##### Table of Contents



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, 2003

Or

|  |  |                                                                                          
|- |  | -----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO

Commission File Number: 000-31255

ISTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 33-0511729                       
|(State or other jurisdiction of
incorporation or organization) |  | (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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) [ ] Yes [X] No

The number of shares of the registrants common stock, $.001 par value,
outstanding as of August 1, 2003 was 13,319,604.





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TABLE OF CONTENTS



|                             |                                                                                              |                                                                |  |  |  |  |  | 
|---------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1 Condensed Consolidated 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                           
|                             | Item 4 Controls and Procedures                                                              
|PART II OTHER INFORMATION   
|                             | Item 1 Legal Proceedings                                                                    
|                             | Item 6 Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|INDEX TO EXHIBITS           
|EXHIBIT 10.1                
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                
|EXHIBIT 32.2                



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##### Table of Contents



Table of Contents

TABLE OF CONTENTS

|        |  |                                                                                       |  |                                                                                                                                                                                                    |    |      |    | 
|------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|        |  |                                                                                       |  |                                                                                                                                                                                                    |    | Page
|        |  |                                                                                       |  |                                                                                                                                                                                                    |    | No  
|        |  |                                                                                       |  |                                                                                                                                                                                                    |    |     
|PART I  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                                                                                    | 3  |     
|Item 1  |  | Condensed Consolidated Financial Statements                                           |  |                                                                                                                                                                                                    | 3  |     
|        |  |                                                                                       |  | Condensed Consolidated Balance Sheets  June 30, 2003
(unaudited) and December 31, 2002                                                                                                            |    |      | 3  | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Operations (unaudited) -
Three and Six Month Periods Ended June 30, 2003 and 2002 and for
the
Period from February 13, 1992 (inception) through June 30, 2003 |    |      | 4  | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (unaudited) -
Six Month Periods Ended June 30, 2003 and 2002 and
for the Period from February 13, 1992 (inception) through
June 30, 2003           |    |      | 5  | 
|        |  |                                                                                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                                     |    |      | 6  | 
|Item 2  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |                                                                                                                                                                                                    | 9  |     
|Item 3  |  | Quantitative and Qualitative Disclosure about Market Risk                             |  |                                                                                                                                                                                                    | 21 |     
|Item 4  |  | Controls and Procedures                                                               |  |                                                                                                                                                                                                    | 21 |     
|PART II |  | OTHER INFORMATION                                                                     |  |                                                                                                                                                                                                    | 21 |     
|Item 1  |  | Legal Proceedings                                                                     |  |                                                                                                                                                                                                    | 21 |     
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                                                                                    | 21 |     
|        |  |                                                                                       |  | Signatures                                                                                                                                                                                         |    |      | 23 | 
|        |  |                                                                                       |  | Index to Exhibits                                                                                                                                                                                  |    |      | 24 | 

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##### Table of Contents






PART I FINANCIAL INFORMATION




Item 1 Condensed Consolidated Financial Statements




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

|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |          |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ----------- | ------ | ------------ | ----- | -------- | ------ | 
|                                     |                                                                                                                                                                                                                   |                                            |       | June 30,    |        | December 31,
|                                     |                                                                                                                                                                                                                   |                                            |       | 2003        |        | 2002        
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |             
|                                     |                                                                                                                                                                                                                   |                                            |       | (Unaudited) |        |              |       |         
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     | Cash and cash equivalents                                                                                                                                                                                         |                                            | $     | 15,118      |        |              | $     | 32,257   |       
|                                     | Short-term investments                                                                                                                                                                                            |                                            |       | 9,986       |        |              |       | 3,455    |       
|                                     | Other current assets                                                                                                                                                                                              |                                            |       | 500         |        |              |       | 509      |       
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     |                                                                                                                                                                                                                   | Total current assets                       |       |             | 25,604 |              |       |          | 36,221 | 
|Property and equipment, net          |                                                                                                                                                                                                                   |                                            | 762   |             |        |              | 879   |         
|Deposits and other assets            |                                                                                                                                                                                                                   |                                            | 35    |             |        |              | 35    |         
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     |                                                                                                                                                                                                                   | Total Assets                               |       | $           | 26,401 |              |       | $        | 37,135 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     | Accounts payable                                                                                                                                                                                                  |                                            | $     | 1,844       |        |              | $     | 910      |       
|                                     | Accrued compensation and related expenses                                                                                                                                                                         |                                            |       | 231         |        |              |       | 687      |       
|                                     | Accrued expenses  clinical trials                                                                                                                                                                                |                                            |       | 627         |        |              |       | 721      |       
|                                     | Other accrued expenses                                                                                                                                                                                            |                                            |       | 604         |        |              |       | 857      |       
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     |                                                                                                                                                                                                                   | Total current liabilities                  |       |             | 3,306  |              |       |          | 3,175  | 
|Deferred rent                        |                                                                                                                                                                                                                   |                                            | 11    |             |        |              | 10    |         
|Deferred income                      |                                                                                                                                                                                                                   |                                            | 4,583 |             |        |              | 4,722 |         
|Stockholders equity:                |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     | Common stock, $.001 par value; 100,000,000 shares
authorized at June 30, 2003 and December 31, 2002;
13,315,039 and 13,288,120 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively |                                            |       | 13          |        |              |       | 13       |       
|                                     | Additional paid in capital                                                                                                                                                                                        |                                            |       | 153,090     |        |              |       | 153,022  |       
|                                     | Deferred compensation                                                                                                                                                                                             |                                            |       | (827        | )      |              |       | (1,390   | )     
|                                     | Accumulated other comprehensive income                                                                                                                                                                            |                                            |       | (21         | )      |              |       | (23      | )     
|                                     | Deficit accumulated during the development stage                                                                                                                                                                  |                                            |       | (133,754    | )      |              |       | (122,394 | )     
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     |                                                                                                                                                                                                                   | Total stockholders equity                 |       |             | 18,501 |              |       |          | 29,228 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         
|                                     |                                                                                                                                                                                                                   | Total Liabilities and Stockholders Equity |       | $           | 26,401 |              |       | $        | 37,135 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |             |        |              |       |         

Note:  The balance sheet at December 31, 2002 has been derived
from the audited financial statements at that date, but does not include all of the information
 and footnotes required by accounting principles generally accepted in the United States for
complete financial statements.

