investing activities |        |                  | (1,066  | )                |      |      | 7,715  |          |       |                | (1,264  | )
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Financing Activities                                                                                            |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Payments on obligation under capital lease                                                                      |                                                               |                                       |                                                    |        |                  |         | (15              | )    |      |        | (827     | )    
|Proceeds from exercise of stock options                                                                         |                                                               |                                       | 107                                                 |        |                  |         | 78               |      |      |        | 667      |      
|Proceeds from exercise of warrants                                                                              |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 41       |      
|Proceeds from bridge loans with related parties                                                                 |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 5,047    |      
|Payments on bridge loans with related parties                                                                   |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | (3,755   | )    
|Proceeds from issuance of preferred stock                                                                       |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | 34,215   |      
|Repurchase of preferred stock                                                                                   |                                                               |                                       |                                                    |        |                  |         |                 |      |      |        | (56      | )    
|Proceeds from issuance of common stock                                                                          |                                                               |                                       |                                                    |        |                  |         | 25               |      |      |        | 36,007   |      
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash provided by financing activities           |        |                  | 107     |                  |      |      | 88     |          |       |                | 71,339  |  
|Effect of exchange rate changes on cash                                                                         |                                                               |                                       | 5                                                   |        |                  |         | (14              | )    |      |        | (36      | )    
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|(Decrease) increase in cash and cash equivalents                                                                |                                                               |                                       | (11,012                                             | )      |                  |         | (1,359           | )    |      |        | 1,336    |      
|Cash and cash equivalents at beginning of period                                                                |                                                               |                                       | 12,348                                              |        |                  |         | 8,772            |      |      |        |         |      
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      
|Cash and cash equivalents at end of period                                                                      |                                                               | $                                     | 1,336                                               |        |                  | $       | 7,413            |      |      | $      | 1,336    |      
|                                                                                                                |                                                               |                                       |                                                     |        |                  |         |                  |      |      |        |          |      

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ISTA Pharmaceuticals, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2002

1. The Company

ISTA Pharmaceuticals, Inc. (ISTA or the Company) was incorporated in
the state of California on February 13, 1992 to discover, develop and market
novel therapeutics for diseases and conditions of the eye. ISTAs initial
product development efforts are focused on using highly purified formulations
of the enzyme hyaluronidase to treat diseases and conditions such as vitreous
hemorrhage, diabetic retinopathy and corneal opacification. The Companys lead
product candidate, Vitrase®, which has completed two Phase III clinical trials,
is a proprietary drug for the treatment of vitreous hemorrhage. The Company has
not commenced commercial operations and is considered to be in the development
stage. The Company reincorporated in Delaware on August 4, 2000.

The financial statements included herein have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business for the
foreseeable future.

As of June 30, 2002, we had approximately $5.3 million in cash and
short-term investments. The Company incurred a net loss of $11.3 million for
the six months ended June 30, 2002 and had an accumulated deficit of $110.7
million at June 30, 2002. The ability of the Company to continue as a going
concern is dependent upon its ability to obtain additional capital and achieve
profitable operations. These factors raise substantial doubt about the
Companys ability to continue as a going concern. The Company will continue to
rely on outside sources of financing to meet its capital needs for the fourth
quarter and beyond. The outcome of these matters cannot be predicted at this
time. Further, there can be no assurance, assuming the Company raises
additional funds, that the Company will achieve positive cash flow. If the
Company is not able to secure additional funding, we will be required to scale
back our research and development programs and general and administrative
activities and we may not be able to continue in business. The
Company has engaged an
investment bank in order to try and raise additional funding. These condensed consolidated financial statements do not include any
adjustments to the specific amounts and classifications of assets and
liabilities that might be necessary should the Company be unable to continue as
a going concern.

2. Basis of Presentation

The unaudited financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. In managements opinion, the
accompanying financial statements have been prepared on a basis consistent with
the audited financial statements and contain adjustments, consisting of only
normal, recurring accruals, necessary to present fairly the Companys financial
position and results of operations. Interim financial results are not
necessarily indicative of results anticipated for the full year.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

For further information, refer to the consolidated financial statements
and footnotes thereto included in the Companys annual report on Form 10-K for
the year ended December 31, 2001.

3. Revenue Recognition

We recognize revenue consistent with the provisions of the Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition, which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Amounts received for upfront product and technology
license fees under multiple-element arrangements are deferred and recognized
over the period of such services or performance if such arrangements require
on-going services or performance. Amounts received for milestones are
recognized upon achievement of the milestone, unless the

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amounts received are creditable against royalties or we have ongoing
performance obligations. Royalty revenue will be recognized upon sale of the
related products, provided the royalty amounts are fixed and determinable and
collection of the related receivable is probable. Any amounts received prior to
satisfying our revenue recognition criteria will be recorded as deferred
revenue in the accompanying balance sheets.

In December 2001, we began a collaboration with Otsuka Pharmaceutical Co.,
Ltd. under which Otsuka will be responsible for all clinical development,
regulatory approvals, sales and marketing activities for Vitrase in Japan. Our
principal sources of revenue from this collaboration and the commercialization
of Vitrase will be the license fee received in December 2001 and amortized over
the Companys continuing involvement with Otsuka, milestone payments and
product sales received from Otsuka. Under the terms of the collaboration, we
are responsible for the manufacture of Vitrase and supplying all of Otsukas
requirements for Vitrase.