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

|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |        | 
|--------------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ----- | ---------------- | - | -------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- |  | - | -------------- | ------ | 
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   | For the Period
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   | From          
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   | February 13,  
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   | 1992          
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   | (Inception)   
|                                                                      |                                     |   | Three Months Ended |       | Six Months Ended |   | Through 
|                                                                      |                                     |   | June 30,           |       | June 30,         |   | June 30,
|                                                                      |                                     |   |                    |       |                  |   |         
|                                                                      |                                     |   | 2003               |       | 2002             |   | 2003     |       | 2002 |   | 2003   
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |        
|Revenue                                                               |                                     | $ | 70                 |       |                  | $ | 70       |       |      | $ | 139     |       |  | $ | 140     |       |  | $ | 417            |       
|Operating expenses:                                                   |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|                                                                      | Research and development            |   |                    | 3,924 |                  |   |          | 4,470 |      |   |         | 7,350 |  |   |         | 7,392 |  |   |                | 80,813 | 
|                                                                      | Selling, general and administrative |   |                    | 2,288 |                  |   |          | 2,249 |      |   |         | 4,352 |  |   |         | 4,166 |  |   |                | 36,105 | 
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Total operating expenses                                              |                                     |   | 6,212              |       |                  |   | 6,719    |       |      |   | 11,702  |       |  |   | 11,558  |       |  |   | 116,918        |       
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Loss from operations                                                  |                                     |   | (6,142             | )     |                  |   | (6,649   | )     |      |   | (11,563 | )     |  |   | (11,418 | )     |  |   | (116,501       | )     
|Interest income                                                       |                                     |   | 94                 |       |                  |   | 43       |       |      |   | 209     |       |  |   | 130     |       |  |   | 2,836          |       
|Interest expense                                                      |                                     |   | (1                 | )     |                  |   | 0        |       |      |   | (6      | )     |  |   | 0       |       |  |   | (799           | )     
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Net loss                                                              |                                     |   | (6,049             | )     |                  |   | (6,606   | )     |      |   | (11,360 | )     |  |   | (11,288 | )     |  |   | (114,464       | )     
|Deemed dividend for preferred
stockholders                            |                                     |   |                   |       |                  |   |         |       |      |   |        |       |  |   |        |       |  |   | (19,245        | )     
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Net loss attributable to common
stockholders                          |                                     | $ | (6,049             | )     |                  | $ | (6,606   | )     |      | $ | (11,360 | )     |  | $ | (11,288 | )     |  | $ | (133,709       | )     
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Net loss per common share, basic and
diluted                          |                                     | $ | (0.45              | )     |                  | $ | (3.93    | )     |      | $ | (0.85   | )     |  | $ | (6.76   | )     |  |   |                |       
|                                                                      |                                     |   |                    |       |                  |   |          |       |      |   |         |       |  |   |         |       |  |   |                |       
|Shares used in computing net loss
per common share, basic and diluted |                                     |   | 13,300             |       |                  |   | 1,681    |       |      |   | 13,295  |       |  |   | 1,671   |       |  |   |                |       

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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,        
|                                                                                                                |                                                               |                                                                             |                                           |      | 2003             |         | 2002             |        | 2003 
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |      
|Operating Activities                                                                                            |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Net loss attributable to common stockholders                                                                    |                                                               | $                                                                           | (11,360                                   | )    |                  | $       | (11,288          | )      |       | $       | (133,709 | )    
|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                                       |                                           |      | 556              |         |                  |        | 1,304 |         |          |       | 9,127          |        
|                                                                                                                |                                                               | Amortization of fair value of warrant discount and related accrued interest |                                           |      | (9               | )       |                  |        |      |         |          |       | 454            |        
|                                                                                                                |                                                               | Common stock issued for services                                            |                                           |      |                 |         |                  |        | 99    |         |          |       | 310            |        
|                                                                                                                |                                                               | Forgiveness of note receivable                                              |                                           |      |                 |         |                  |        |      |         |          |       | 162            |        
|                                                                                                                |                                                               | Depreciation and amortization                                               |                                           |      | 174              |         |                  |        | 168   |         |          |       | 1,840          |        
|                                                                                                                |                                                               | Deferred rent                                                               |                                           |      | 1                |         |                  |        | 15    |         |          |       | 11             |        
|                                                                                                                |                                                               | Deferred income                                                             |                                           |      | (139             | )       |                  |        | (140  | )       |          |       | 4,583          |        
|Changes in operating assets and liabilities:                                                                    |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|                                                                                                                | Advanced payments  clinical trials and other current assets  |                                                                             |                                           | 9    |                  |         |                  | 197    |       |         |          | (500  | )             
|                                                                                                                | Note receivable from officer                                  |                                                                             |                                           |     |                  |         |                  |       |       |         |          | (162  | )             
|                                                                                                                | Accounts payable                                              |                                                                             |                                           | 934  |                  |         |                  | 1,133  |       |         |          | 1,845 |               
|                                                                                                                | Accrued compensation and related expenses                     |                                                                             |                                           | (456 | )                |         |                  | (494   | )     |         |          | 231   |               
|                                                                                                                | Accrued expenses  clinical trials and other accrued expenses |                                                                             |                                           | (347 | )                |         |                  | (1,052 | )     |         |          | 1,355 |               
|                                                                                                                | License fee received from Visionex                            |                                                                             |                                           |     |                  |         |                  |       |       |         |          | 5,000 |               
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|                                                                                                                |                                                               |                                                                             | Net cash used in operating activities     |      |                  | (10,637 | )                |        |       | (10,058 | )        |       |                | (90,204 | )
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Investing Activities                                                                                            |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Purchase of marketable investment securities                                                                    |                                                               |                                                                             | (9,330                                    | )    |                  |         | (11,026          | )      |       |         | (56,001  | )    
|Sale of marketable investment securities                                                                        |                                                               |                                                                             | 2,799                                     |      |                  |         | 10,258           |        |       |         | 45,989   |      
|Purchase of equipment                                                                                           |                                                               |                                                                             | (57                                       | )    |                  |         | (298             | )      |       |         | (2,599   | )    
|Deposits and other assets                                                                                       |                                                               |                                                                             |                                          |      |                  |         |                 |        |       |         | (53      | )    
|Proceeds from refinancing under capital leases                                                                  |                                                               |                                                                             |                                          |      |                  |         |                 |        |       |         | 827      |      
|Cash acquired from Visionex transaction                                                                         |                                                               |                                                                             |                                          |      |                  |         |                 |        |       |         | 4,403    |      
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|                                                                                                                |                                                               |                                                                             | Net cash used in investing activities     |      |                  | (6,588  | )                |        |       | (1,066  | )        |       |                | (7,434  | )
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Financing Activities                                                                                            |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Payments on obligation under capital lease                                                                      |                                                               |                                                                             |                                          |      |                  |         |                 |        |       |         | (827     | )    
|Proceeds from exercise of stock options                                                                         |                                                               |                                                                             | 84                                        |      |                  |         | 107              |        |       |         | 765      |      
|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                                                                          |                                                               |                                                                             |                                          |      |                  |         |                 |        |       |         | 77,350   |      
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|                                                                                                                |                                                               |                                                                             | Net cash provided by financing activities |      |                  | 84      |                  |        |       | 107     |          |       |                | 112,780 |  
|Effect of exchange rate changes on cash                                                                         |                                                               |                                                                             | 2                                         |      |                  |         | 5                |        |       |         | (24      | )    
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|(Decrease) Increase in Cash and Cash Equivalents                                                                |                                                               |                                                                             | (17,139                                   | )    |                  |         | (11,012          | )      |       |         | 15,118   |      
|Cash and cash equivalents at beginning of period                                                                |                                                               |                                                                             | 32,257                                    |      |                  |         | 12,348           |        |       |         |         |      
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      
|Cash and Cash Equivalents At End of Period                                                                      |                                                               | $                                                                           | 15,118                                    |      |                  | $       | 1,336            |        |       | $       | 15,118   |      
|                                                                                                                |                                                               |                                                                             |                                           |      |                  |         |                  |        |       |         |          |      

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ISTA Pharmaceuticals, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2003

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
new remedies for diseases and conditions of the eye. The Company reincorporated
in Delaware on August 4, 2000.

Some of the products that the Company is developing involve the use of
highly purified formulations of hyaluronidase. The Companys lead ovine
hyaluronidase-based product candidate, Vitrase®, is a proprietary drug for the
treatment of vitreous hemorrhage and diabetic retinopathy. In addition, ISTA is
developing Vitrase® for use as a spreading agent to facilitate the dispersion
and absorption of other drugs. The Company is also developing products to
treat hyphema, glaucoma and ocular inflammation. The Companys goal is to
become a fully integrated specialty pharmaceutical company by acquiring
complementary products, either already marketed or in late-stage development.
The Company has not commenced commercial operations and is considered to be in
the development stage.

As of June 30, 2003, the Company had approximately $25.1 million in cash
and short-term investments. The Company incurred a net loss of $11.4 million
for the six months ended June 30, 2003 and had an accumulated deficit of $133.8
million at June 30, 2003. The ability of the Company to continue as a going
concern is dependent upon its ability to obtain additional capital and achieve
profitable operations. The Companys ability to transition from the development
stage and ultimately, to attain profitable operations, is dependent upon
obtaining sufficient working capital to complete the successful development of
its products, approval by the U.S. Food and Drug Administration (FDA) of its
products, achieving market acceptance of such products and achievement of
sufficient levels of revenue to support the Companys cost structure.
Management believes that the Companys existing capital resources will enable
the Company to fund operations for at least the next 12 months. The condensed
consolidated financial statements contained in this Form 10-Q 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

General

The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). 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.

On November 11, 2002, the stockholders approved a 1-for-10 reverse stock
split. The reverse stock split reduced the outstanding number of shares but not
the par value of the Companys common stock. The stated capital on the
Companys balance sheet attributable to the outstanding shares of common stock
(which is determined by multiplying the par value by the number of shares
outstanding) was reduced proportionately based on the reverse stock split ratio
of 1-for-10. However, the additional paid-in capital account on the Companys
balance sheet was increased by the amount by which the stated capital was
reduced, so that the aggregate amount of the Companys stockholders equity is
unchanged by the reverse stock split. The per share net loss and the per share
net book value of the Companys common stock is also increased because there
are fewer shares of common stock outstanding. All historical common stock
shares and per share data have been adjusted for the reverse stock split
throughout these financial statements for all periods presented.

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For further information, refer to the consolidated financial statements
and footnotes thereto included in the Companys annual report on Form 10-K/A
for the year ended December 31, 2002.

3. Revenue Recognition

The Company recognizes revenue consistent with the provisions of 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 ratably over the period of such
services or performance if such arrangements require on-going services or
performance. Non-refundable amounts received for milestone payments are
recognized upon (i) the achievement of specified milestones when the Company
has earned the milestone payment or, (ii) the milestone payment is substantive
in nature and the achievement of the milestone was not reasonably assured at
the inception of the agreement. The Company defers payments for milestone
events which are reasonably assured and recognizes them ratably over the
minimum remaining period of the Companys performance obligations. Payments for
milestones which are not reasonably assured are treated as the culmination of a
separate earnings process and are recognized as revenue when the milestones are
achieved. 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, the Company 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®, for ophthalmic uses in the posterior segment of the eye, in Japan.
The Companys principal sources of revenue from this collaboration and the
commercialization of Vitrase® will be the license fee received in December
2001, which is being amortized over the Companys continuing involvement with
Otsuka, milestone payments and product sales received from Otsuka. To date, the
Company has not earned this milestone payment from Otsuka and it cannot
guarantee that it will receive this milestone payment in the future. Under the
terms of the collaboration, the Company is 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, 2003
and 2002 was $11,358,000 and $11,303,000, 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. Stock-Based Compensation

In
December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, which (i) amends SFAS
No. 123, Accounting for Stock-Based Compensation to add two new transitional
approaches when changing from the Accounting Principals Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees intrinsic value method of
accounting for stock-based employee compensation to the SFAS No. 123 fair value
method and (ii) amends APB Opinion No. 28, Interim Financial Reporting to
call for disclosure of SFAS No. 148 pro forma information on a quarterly basis.
The Company has elected to adopt the disclosure only provisions of SFAS No. 148
and will continue to follow APB Opinion No. 25 and related interpretations in
accounting for stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than the market value at the measurement
date.

When the exercise price of the employee or director stock options is less
then the estimated fair value of the underlying stock on the grant date, the
Company records deferred compensation for the difference and amortizes this
amount to expense in accordance with FASB Interpretation No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Options or Award Plans,
over the vesting period of the options.

Options or stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction With Selling Goods or
Services, and recognized over the related service period. Deferred charges for
options granted to non-employees are periodically re-measured as the options
vest.