4. Comprehensive Income (Loss)

Statement of
Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income,requires reporting and displaying comprehensive income
(loss) and its components, which, for ISTA, includes net loss and unrealized
gains and losses on investments and foreign currency translation gains and
losses. Total comprehensive loss for the six month period ended June 30, 2002
and 2001 was $11,325,000 and $10,126,000, respectively. In accordance with
SFAS No. 130, the accumulated balance of unrealized gains(losses) on
investments and the accumulated balance of foreign currency translation
adjustments are disclosed as separate components of stockholders equity.

5. Net Loss Per Share

In accordance with SFAS No. 128, Earnings Per Share,and SEC Staff
Accounting Bulletin (SAB) No. 98, basic net loss per common share is computed
by dividing the net loss for the period by the weighted average number of
common shares outstanding during the period. Under SFAS No. 128, diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares,
such as stock options, outstanding during the period. Such common equivalent
shares have not been included in the Companys computation of net loss per
share as their effect would be anti-dilutive.

Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.




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

This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. These forward-looking statements concern
matters that involve risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Words such as may, will, should, could, expect, plan, anticipate,
believe, estimate, predict, potential or continue or similar words
are intended to identify forward looking statements, although not all forward
looking statements contain these words.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date hereof to conform such statements to
actual results or to changes in our expectations.

Readers are urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors which
affect our business, including without limitation Factors That May Affect
Results of Operations and Financial Condition set forth in this Form 10-Q, and
the audited financial statements and the notes thereto and disclosures made
under the captions, Management Discussion and Analysis of Financial Condition
and Results of Operations, Risk Factors, Consolidated Financial Statements
and Notes to

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Consolidated Financial Statements, included in the Companys annual
report on Form 10-K for the year ended December 31, 2001.

Overview

ISTA was founded to discover, develop and market new remedies for diseases
and conditions of the eye. Our product development efforts are focused on
using highly purified formulations of the enzyme hyaluronidase to treat
diseases and conditions such as vitreous hemorrhage, diabetic retinopathy and
corneal opacification. Our lead product candidate, Vitrase, is a proprietary
drug for the treatment of vitreous hemorrhage and diabetic retinopathy.

In March 2000, we completed the acquisition of Visionex, a Singapore
corporation, which had been conducting a Phase II clinical trial of Vitrase in
Singapore. Visionex was a related party through common ownership by some of our
stockholders. We are planning to significantly wind down the operations of
Visionex in 2002 upon completion of the Phase II clinical trials of Vitrase in
Singapore.

In March 2000, we began a collaboration with Allergan, Inc., under which
Allergan will be responsible for the marketing, sale and distribution of
Vitrase in the United States and all international markets, except Mexico until
April 2004, and Japan. We will be dependent on the success of Allergan in
commercializing Vitrase in these markets. Our principal sources of revenue
from this collaboration and the commercialization of Vitrase will be milestone,
royalty and profit sharing payments received from Allergan. Under the terms of
the collaboration, we are responsible for the manufacture of Vitrase and for
supplying all of Allergans requirements for Vitrase. If we are successful in
obtaining regulatory approval for Vitrase and Allergan achieves significant
sales of the product, our aggregate manufacturing costs will increase.

In December 2001, we began a collaboration with Otsuka Pharmaceutical Co.,
Ltd., under which Otsuka will be responsible for all clinical development,
regulatory approval, sales and marketing activities for Vitrase in Japan. Our
principal sources of revenue from this collaboration and the commercialization
of Vitrase will be the license fee received in December 2001 and amortized over
the Companys continuing involvement with Otsuka, milestone payments and
product sales received from Otsuka. Under the terms of the collaboration, we
are responsible for the manufacture of Vitrase and supplying all of Otsukas
requirements for Vitrase.

In December 2001, we announced our strategic plan to transition from a
development organization to a fully-integrated, specialty pharmaceutical
company with a primary focus on ophthalmology by acquiring complimentary
products, either already marketed or in development.

In March 2002, we announced the preliminary results for our Phase III
clinical studies of Vitrase. The data from the two Phase III studies did not
show a statistically significant improvement in the primary (surrogate)
endpoint. However, further analysis has shown that for the 55 IU dose of
Vitrase in both studies, there was a clinically meaningful and statistically
significant decrease in the density of vitreous hemorrhage and a statistically
significant difference in the proportion of patients with an improvement in
best-corrected visual acuity at one and two months, which extended to the
three-month post-treatment visit in the study conducted outside North America.
Based on these improvements in visual function and our review and discussions
with the FDA regarding the data from the two studies, we plan to submit the
clinical section and the chemistry, manufacturing and controls section of the
New Drug Application (NDA) for Vitrase by the end of the third quarter of 2002.
Furthermore, we plan to submit the final component of the Vitrase NDA,
concerning manufacturing validation, in the first quarter of 2003.