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As required under SFAS No. 123 and SFAS No. 148, the pro forma effects of
stock-based compensation on net loss and net loss per common share have been
estimated at the date of grant using the Black-Scholes option pricing model
based on the following weighted-average assumptions: risk-free interest rate of
3%, dividend yields of 0%, expected volatility of 73%, and a weighted-average
expected life of the option of 4 years.

For purposes of adjusted pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options vesting period. The
effect of applying SFAS No. 123 for purposes of providing pro forma disclosures
is not likely to be representative of the effects on the Companys operating
results for future years because changes in the subjective input assumptions
can materially affect future value estimates. Pro forma information is as
follows:

|                                                        |  |                  |          |               |  |  |          |  
|------------------------------------------------------- |  | ---------------- | -------- | ------------- |  |  | -------- | -
|                                                        |  | Six Months Ended
|                                                        |  |                 
|                                                        |  | June 30, 2003    |          | June 30, 2002
|                                                        |  |                  |          |              
|Net loss attributed to common stockholders, as reported |  |                  | ($11,360 | )             |  |  | ($11,288 | )
|                                                        |  |                  |          |               |  |  |          |  
|Pro forma net loss                                      |  |                  | ($12,102 | )             |  |  | ($11,592 | )
|                                                        |  |                  |          |               |  |  |          |  
|Net loss per share, basic and diluted, as reported      |  |                  | ($.85    | )             |  |  | ($6.76   | )
|                                                        |  |                  |          |               |  |  |          |  
|Pro forma net loss per share, basic and diluted         |  |                  | ($.91    | )             |  |  | ($6.94   | )
|                                                        |  |                  |          |               |  |  |          |  

6. 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.

7. Private Investment in Public Equity

On November 19, 2002, the Company
consummated a private investment in
public equity (PIPE) transaction, involving a private placement of
10,526,306 shares of its common stock for the aggregate gross purchase price of
approximately $40.0 million, or $3.80 per share, and warrants to purchase up to
1,578,946 shares of its common stock for an exercise price of $3.80 per share.
Investors in the PIPE transaction included persons and entities affiliated with
The Sprout Group, Sanderling Venture Partners, Investor Growth Capital Limited,
Gund Investment Corporation, KBL Healthcare, MDS Capital, and Ontario Teachers
Pension Plan Board. In addition, $4.0 million of promissory notes previously
issued to several of the same investors in ISTAs September 2002 bridge
financing were converted into 1,052,620 shares of the Companys common stock,
based upon the conversion price of $3.80 per share, concurrently with the
consummation of the PIPE transaction. The Company believes this funding will
enable it to execute on its plans to complete development work on the Companys
late-stage product candidates and introduce these products to the ophthalmic
marketplace if they are approved by the FDA.

8. Commitments and Contingencies

The Company is subject to routine claims and litigation incidental to its
business. In the opinion of management, the resolution of such claims is not
expected to have a material adverse effect on the operating results or
financial position of the Company.

Visionex

Visionex was established in 1997, under the laws of Singapore, to engage
in clinical, regulatory and marketing activities. During 1997, Visionex
obtained from us the exclusive rights to register, import, market, sell and
distribute Vitrase® and a product called Keraform® in East Asian markets,
excluding Japan and Korea, for which Visionex paid us $5.0 million. Prior to
the Companys acquisition of Visionex (discussed below), investors who owned
66% of ISTA shares controlled 100% of Visionex shares.

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On March 8, 2000, the Company acquired Visionex by entering into an
agreement with Visionex shareholders whereby we issued 3,319,363 shares of the
Companys Series C preferred stock, convertible into 245,879 shares of its
common stock, to acquire all of the outstanding capital stock of Visionex. The
Company assigned a fair value of $11.70 per share to the 3,319,363 shares of
Series C preferred stock issued to effect the acquisition, at which time the
Company recorded a deemed dividend of $19.2 million to recognize the excess of
the value of the shares issued over the net assets acquired.

Under Singapore tax law, Visionex was subject to a 15% withholding tax on
a $5.0 million license that it paid to the Company in connection with a license
to market, sell and distribute Vitrase® and its other corneaplasty products in
certain countries in Southeast Asia. This withholding tax was waived by the
Economic Development Board, or EDB, of Singapore subject to various conditions,
including a commitment that Visionex would implement a proposed project to
expand its business activities in Singapore to the benefit of the local
economy. The Company substantially wound down Visionex operations in July 2002,
and the proposed project was never implemented. Based upon a letter the Company
received from the EDB and the Companys assessment of its obligations
with the EDB, management does not believe that the Company will be required to
pay any withholding tax or related obligations in connection with the license
fee. However, if the Company is required to pay this withholding tax, the
Company does not believe such payment would have a material adverse effect on
the Companys business.

9. Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (EITF) reached
consensus on EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to
use assets. The final consensus of EITF 00-21 will be applicable to agreements
entered into in fiscal periods beginning after June 15, 2003, with early
adoption permitted. Additionally, companies will be permitted to apply the
consensus guidance to all existing arrangements as the cumulative effect of a
change in accounting principle in accordance with APB Opinion No. 20,
Accounting Changes. Management is currently evaluating the effect that the
adoption of EITF 00-21 will have on its results of operations and financial
position.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 is an
amendment to SFAS No. 123 providing alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and also provides additional disclosures about the method
of accounting for stock-based employee compensation. Amendments are effective
for financial statements for the Company beginning January 1, 2003. The Company
has currently chosen to not adopt the voluntary change to the fair value based
method of accounting for stock-based employee compensation. If the Company
should choose to adopt such a method, its implementation pursuant to SFAS No.
148 could have a material effect on the Companys consolidated financial
position and results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 provides guidance on 1) the identification of entities for which control
is achieved through means other than through voting rights, known as variable
interest entities (VIEs); and 2) which business enterprise is the primary
beneficiary and when it should consolidate the VIE. This new model for
consolidation applies to entities: 1) where the equity investors (if any) do
not have a controlling financial interest, or 2) whose equity investment at
risk is insufficient to finance that entitys activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. FIN 46 is
effective for all new VIEs created or acquired after January 31, 2003. For VIEs
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15, 2003.
Certain disclosures are effective immediately. The Company does not expect the
implementation of FIN 46 to have a material effect on its financial condition
or results of operations.