On May 9, 2002 we acquired substantially all of the assets of AcSentient,
Inc. The assets include United States marketing rights for a new formulation
of timolol, timolol-LA, a beta-blocking agent for treating glaucoma.
AcSentient previously acquired rights to timolol-LA from Senju Pharmaceutical
Co., Ltd. (Japan). We believe that Senju will be submitting the NDA for
timolol-LA early in the fourth quarter of 2002, which will include data from a
recently conducted U.S.-based, multi-center Phase III clinical trial. The
assets acquired from AcSentient also include United States product rights to
bromfenac, a topical non-steroidal anti-inflammatory compound for the treatment
of ocular inflammations, and worldwide marketing rights for Caprogel®, a novel
compound for the treatment of hyphema, or bleeding into the front of the eye.
AcSentient previously acquired rights to these compounds from Senju and the
Eastern Virginia School of Medicine, respectively. Under the terms of the
transaction, we have assumed payment and other obligations and responsibility
for final development of bromfenac and Caprogel. We anticipate initiating a
Phase III study of bromfenac in the United States in the first half of 2003.
We believe that data from this Phase III study, combined with preclinical and
clinical study data from trials

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previously conducted in Japan, will be sufficient for us to submit an NDA
for bromfenac in late 2003. Furthermore, we intend to initiate a Phase III
study of Caprogel in the first half of 2003. We believe that this Phase III
study, in combination with a Phase III study of Caprogel previously completed
in the United States, will support our preparation and submission of an NDA
towards the end of 2003. We anticipate incurring additional research and
development expenses in connection with the final development of bromfenac and
Caprogel, and if these compounds are approved for sale in the United States, we
expect to incur significant marketing and sales expenses. In addition, we will
also be responsible for certain milestone payments to a third party in
connection with the marketing approval in the United States for these
compounds.

We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through June 30, 2002 of
$110.7 million. Our losses have resulted primarily from research and
development activities, including clinical trials, related general and
administrative expenses and a deemed dividend for preferred stockholders. We
expect to continue to incur operating losses for the foreseeable future as we
continue our research and development and clinical testing activities, and seek
regulatory approval for our product candidates.

Results of Operations

Three Months Ended June 30, 2002 and 2001

Revenue.Revenue of $70,000 for the three months ended June 30, 2002
reflects the amortization for the period of deferred revenue recorded in
December 2001 for the license fee payment made by Otsuka in connection with the license for Vitrase in Japan.

Research and development expenses.Research and development expenses were
$4.5 million for the three months ended June 30, 2002 compared to $3.6 million
for the three months ended June 30, 2001. The increase in research and
development expenses was primarily attributable to the costs
(including payment and other obligations) associated with
the Companys acquisition from AcSentient of certain rights to
timolol-LA, Caprogel, and bromfenac in May 2002.

General and administrative expenses.General and administrative expenses
were $2.2 million for the three months ended June 30, 2002 compared to $1.7
million for the three months ended June 30, 2001. The increase in general and
administrative expenses was primarily attributable to an increase in the
amortization of non-cash, stock based compensation expense and higher corporate
operating expenses.

Interest income.Interest income was $43,000 for the three months ended
June 30, 2002 compared to $383,000 for the three months ended June 30, 2001.
The decrease in interest income was attributable to higher cash balances for
the second quarter of 2001 compared to the second quarter of 2002.

Six Months Ended June 30, 2002 and 2001

Revenue.Revenue of $140,000 for the six months ended June 30, 2002
reflects the amortization for the period of deferred revenue recorded in
December 2001 for the license fee payment made by Otsuka in connection with the license for Vitrase in Japan.

Research and development expenses.Research and development expenses were
$7.4 million for the six months ended June 30, 2002 compared to $7.6 million
for the six months ended June 30, 2001. The decrease in research and
development expenses was primarily attributable to decreases in expenses
associated with two Phase III clinical trials of Vitrase for the treatment of
severe vitreous hemorrhage, offset against the costs (including
payment and other obligations) associated with the
Companys acquisition from AcSentient of certain rights to
timolol-LA, Caprogel, and bromfenac in May 2002.

General and administrative expenses.General and administrative expenses
were $4.2 million for the six months ended June 30, 2002 compared to $3.2
million for the six months ended June 30, 2001. The increase in general and
administrative expenses was primarily attributable to an increase in the
amortization of non-cash, stock based compensation expense and higher corporate
operating expenses.

Interest income.Interest income was $130,000 for the six months ended
June 30, 2002 compared to $647,000 for the six months ended June 30, 2001. The
decrease in interest income was attributable to higher cash balances during the
first six months of 2001 compared to the first six months of 2002.

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Liquidity and Capital Resources

As of June 30, 2002, we had approximately $5.3 million in cash and
short-term investments.

We have financed our operations since inception primarily through private
sales of our preferred stock and sale of our common stock in our initial public
offering. We received net proceeds of $10.0 million from the private sale of
preferred stock in March 2000, $31.7 million from our initial public offering
in August 2000, $4.0 million from the private sale of common stock in December
2001 and $5.0 million from a license fee payment in December 2001.

For the six months ended June 30, 2002, we used $10.1 million of cash for
operations principally as a result of the net loss of $11.3 million partially
offset by non-cash compensation expense of approximately $1.3 million. We used
approximately $9.1 million of cash for operations in the six months ended June
30, 2001.

For the six months ended June 30, 2002, we used $1.1 million of cash for
investing activities, primarily for the purchase of marketable investment
securities. For the six months ended June 30, 2001, $7.7 million was provided
by investing activities, primarily from the sale of marketable securities.

Net cash provided by financing activities totaled $107,000 for the six
months ended June 30, 2002 compared to $88,000 for the six months ended June
30, 2001. These activities primarily involved the exercise of stock options.

As of June 30, 2002, the Company had an accumulated deficit of $110.7
million. The Company has operated at a loss since inception and expects this
to continue for some time. The amount of the accumulated deficit will continue
to grow if we are able to continue our clinical, research and development efforts for our
product candidates. We need to raise additional funding in order to
continue our clinical, research and development efforts, and if these activities are successful and we receive FDA
approval to market these products, additional funding will be required to
market and sell these products.