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

This Interim Report on Form 10-Q contains forward-looking statements that
have been made pursuant to the provisions of the Securities Litigation Act of
1995 and concern matters that involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Discussions containing forward-looking statements may be found in
the material set forth under Managements Discussion and Analysis of Financial
Condition and Results of Operations and in other sections of this Form 10-Q.
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 our
opinions and expectations reflected in the forward-looking statements are
reasonable as of the date of this Report, we cannot guarantee future results,
levels of activity, performance or

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achievements, and our actual results may differ substantially from the
views and expectations set forth in this Report. We expressly disclaim any
intent or obligation to update any forward-looking statements after the date
hereof to conform such statements to actual results or to changes in our
opinions or 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 Consolidated Financial Statements, included in the Companys
annual report on Form 10-K/A Amendment No. 1 for the year ended December 31,
2002.

Overview

ISTA Pharmaceuticals, Inc. (the Company or ISTA) is a
development-stage specialty pharmaceutical company focused on the development
and commercialization of new remedies for diseases and conditions of the eye.
Since the Companys inception, we have devoted our resources primarily to fund
research and development programs and late-stage product acquisitions. 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 complementary products, either
already marketed or in late stage development.

In order to
advance our strategic plan, we are pursuing the development of
several products, including Vitrase® and ISTALOL, which are in the later
stages of review by the FDA. There can be no assurances that either Vitrase® or
ISTALOL will receive final FDA approval. However, we are currently undertaking
significant preparations for expansion of our manufacturing and marketing
capabilities in the event such approvals are obtained. If approved by the FDA,
Vitrase®, for the treatment of vitreous hemorrhage, will be manufactured for us
through our contract manufacturer and marketed by Allergan, Inc. in the United
States, while ISTALOL will be manufactured for us through our contract
manufacturer and marketed by us in the United States.

We currently have no approved products. Vitrase® (ovine hyaluronidase) is
our proprietary drug that we are developing for the treatment of vitreous
hemorrhage and diabetic retinopathy. In addition, we are pursuing market
approval in the United States for Vitrase® for use as a spreading agent to
facilitate the dispersion and absorption of other drugs. We are also pursuing
market approval in the United States of ISTALOL, our new formulation of
timolol, to treat glaucoma and developing other products designed to treat
hyphema and ocular inflammation. We believe that if Vitrase®, ISTALOL, and our
other ophthalmic product candidates are successful, we will advance our
strategic plan to become a fully-integrated specialty pharmaceutical company.

We currently have no products available for sale. We have incurred losses
since inception and had an accumulated deficit through June 30, 2003 of $133.8
million. Our losses have resulted primarily from research and development
activities, including clinical trials, related general and administrative
expenses and a deemed dividend to our preferred shareholders. We expect to
continue to incur operating losses for the foreseeable future as we continue to
conduct research, development and clinical testing activities, and to seek
regulatory approval for our product candidates.

Vitrase®

Our current lead product candidate is Vitrase®, which is derived from
highly purified formulations of ovine hyaluronidase. In October 2002, we
submitted to the FDA a New Drug Application (NDA) for Vitrase® for the
treatment of vitreous hemorrhage.

On April 3, 2003, the FDA issued an approvable letter in which the FDA
cited issues primarily related to the sufficiency of the efficacy data
submitted with the NDA for Vitrase® for the treatment of vitreous hemorrhage.
The FDA requested additional analysis of the existing data and an additional
confirmatory clinical study based upon that analysis. We are discussing with
the FDA the comments contained in the approvable letter and, based upon those
discussions, will determine the next appropriate steps in the review and
approval process of Vitrase® for the treatment of vitreous hemorrhage.

In March 2000, we entered into a collaboration with Allergan, Inc., under
which Allergan will be responsible for the marketing, sale and distribution of
Vitrase®, for ophthalmic uses in the posterior region of the eye, in the United
States and all international markets except Mexico (until April 2004) and
Japan. Accordingly, we depend on the success of Allergan in commercializing
Vitrase® in these markets. Our principal sources of revenue from this
collaboration 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

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of Allergans requirements for Vitrase® for these markets. If we are
successful in obtaining regulatory approval for Vitrase® in these markets and
providing adequate supplies to Allergan, and Allergan subsequently achieves
significant sales of the product, we may receive substantial royalties and
other payments from Allergan; however, our aggregate manufacturing costs may
also increase.

In December 2001, we entered into a collaboration with Otsuka
Pharmaceuticals Co. Ltd., a leading Japan-based international health care and
pharmaceuticals company. Under the terms of the collaboration, Otsuka will be
responsible for all clinical development, regulatory approvals, sales and
marketing activities for Vitrase® for ophthalmic uses in the posterior segment
of the eye in Japan, and we will be responsible for supplying all of Otsukas
requirements for Vitrase® for this market. Our principal sources of revenue
from this collaboration will be license fees and milestone payments from
Otsuka.

Currently, we rely upon Biozyme Laboratories Limited to supply us with
ovine hyaluronidase, the active pharmaceutical ingredient in Vitrase®, and we
rely on R.P. Scherer West, Inc. (a wholly owned subsidiary of Cardinal Health)
to supply us with the finished Vitrase® product. Each of these parties is the
sole source. Since Vitrase® has not received FDA approval, neither party has
past experience in supplying us with commercial quantities of Vitrase®.

In July 2003, we announced that we had been granted United States patent number 6,551,590 B2 covering
the use of certain preparations of hyaluronidase derived from any source
(including bovine and ovine sources) for ophthalmic administration and enzymatic
methods for accelerating the clearance of hemorrhagic blood from the vitreous
body of the eye. Previously, we were granted United States patent number
5,866,120 in July 1999 and United States patent number 6,039,943 in March 2000,
both covering methods for clearing blood from the vitreous humor using
hyaluronidase.

In August 2003, we submitted to the FDA a second NDA for Vitrase® for use
as a spreading agent to facilitate the dispersion and absorption of other
drugs. In addition, in the Dosage and Administration section of this second
Vitrase® NDA, we are seeking approval from the FDA to provide directions for
reconstitution of Vitrase® for potential treatment applications in the back of
the eye. The product submitted in the second NDA is the same package configuration as the
original NDA. The dose used as a spreading agent is different than the dose used
for injection to the back of the eye. With respect to the second Vitrase® NDA, we may pursue different package
configurations of the product over time to facilitate product utilization, improve profit
margins and aid in third party reimbursement.

Acquisition of Other Product Candidates

In May 2002, the Company acquired substantially all the assets of
AcSentient, Inc. The assets include United States marketing rights for a new
one-a-day liquid formulation of timolol, which we have named ISTALOL, a
beta-blocking agent for treating glaucoma.

AcSentient previously acquired rights to this
compound from Senju Pharmaceutical Co., Ltd. The assets
acquired from AcSentient also included United States product rights to
bromfenac, a topical non-steroidal anti-inflammatory compound for the treatment
ocular inflammation, and worldwide marketing rights for Caprogel®, a novel
compound for the treatment of hyphema. AcSentient previously acquired the
rights to these two compounds from Senju and the Eastern Virginia School of
Medicine, respectively.

We acquired the rights to these three compounds in exchange for $290,000
and 10,000 shares of our common stock valued at $99,000 ($9.90 per share).
Additionally, we assumed the liabilities of two milestone payments to Senju
($750,000 and $500,000), a milestone payment to the Eastern Virginia School of
Medicine ($65,000), legal expenses associated with the acquisition ($20,000)
and a patent application fee for Caprogel® ($4,500). As of the date these
compounds were acquired, they had not achieved feasibility and there is no
significant alternative future use should our development efforts prove
unsuccessful. Accordingly, we recorded an acquired in-process research and
development charge of $1,728,500 in May 2002 related to the purchase of these
compounds.

The NDA for ISTALOL was submitted by Senju to the FDA in September 2002.
The NDA included data from pre-clinical studies conducted in Japan, combined
with data from a Phase I clinical study conducted in the United States and a
multi-center Phase III clinical study recently completed in the United States.
In July 2003, the FDA issued an approvable letter with respect to the
ISTALOL NDA citing issues related to manufacturing methods and controls. No
additional clinical studies were requested. We believe the issues cited by the
FDA are addressable and we are also seeking qualification of an alternative
manufacturing site. We are currently conducting a Phase III study of bromfenac
in the United States. Assuming successful completion of our clinical studies,
we anticipate submitting an NDA for bromfenac in early 2004. We are currently
conducting feasibility studies for the commercialization of Caprogel®. Once
completed, and if these studies yield promising results, we intend to pursue
further clinical development of Caprogel® consistent with such studies
results. However, the timing and scope for our development of Caprogel® may
change based on our assessment, from time to time, of this product candidates
market potential, other product opportunities and our corporate priorities.

ISTALOL

In May 2002, we acquired substantially all of the assets of AcSentient,
Inc. The assets include United States marketing rights for a new once-a-day
liquid formulation of timolol, which we have named ISTALOL, a beta-blocking
agent for treating glaucoma. AcSentient previously acquired rights to this
compound from Senju Pharmaceutical Co., Ltd., headquartered in Osaka, Japan.
Senju has a diverse product portfolio including ophthalmic, central nervous
system, cardiovascular, circulatory, gastro-intestinal, respiratory, oncology
and dermatological products.

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Our acquisition of ISTALOL was consistent with our strategic objective of
acquiring complementary late-stage product candidates. Senju submitted the NDA
for ISTALOL to the FDA in September 2002. That NDA included data from
pre-clinical studies conducted in Japan, combined with data from a Phase I
clinical study conducted in the United States and a multi-center Phase III
clinical study recently completed in the United States. In July 2003, the FDA
issued an approvable letter with respect to the ISTALOL NDA citing issues
related to manufacturing methods and controls. No additional clinical studies
were requested. We believe the issues cited by the FDA are addressable and we
are also seeking qualification of Bausch & Lomb as an alternative manufacturing
site.

If the FDA approves all components of the ISTALOL NDA, we believe that we
will be positioned to commercialize ISTALOL in the United States, and to
thereby further broaden our specialty ophthalmic pharmaceutical product
offerings.

We have supply agreements with Bausch & Lomb Incorporated to manufacture
commercial quantities of ISTALOL and bromfenac. Under the terms of these
agreements we are required to pay approximately $825,000 in development fees to
Bausch & Lomb. The initial term of the supply agreement for the manufacturing
of bromfenac expires on the fourth anniversary of our receipt of written FDA
approval of the NDA for bromfenac and the initial term of the supply agreement
for the manufacturing of ISTALOL expires on the third anniversary of our
receipt of written FDA approval of the NDA for ISTALOL. Each of these
agreements will be automatically renewed for additional two year periods unless
terminated by either party pursuant to the terms of the agreement.

Bromfenac and Caprogel®

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 inflammation, and worldwide marketing rights for Caprogel®,
a novel compound for the treatment of hyphema, or bleeding into the front of
the eye. AcSentient had previously acquired the rights to these two compounds
from Senju and the Eastern Virginia School of Medicine, respectively. Under the
terms of the AcSentient asset acquisition, we are responsible for payments and
other obligations connected with further development of bromfenac and
Caprogel®.

We are currently initiating a Phase III study of bromfenac in the United
States. Assuming successful completion of our clinical studies, we anticipate
submitting an NDA for bromfenac in early 2004.

We are currently conducting feasibility studies for the commercialization
of Caprogel®. Once completed, and if these studies yield promising results, we
intend to pursue further clinical development of Caprogel® consistent with such
studies results. However, the timing and scope for our development of
Caprogel® may change based on our assessment, from time to time, of this
products market potential, other product opportunities and our
corporate priorities.

We anticipate incurring additional research and development expenses in
connection with the further development of bromfenac and Caprogel®. If these
compounds are approved for sale in the United States, we expect to incur
significant additional marketing and sales expenses in establishing and
supporting the necessary infrastructure to market and distribute these products
in the United States.

Results of Operations

Three Months Ended June 30, 2003 and 2002

Revenue.Revenue of $70,000 for both the three months ended June 30, 2003
and 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 for
the three months ended June 30, 2003 were $3.9 million compared to $4.5 million
for the three months ended June 30, 2002. The decrease of $600,000 is
principally due to the immediate write off in the second quarter of 2002 of
acquisition costs associated with the asset purchase of three late stage
development compounds (ISTALOL, bromfenac, and Caprogel®) from AcSentient,
Inc. As of the date these compounds were acquired, they had not achieved
feasibility and there was no significant alternative future use should our
development efforts prove unsuccessful. Accordingly, we recorded an acquired
in-process research and development charge of $1.7 million in the second
quarter of 2002. Exclusive of this one-time expense, the $1.1 million increase
in research and development costs in the second quarter of 2003 as compared to
the same period last year is primarily attributable to increased development
and/or manufacturing spending related to Vitrase®, ISTALOL, and bromfenac.