At the time of this
filing, we believe that our cash on hand will be sufficient
to fund our operations and capital expenditure needs for approximately the next
month. We have
engaged an investment bank in order to try and raise additional
funding. There can be no assurance that we will be
able to raise additional funds on terms favorable to us or to
our stockholders, or at all. Our failure to raise sufficient funds
will require us to eliminate some or all of our product development
efforts and significantly limit
our ability to operate as a going concern. If additional funds are raised by
issuing equity securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience substantial dilution or such equity
securities may provide for rights, preferences or privileges senior to those of
the holders of our common stock.

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Factors that May Effect Results of Operations and Financial Condition.

We have a history of net losses and negative cash flow, and we may never
achieve or maintain profitability.

We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
June 30, 2002, our accumulated deficit was $110.7 million, including a net loss
of $22.5 million for the year ended December 31, 2001 and a net loss of
approximately $11.3 million for the six months ended June 30, 2002. We have not
generated any revenue from product sales to date, and we may never generate
revenues from product sales in the future. Even if we do achieve significant
revenues from product sales, we expect to incur operating losses for the foreseeable future and, due to expenses associated with our acquisition
of product rights from AcSentient and the currently anticipated increase in
research and development expenses in 2002 over the levels previously planned,
we now anticipate that our cash in hand will be sufficient to fund our
operations and capital expenditure needs for approximately the next month from
the time of filing. We may never achieve profitable operations.

If we cannot raise additional capital on acceptable terms, we will need to
significantly curtail our operations and we may not be able to continue as a
going concern.

At the time of this
filing, we believe that our cash on hand will be sufficient to fund our operations
and capital expenditure needs for approximately the next month. We
have engaged an investment bank in order to raise additional funding.
There can be no assurance that we will be able to raise additional funds on
terms favorable to us or to our stockholders, or at all. Our failure to raise
sufficient funds will require us to eliminate some or all of our product
development efforts and significantly limit our ability to operate as a going
concern.

Due to the preliminary results of our Phase III clinical trials for Vitrase, we
may terminate the development of Vitrase for severe vitreous hemorrhage.

In March 2002, we announced the preliminary efficacy and safety results
for our two Phase III clinical studies of Vitrase. The data from these two
studies did not show a statistically significant improvement in the primary
(surrogate) endpoint. However, further analysis has shown that for the 55 IU
dose of Vitrase, in both studies, there was a clinically meaningful and
statistically significant decrease in the density of vitreous
hemorrhage and a statistically significant difference in the proportion of patients with an
improvement in best-corrected visual acuity at one and two months, which
extended to the three-month post-treatment visit in the study conducted outside
of North America. Based on these improvements in visual function and our
review and discussions with the FDA regarding the data from the two studies, we
plan to submit the clinical section and the chemistry, manufacturing and
controls section of the NDA for Vitrase by the end of
the third quarter of 2002. Furthermore, we plan to submit the final component
of the Vitrase NDA, concerning manufacturing validation, in the first quarter
of 2003. The FDAs review of the NDA for Vitrase may result in a requirement
that we conduct additional Phase III clinical studies to support regulatory
approval. Additional Phase III clinical studies will require us to raise
additional capital, which we may not be able to raise on favorable terms, or at
all. Even if we raise additional funds and conduct additional clinical trials,
we cannot assure you that the results will support the filing or regulatory
approval of an NDA, and we may decide to terminate our efforts to develop
Vitrase if the results of any additional clinical studies do not justify the
costs involved. If we terminate development of Vitrase, we will be dependent
on the development of our other product candidates and our ability to
successfully acquire other products and technologies.

If we are not able to complete clinical trials for bromfenac or Caprogel
successfully or our clinical trials are delayed, we may not be able to market
these products.

In connection with our acquisition of substantially all of the assets of
AcSentient, we acquired United States product rights to bromfenac and worldwide
marketing rights for Caprogel. Phase I, Phase II and Phase III clinical trials
of bromfenac have already been completed in Japan. We anticipate initiating a
single Phase III study of bromfenac in the United States in the first half of
2003, and when that is successfully completed, submitting an NDA in late 2003.
Phase II and Phase III clinical trials of Caprogel have been completed and we
intend to initiate one additional Phase III study of Caprogel in the first half
of 2003. When that Phase III study is completed, we believe that we will have
the necessary support to prepare and submit an NDA for Caprogel towards the end
of 2003. However, the FDA may require us to conduct additional clinical trials
with respect to bromfenac or Caprogel

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prior to filing NDAs for those products. We may not be able to raise
additional capital in order to conduct necessary clinical trials and there is a
possibility that the results of any clinical trials conducted by us for
bromfenac or Caprogel may not support regulatory approval.

We may be delisted on the Nasdaq National
Market.

On June 28, 2002, we received a notice from the Nasdaq National Market that our
common stock had failed to maintain the required minimum closing bid price of
$1.00 set forth in Marketplace Rule 4450(a)(5) for a period of 30 consecutive
trading days. As a result, Nasdaq provided us 90 calendar days, or until
September 26, 2002, to regain compliance with this requirement or face
delisting from trading on Nasdaq. On August 1, 2002, we were also informed by
Nasdaq that we do not currently qualify under the new minimum $10,000,000
stockholders equity standard and we have until November 1, 2002 to achieve
compliance with this requirement.