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Selling, general and administrative expenses.Selling, general and
administrative expenses were $2.3 million for the three months ended June 30,
2003 compared to $2.2 million for the three months ended June 30, 2002. The
increase in selling, general and administrative expenses is primarily due to
additional personnel and facilities expenses in 2003 compared to 2002.

Interest income.Interest income was $94,000 for the three months ended
June 30, 2003 compared to $43,000 for the three months ended June 30, 2002. The
increase in interest income was primarily attributable to higher cash balances
for the first quarter of 2003 compared to the first quarter of 2002 due to the
PIPE transaction that occurred in November 2002.

Interest expense.Interest expense was $1,000 for the three months ended
June 30, 2003 and there was no interest expense for the three months ended June
30, 2002. The interest expense was primarily attributable to the financing of
our directors and officers insurance premiums during the three months ended
June 30, 2003.

Six Months Ended June 30, 2003 and 2002

Revenue.Revenue of $139,000 and $140,000 for the six months ended June
30, 2003 and 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, 2003 and remained flat at $7.4
million for the six months ended June 30, 2002. During the six months ended
June 30, 2002, we incurred an immediate write off of acquisition costs
associated with the asset purchase of three late stage development compounds
(ISTALOL, bromfenac, and Caprogel®) from AcSentient, Inc. As of the date
these compounds were acquired, they had not achieved feasibility and there was
no significant alternative future use should our development efforts prove
unsuccessful. Accordingly, we recorded an acquired in-process research and
development charge of $1.7 million during the six months ended June 30, 2002.
Exclusive of this one-time expense, the $1.7 million increase in research and
development costs during the six months ended June 30, 2003 as compared to the
same period last year is primarily attributable to increased development and/or
manufacturing spending related to Vitrase®, ISTALOL, and bromfenac.

Selling, general and administrative expenses.General and administrative
expenses were $4.4 million for the six months ended June 30, 2003 compared to
$4.2 million for the six months ended June 30, 2002. The increase is primarily
due to additional personnel and facilities expenses in 2003 compared to 2002
and an increase in the cost of directors & officers insurance that went into
effect during the last half of 2002.

Interest income.Interest income was $209,000 for the six months ended
June 30, 2003 compared to $130,000 for the six months ended June 30, 2002. The
increase in interest income was attributable to higher cash balances during the
first six months of 2003 compared to the first six months of 2002.

Interest expense.Interest expense was $6,000 for the six months ended
June 30, 2003 and there was no interest expense for the six months ended June
30, 2002. The interest expense was primarily attributable to the financing of
our directors and officers insurance premiums during the six months ended
June 30, 2003.

Liquidity and Capital Resources

As of June 30, 2003, we had approximately $25.1 million in cash and
short-term investments.

We have financed our operations since inception primarily through private
equity sales and the 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, $31.5 million from our initial public offering in August
2000, $4.0 million from the private sale of common stock in December 2001, $5.0
million from a license fee payment in December 2001, $4.0 million from the
issuance of promissory notes in September 2002 and $40.0 million from our PIPE
transaction in November 2002. This PIPE transaction involved a private
placement of 10,526,306 shares of our common stock for the aggregate purchase
price of approximately $40.0 million, or $3.80 per share, and warrants to
purchase up to 1,578,946 shares of our common stock for an exercise price of
$3.80 per share.

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For the six months ended June 30, 2003, we used $10.6 million of cash for
operations principally as a result of the net loss of $11.4 million partially
offset by non-cash compensation expense of $556,000 related to the
amortization of our deferred stock-based compensation. We used approximately
$10.1 million of cash for operations in the six months ended June 30, 2002.

For the six months ended June 30, 2003, we used $6.6 million of cash for
investing activities, primarily to purchase marketable securities. For the six
months ended June 30, 2002, we used $1.1 million for investing activities,
primarily to purchase marketable securities.

For the six months ended June 30, 2003, we received $84,000 from financing
activities, primarily from the exercise of stock options. For the six months
ended June 30, 2002, we received $107,000 from financing activities, primarily
from the exercise of stock options.

We may be required to raise additional capital in the future through
collaborative agreements, PIPE related financing, and various other public or
private equity or debt financings. If we are required to raise additional
capital in the future, there can be no assurance that the additional financing
will be available on favorable terms.

We continually evaluate new opportunities for late-stage or currently
marketed complementary product candidates and, if and when appropriate, intend
to pursue such opportunities through further product acquisitions and related
development activities. Our ability to execute on such opportunities in some
circumstances will be dependant upon our ability to raise additional capital on
commercially reasonable terms. There can be no assurance that funds from these
sources will be available when needed or, if available, will be on terms
favorable to us or to our stockholders. If additional funds are raised by
issuing equity securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience additional dilution or such equity
securities may provide for rights, preferences or privileges senior to those of
the holders of our common stock.

Our actual future capital requirements will depend on many factors,
including the following:



| |  |  | receiving milestone payments from Allergan and Otsuka                                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | the rate of progress of our research and development programs                                                        
|
| |  |  | the results of our clinical trials and requirements to conduct additional clinical trials                            
|
| |  |  | the time and expense necessary to obtain regulatory approvals                                                        
|
| |  |  | activities and payments in connection with the in-license or acquisition of products                                 
|
| |  |  | our ability to establish and maintain collaborative relationships                                                    
|
| |  |  | sales and marketing activities related to our product candidates,
including each of ISTALOL, bromfenac and Caprogel®
|
| |  |  | competitive, technological, market and other developments                                                            

Factors that May Affect Results of Operations and Financial Condition.

Risks Related to Our Company

If we do not receive and maintain regulatory approvals for our product
candidates, we or our marketing partners will not be able to commercialize our
products, which would substantially impair our ability to generate revenues and
materially harm our business and financial condition.

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. Many other countries including
the major European countries and Japan have similar requirements.

The NDA process is extensive, time-consuming and costly, and there is no
guarantee that regulatory authorities will approve NDAs of any of our product
candidates. We have submitted NDAs, which are currently pending before the FDA,
for both Vitrase®
and for ISTALOL. Moreover, we depend on the assistance of Senju
Pharmaceutical Co., Ltd. for obtaining regulatory approval for ISTALOL.