If our common stock were to be delisted from the Nasdaq National Market,
trading in our common stock would decrease substantially, or cease altogether,
the market price of the common stock may decline further, potentially to zero,
and our stockholders may lose some or all of their investment. Furthermore,
delisting of our common stock from the Nasdaq National Market would inhibit, if
not preclude, our ability to raise additional working capital on acceptable
terms, if at all.

If regulatory approval for the new formulation of timolol is unsuccessful or
delayed, we may not be able to market the product.

In connection with our acquisition of substantially all of the assets of
AcSentient, we also acquired the United States marketing rights for timolol-LA.
We depend on Senju for obtaining regulatory approval for timolol-LA. We
believe that Senju will be submitting the NDA for timolol-LA early in the
fourth quarter of 2002, which will include data from a recently conducted
U.S.-based, multi-center Phase III clinical trial and previous pre-clinical
trials and other clinical trials. However, the FDA may require Senju to
conduct additional clinical trials prior to filing an NDA. The amount of time
and resources Senju dedicates to obtaining regulatory approval of timolol-LA is
not within our control.

If we do not receive and maintain regulatory approvals for our products, we
will not be able to manufacture or market our products.

None of our product candidates has received regulatory approval from the
FDA. Approval from the FDA is necessary to manufacture and market
pharmaceutical products in the United States. Other countries have similar
requirements.

The process that pharmaceuticals must undergo to receive necessary
approval is extensive, time-consuming and costly, and there is no guarantee
that regulatory authorities will approve any of our product candidates. FDA
approval can be delayed, limited or not granted for many reasons, including:



| |  |  | a product candidate may not be safe or effective                                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | FDA officials may not find that the data from preclinical testing and clinical trials justifies approval                                                  
|
| |  |  | the FDA might not approve our manufacturing processes or facilities
or the processes or facilities of our contract manufacturers or raw
material suppliers
|
| |  |  | the FDA may change its approval policies or adopt new regulations                                                                                         
|
| |  |  | the FDA may approve a product candidate for indications that are
narrow, which may limit our sales and marketing activities                               

The process of obtaining approvals in foreign countries is subject to
delay and failure for the same reasons.

If we are not able to complete our clinical trials successfully, we may not be
able to obtain regulatory approvals to market our products.

Many of our research and development programs are at an early stage and
clinical testing is a long, expensive and uncertain process. Even if initial
results of preclinical studies or clinical trial results are positive, we may
obtain different results in later stages of drug development, including failure
to show desired safety and efficacy. For example, our preliminary efficacy and
safety results for our two Phase III clinical trials of Vitrase for the
treatment of severe vitreous hemorrhage did not show a statistically
significant improvement in the primary (surrogate) endpoint. We cannot assure
you that any additional clinical trials we may decide to conduct of Vitrase for
the treatment of severe vitreous hemorrhage will support the filing or
regulatory approval of a NDA.

The clinical trials of any of our product candidates could be
unsuccessful, which would prevent us from obtaining regulatory approval and
commercializing the product. Our failure to develop safe and effective products
would substantially impair our ability to generate revenues and materially harm
our business and financial condition.

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We may be unable to execute our strategic plan to transition to a
fully-integrated, specialty pharmaceutical company.

Our strategy to acquire or in-license currently marketed ophthalmic
products will be dependent upon a number of factors including identifying such
acquisition opportunities, successfully negotiating favorable terms with third
parties for the acquisition of such products and our ability to raise
additional capital to enable the acquisition of such products. Furthermore, we
have not established sales, marketing or distribution capabilities to support
the marketing of any products and we do not have experience in the
manufacturing of any products in commercial quantities.

We may not be able to identify any product acquisition opportunities or be
successful in negotiating favorable terms for such product acquisitions, or at
all. Should we be successful in acquiring any products, we will need to
establish our own sales, marketing, distribution and manufacturing
capabilities, each of which will require substantial financial and management
resources. Our failure to establish an effective sales, marketing, distribution
and manufacturing capabilities on a timely basis would adversely affect our
ability to commercialize any acquired products.

We depend on our new Chief Executive Officer, Vicente Anido, Jr., Ph.D., to
execute our strategic plan to transition to a fully-integrated, specialty
pharmaceutical company.

Our success largely depends on the skills, experience and efforts of our
new Chief Executive Officer, Vicente Anido, Jr., Ph.D. Dr. Anido may terminate
his employment at any time. In addition, we do not maintain key person life
insurance policies covering Dr. Anido. The loss of Dr. Anido would jeopardize
our ability to execute our strategic plan.

If we have problems with our contract manufacturer, our product development and
commercialization efforts could be delayed or stopped.

We have entered into a master services agreement with a new contract
manufacturer, SP Pharmaceuticals, for the manufacture of commercial quantities
of Vitrase. To date, we needed Vitrase only for clinical trials. Before any new
contract manufacturer can produce commercial quantities of Vitrase, if applied,
we must demonstrate to the FDAs satisfaction that the new source of Vitrase is
substantially equivalent to the supply of the drug used in our clinical trials.
Such demonstration may include the requirement to conduct additional clinical
trials. In addition, the manufacturing facilities of all of our contract
manufacturers must comply with current Good Manufacturing Practice regulations,
which the FDA strictly enforces. Furthermore, the facilities of the contract
manufacturer must undergo and pass pre-approval inspection by the FDA before
any of our products can be approved for manufacture. We cannot assure you that
SP Pharmaceuticals will be able to develop processes necessary to produce
substantially equivalent product or that regulatory authorities will this new
manufacturer. Failure to develop necessary production processes or receive
regulatory approval could delay or stop our efforts to develop and
commercialize Vitrase.

Our strategic partners may not perform their duties under our agreements, in
which case our ability to commercialize Vitrase may be significantly impaired.

We have entered into collaborations with both Allergan, Inc. and Otsuka
Pharmaceutical Co., Ltd. for Vitrase. If we obtain regulatory approval for
Vitrase in the United States and Europe, we will be dependent on Allergan for
the commercialization of Vitrase in the United States and Europe. We will
depend on Otsuka for obtaining regulatory approval of Vitrase in Japan, and if
such approval is obtained, we will be dependent upon Otsuka for the
commercialization of Vitrase in Japan. The amount and timing of resources
Allergan and Otsuka dedicate to our collaborations is not within our control.
Accordingly, any breach or termination of our agreements by Allergan or Otsuka
could delay or stop the commercialization of Vitrase. For various reasons,
including our preliminary results of our two Phase III clinical trials of
Vitrase for the treatment of severe vitreous hemorrhage, our strategic partners
may change their strategic focus, terminate our agreements, pursue alternative
technologies or develop competing products. Unfavorable developments in our
relationship with our strategic partners could have a significant adverse
effect on us and our stock price.

If we have problems with Biozyme, our product development and commercialization
efforts could be delayed or stopped.

We have a supply agreement with Biozyme Laboratories Limited pursuant to
which Biozyme supplies our contract manufacturer with all of our ovine
hyaluronidase requirements for use in our clinical trials. Biozyme is currently
our only source for highly purified hyaluronidase, which is extracted from
sheep in New Zealand.

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Difficulties in our relationship with Biozyme could limit our ability to
provide sufficient quantities of our products for clinical trials and
commercial sales.

The outbreak of foot-and-mouth disease in Europe and elsewhere may
significantly interrupt the supply of the active pharmaceutical ingredient for
our products.

The active pharmaceutical ingredient in our product candidates is
hyaluronidase, which is extracted from sheep in New Zealand. Biozyme, the
company that processes hyaluronidase for us, is located in Wales and ships
hyaluronidase to our manufacturer, SP Pharmaceuticals, in Albuquerque, New
Mexico, approximately twice per month for formulation and filling of dose
specific vials. The export of each shipment of hyaluronidase from the United
Kingdom (UK) requires that the Ministry of Agriculture, Fisheries and Food
(MAFF) issue an export permit. The MAFF has never denied the issuance of an
export permit for any shipment of hyaluronidase to ISTA. To permit the
importation of hyaluronidase in to the United States, we are required to secure
an annual import permit from the United States Department of Agriculture
(USDA). The USDA has never denied the issuance of an annual import permit to
ISTA.

In February 2001, an outbreak of foot-and-mouth disease in the UK led to
governmental actions around the world to prevent the highly contagious disease
from spreading to animals in other countries. Such actions have included
temporarily prohibiting the importation and exportation of cattle, sheep and
other animals subject to the disease, and products derived from these animals,
to and from the UK and to and from other countries. As a result, the MAFF
temporarily placed exportation of processed hyaluronidase and other biological
materials on hold because of the foot-and-mouth disease outbreak. Before it
will issue export permits for these materials, including hyaluronidase, MAFF is
requiring that the USDA make a written request that permits be issued. The USDA
issued a permit request for our hyaluronidase. The MAFF then issued the export
permit and the shipment of hyaluronidase was delivered to ISTA. Subsequent
shipments of hyaluronidase have been delivered without delay consistent with
the procedure in place prior to the outbreak of foot-and-mouth disease. If
future events lead to lengthy delays in the shipment of our active
pharmaceutical ingredient to our manufacturer, our on-going clinical studies
and our business and financial condition may be materially impaired.

We may be required to bring litigation to enforce our intellectual property
rights, which may result in substantial expense.

We rely on patents to protect our intellectual property rights. The
strength of this protection, however, is uncertain. In particular, it is not
certain that:



| |  |  | our patents and pending patent applications use technology that we invented first                                                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we were the first to file patent applications for these inventions                                                                                                                                                                   
|
| |  |  | others will not independently develop similar or alternative technologies or duplicate our technologies                                                                                                                              
|
| |  |  | any of our pending patent applications will result in issued patents                                                                                                                                                                 
|
| |  |  | any patents issued to us will provide a basis for commercially viable
products, will provide us with any competitive advantages or will not
face third party challenges or be the subject of further proceedings
limiting their scope

We may become involved in interference proceedings in the U.S. Patent and
Trademark Office to determine the priority of our inventions. We could also
become involved in opposition proceedings in foreign countries challenging the
validity of our patents. In addition, costly litigation could be necessary to
protect our patent position. Patent law relating to the scope of claims in the
technology fields in which we operate is still evolving and, consequently,
patent positions in our industry are generally uncertain. We may not prevail in
any lawsuit or, if we do prevail, we may not receive commercially valuable
remedies. Failure to protect our patent rights could harm us.

We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect with
confidentiality agreements with employees, consultants and others with whom we
discuss our business. These individuals may breach our confidentiality
agreements and our remedies may not be adequate to enforce these agreements.
Disputes may arise concerning the ownership of intellectual property or the
applicability

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or enforceability of these agreements, and we may not resolve these
disputes in our favor. Furthermore, our competitors may independently develop
trade secrets and proprietary technology similar to ours. We may not be able to
maintain the confidentiality of information relating to such products.

Our products could infringe the intellectual property rights of others, which
may cause us to engage in costly litigation and, if we are not successful,
could cause us to pay substantial damages and prohibit us from selling our
products.

Third parties may assert patent, trademark or copyright infringement or
other intellectual property claims against us based on their patents or other
intellectual property. We may be required to pay substantial damages, including
but not limited to treble damages, for past infringement if it is ultimately
determined that our products infringe a third partys intellectual property
rights. Even if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert managements
attention from other business concerns. Further, we may be unable to sell our
products before we obtain a license from the owner of the relevant technology
or other intellectual property rights. If such a license is available at all,
it may require us to pay substantial royalties.

We have ceased negotiations with a third party for our acquisition of
rights to patent applications owned by such party related to our Keraform
product in development. As a result, we may be required to license these patent
rights in order to commercialize our Keraform product as currently planned.
Such a license may not be available to us on favorable terms, if at all. If
such license is not available and we commercialize our Keraform product in its
current configuration, there is a possibility that we could be sued for patent
infringement should any patents containing claims related to our Keraform
product issue from these patent applications.

If we do not receive third-party reimbursement, our products may not be
accepted in the market.

Our ability to earn sufficient returns on our products will depend in part
on the extent to which reimbursement for our products and related treatments
will be available from government health administration authorities, private
health coverage insurers, managed care organizations and other organizations.

Third-party payers are increasingly attempting to limit both the coverage
and the level of reimbursement of new drug products to contain costs.
Consequently, significant uncertainty exists as to the reimbursement status of
newly approved healthcare products. If we succeed in bringing one or more of
our product candidates to market, third-party payers may not establish adequate
levels of reimbursement for our products, which could limit their market
acceptance.

We face intense competition and rapid technological change that could result in
products that are superior to the products we are developing.

We have numerous competitors in the United States and abroad, including,
among others, major pharmaceutical and specialized biotechnology firms,
universities and other research institutions that may be developing competing
products. Such competitors may include Alcon Laboratories, Inc., Bausch & Lomb,
Incorporated, CIBA Vision (a unit of Novartis AG), Merck & Co, Allergan and Eli
Lilly and Company. These competitors may develop technologies and products that
are more effective or less costly than our current or future product candidates
or that could render our technologies and product candidates obsolete or
noncompetitive. Many of these competitors have substantially more resources and
product development, manufacturing and marketing experience and capabilities
than we do. In addition, many of our competitors have significantly greater
experience than we do in undertaking preclinical testing and clinical trials of
pharmaceutical product candidates and obtaining FDA and other regulatory
approvals of products and therapies for use in healthcare.

We are exposed to product liability claims, and insurance against these claims
may not be available to us at a reasonable rate.

The coverage limits of our insurance policies may be inadequate to protect
us from any liabilities we might incur in connection with clinical trials or
the sale of our products. Product liability insurance is expensive and in the
future may not be available on acceptable terms, or at all. A successful claim
or claims brought against us in excess of our insurance coverage could
materially harm our business and financial condition.

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We deal with hazardous materials and generate hazardous wastes and must comply
with environmental laws and regulations, which can be expensive and restrict
how we do business. We could also be liable for damages or penalties if we are
involved in a hazardous material or waste spill or other accident.

Our research and development work and manufacturing processes involve the
use of hazardous materials and waste, including chemical, radioactive and
biological materials. Our operations also produce hazardous wastes. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and waste. In
the event of a hazardous material or waste spill or other accident, we could
also be liable for damages or penalties. In addition, we may be liable or
potentially liable for injury or contamination that results from our, or a
third partys, use of these materials, and our liability could exceed our total
assets.

Our stock price is subject to significant volatility.

Our stock price has been and may continue to be subject to significant
volatility. The following factors, in addition to other risk factors described
in this section, may cause the market price of our common stock to fall:



| |  |  | competitors announcing technological innovations or new commercial products  
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | developments concerning proprietary rights, including patents                
|
| |  |  | competitors publicity regarding actual or potential products underdevelopment
|
| |  |  | regulatory developments in the United States and foreign countries           
|
| |  |  | period-to-period fluctuations in our financial results                       
|
| |  |  | litigation                                                                   
|
| |  |  | economic and other external factors, including disasters and other crises    

We participate in a highly dynamic industry, which often results in
significant volatility in the market price of our common stock irrespective of
company performance. Fluctuations in the price of our common stock may be
exacerbated by conditions in the healthcare and technology industry segments or
conditions in the financial markets generally.




Item 3 Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. The average
duration of all of our investments in 2001 and for the first six months of 2002
was less than one year. Due to the short-term nature of these investments, we
believe we have no material exposure to interest rate risk arising from our
investments. A hypothetical 100 basis point adverse move in interest

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rates along the entire interest rate yield curve would not materially
affect the fair market value of our interest sensitive financial investments.
Declines in interest rates over time will, however, reduce our investment
income, while increases in interest rates over time will increase our interest
expense.

We have operated primarily in the United States and have had no sales to
date. Accordingly, we have not had any significant exposure to foreign
currency rate fluctuations. Visionexs functional currency is the Singapore
dollar and a portion of Visionexs business is conducted in currencies other
than the Singapore dollar. However, Visionexs operations have historically
been insignificant and we have no current plans to substantially increase
Visionexs activity. As a result, currency fluctuations between the Singapore
dollar and the currencies in which Visionex does business will cause foreign
currency translation gains and losses. We do not expect our foreign currency
translation gains or losses to be material. We do not currently engage in
foreign exchange hedging transactions to manage our foreign currency exposure.




PART II  OTHER INFORMATION




Item 1 Legal Proceedings

None




Item 2 Change in Securities and Use of Proceeds

Initial Public Offering

On August 25, 2000 the Company completed an initial public offering of
3,000,000 shares of common stock at an initial public offering price of $10.50
per share with gross proceeds of $31,500,000. Net proceeds, after a 7%
underwriters discount, were $29,295,000. Additional expenses relating to the
initial public offering, other than the underwriters discount, amounted to
$1,918,000. The managing underwriters for the offering were CIBC World Markets,
Prudential Vector Healthcare and Thomas Weisel Partners LLC. The shares of
common stock sold in the offering were registered under the Act in a
Registration Statement on Form S-1, as amended (File No. 333-34120). The
Securities and Exchange Commission initially declared the Registration
Statement effective on August 9, 2000. We subsequently filed two post-effective
amendments to the Registration Statement, the last of which was declared
effective on August 21, 2000.

In September 2000, the underwriters exercised their over-allotment option
for an additional 450,000 shares of common stock at the initial public offering
price of $10.50, less a 7% discount, resulting in net proceeds of $4,394,000.

The net proceeds from our initial public offering are primarily being used
to fund our clinical trials and preclinical research, with a particular focus
on Vitrase for the treatment of severe vitreous hemorrhage, and for general
corporate purposes, including working capital. We may use a portion of the net
proceeds to acquire or invest in technologies, products or businesses
complementary to our business. None of the net offering proceeds of ISTA have
been or will be paid directly or indirectly to any director, officer, general
partner of ISTA or their associates, persons owning more than 10% or more of
any class of ISTAs equity securities, or an affiliate of ISTA.

Otsuka Collaboration

In December 2001, we completed the private placement of 845,665 shares of
common stock at a price of $4.73 per share as part of our collaboration with
Otsuka for the rights for Vitrase in Japan.

The sale and issuance of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended in reliance upon
Section 4(2) of the Securities Act of 1933, as amended. The recipient of
securities represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationship
with ISTA, to information about us.

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AcSentient, Inc. Asset Purchase

In May 2002, we acquired substantially all of the assets of AcSentient,
Inc. for $290,000 in cash and the issuance of 100,000 shares of common stock. We also agreed to issue an additional 200,000 shares of common
stock over time and upon the achievement of certain milestones.

The issuance of these securities was deemed to be exempt from registration
under the Securities Act of 1933, as amended in reliance upon Section 4(2) of
the Securities Act of 1933, as amended. The recipient of securities represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with ISTA, to
information about us.




Item 3 Defaults upon Senior Securities

None




Item 4 Submission of Matters to a Vote of Security Holders

Set forth below is information concerning each matter submitted to a vote
at the Annual Meeting of Stockholders on May 29, 2002.

Proposal No. 1:
The stockholders elected one Class II director to serve
for a term of three years expiring upon the 2005 Annual Meeting of Stockholders
or until his successor has been duly elected and qualified.

|                          |  |           |            |                |  |  |         | 
|------------------------- |  | --------- | ---------- | -------------- |  |  | ------- | 
|Director's Name           |  | Votes For |            | Votes Withheld
|                          |  |           |            |               
|Vicente Anido, Jr., Ph.D. |  |           | 10,523,667 |                |  |  | 859,752 | 

Proposal No. 2: The stockholders ratified the appointment of Ernst & Young
LLP as the Companys independent auditors for the fiscal year ended December
31, 2002 (with 11,320,581 affirmative votes, 59,688 votes against, 3,150 votes
abstaining, and no broker non  votes).




Item 5 Other Information

None




Item 6 Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits See Exhibit Index
| | --- |  | --------------------------
|
| | (b) |  | Reports on Form 8-K       
|

| |  |  | 1. |  | May 6, 2002 a Form 8-K was filed with regard to the Companys
entering into an Asset Purchase and Sale Agreement with AcSentient,
Inc.                                                                                                                     
| |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 2. |  | June 11, 2002 a Form 8-K was filed with regard to the Companys
engagement of an investment bank and intention, subject to market
conditions, to raise approximately $30 million through an offering of
shares of its common stock to accredited investors.
|
| |  |  | 3. |  | June 26, 2002 a Form 8-K/A was filed with regard to the filing of a
Form 8-K on May 6, 2002 for the Asset Purchase and Sale Agreement with
AcSentient, Inc.                                                                                                

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, ISTA
Pharmaceuticals, Inc. has duly caused this 10-Q report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
County of Orange, State of California, on this 14th day of August 2002.

| |  |                                                                                               
| |  | ----------------------------------------------------------------------------------------------
| |  | ISTA Pharmaceuticals, Inc.                                                                    
| |  |                                                                                               
| |  | (Registrant)                                                                                  
|
|
| |  | /s/ Vicente
Anido, Jr., Ph.D.

Vicente Anido, Jr., Ph.D.
President and Chief Executive
Officer

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                              
|Number  |  | Description                                                                                                                                                                  
|        |  |                                                                                                                                                                              
|        |  |                                                                                                                                                                              
|10.1    |  | Form of Change
of Control Severance Agreement with certain officers                                                                                                          
|10.2    |  | Form of Change
of Control Severance Agreement with certain officers                                                                                                          
|99.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

20