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Although we recently received an approvable letter from the FDA with
respect to ISTAs NDA for Vitrase® for the treatment of vitreous hemorrhage,
the FDA has requested additional analysis of the existing data and an
additional confirmatory clinical study based upon that analysis. There can be
no assurances that the FDA will approve our NDA for Vitrase®, even if we decide
to and are successfully able to undertake the further analysis and clinical
testing requested by the FDA. The FDA has also issued an approvable letter
with respect to the ISTALOL NDA citing issues related to manufacturing methods
and controls. While we believe these issues are addressable, there can be no
assurance that the FDA will accept our responses to these issues or will otherwise approve the NDA for ISTALOL.

Clinical testing of pharmaceutical products is also 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. Our
bromfenac product, a topical non-steroidal anti-inflammatory compound for the
treatment of ocular inflammation is currently undergoing clinical trials. The
clinical trials of any of our product candidates could be unsuccessful, which
would prevent us from obtaining regulatory approval and commercializing the
product.

FDA approval can be delayed, limited or not granted for many reasons,
including, among others:



| |  |  | FDA officials may not find a product candidate safe or effective to
merit an approval                                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | FDA officials may not find that the data from preclinical testing and
clinical trials justifies approval, or they may require additional
studies that would make it commercially unattractive to continue pursuit
of 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 or under conditions that place our product at a competitive
disadvantage, which may limit our sales and marketing activities or
otherwise adversely impact the commercial potential of a product

If the FDA does not approve our products on commercially viable terms or
we terminate development of any of our products due to difficulties encountered
in the regulatory approval process, it will have a material adverse impact on
our business and we will be dependent on the development of our other product
candidates and/or our ability to successfully acquire other products and
technologies.

In addition, we intend to market our products, and perhaps have certain of
our products manufactured, in foreign countries. The process of obtaining
approvals in foreign countries is subject to delay and failure for similar
reasons.

If our product candidates are approved by the FDA but do not gain market
acceptance, our business will suffer because we might not be able to fund
future operations.

A number of factors may affect the market acceptance of Vitrase®,
ISTALOL, bromfenac, Caprogel® or any other products we develop or acquire in
the future, including, among others:



| |  |  | the price of our products relative to other therapies for the same or
similar treatments                                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the perception by patients, physicians and other members of the
health care community of the effectiveness and safety of our products
for their prescribed treatments
|
| |  |  | our ability to fund sales and marketing departments                                                                                                                  
|
| |  |  | the effectiveness of our sales and marketing efforts                                                                                                                 

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If our products do not gain market acceptance we may not be able to fund
future operations, including the development or acquisition of new product
candidates and/or our sales and marketing efforts for our approved products.

If we are unable to sufficiently develop our sales, marketing and distribution
capabilities or enter into agreements with third parties to perform these
functions, we will not be able to commercialize products.

We currently are in the process of developing our sales, marketing and
distribution capabilities. However, our current capabilities in these areas are
limited. In order to commercialize any products, we must internally develop
substantial sales, marketing and distribution capabilities, or establish
collaborations or other arrangements with third parties to perform these
services. We do not have extensive experience in these areas, and we may not be
able to establish adequate in-house sales, marketing and distribution
capabilities or engage and effectively manage relationships with third parties
to perform any or all of such services. For example, we intend to rely on
Allergan, Inc. in the United States and Otsuka Pharmaceuticals, Co. Ltd. in Japan, to
respectively market Vitrase® for ophthalmic uses for the posterior region of
the eye. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon
the efforts of third parties, whose efforts may not be successful.

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 never been profitable, and we might never become profitable.
As of June 30, 2003, our accumulated deficit was $133.8 million, including a
net loss of approximately $23.0 million for the year ended December 31, 2002
and a net loss of $11.4 million for the six months ended June 30, 2003. 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 significant operating losses
over the next several years. As of June 30, 2003, we had approximately $25.1
million in cash and short-term investments and working capital of $22.3
million. We anticipate that our existing capital resources will enable us to
fund operations for at least the next twelve months. We may be required to
raise additional capital in the future. If we are required to raise additional
capital in the future there can be no assurance that the additional financing
will be available on favorable terms.

We may be unable to execute our strategic plan to transition to a
fully-integrated specialty pharmaceutical company, which could have a material
adverse impact on our business and financial condition.

Our strategy to acquire or in-license ophthalmic pharmaceutical products,
either currently marketed or in late-stage development, will be dependent upon
a number of factors including identifying such acquisition opportunities,
successfully negotiating favorable terms with third parties for the acquisition
or licensing of such products and our ability to raise additional capital to
facilitate the acquisition or licensing of such products. Furthermore, we have
limited sales, marketing and distribution capabilities to support the marketing
of any products, and we do not have experience in managing third-party
manufacturers of any products in commercial quantities. In addition, if we
acquire or in-license late-stage development products, our ability to
successfully commercialize such products will also be dependent on our ability
to successfully complete development of such products, including obtaining the
necessary regulatory approvals. For example, we have in-licensed U.S. marketing
rights to ISTALOL and bromfenac from Senju Pharmaceutical Co., Ltd., and we have
in-licensed worldwide rights to Caprogel® from the Eastern Virginia School of
Medicine. Senju is responsible for the development of ISTALOL, including
obtaining the necessary regulatory approvals in the United States. The Company
is responsible for the further development of bromfenac and Caprogel®.

We may not be able to identify any product acquisition opportunities or be
successful in negotiating favorable terms for any such product acquisitions.
Should we be successful in acquiring or licensing any products, we will need to
establish and enhance our sales, marketing, distribution and manufacturing
capabilities, each of which will require substantial financial and management
resources. Our failure to establish effective sales, marketing, distribution
and manufacturing capabilities on a timely basis would adversely affect our
ability to commercialize any acquired products. If we are unable to execute our
strategic plan to transition to a fully-integrated specialty pharmaceutical
company on a timely basis, our ability to generate revenues would be
substantially impaired which would materially harm our business and financial
condition.

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

We have entered into a master services agreement with R.P Scherer West,
Inc. (which was subsequently acquired by Cardinal Health), for the manufacture
of commercial quantities, if approved, of our Vitrase® finished product. We
have also entered into a

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manufacturing services agreement with Bausch & Lomb for the manufacture of
commercial quantities, if approved, of our ISTALOL and bromfenac products. To
date, we have needed these products only in amounts sufficient for clinical
trials. Before any contract manufacturer can produce commercial quantities of a
product, we must demonstrate to the FDAs satisfaction that the product source
for commercial quantities is substantially equivalent to the supply of the
product 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. Moreover, 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 Cardinal Health or Bausch &
Lomb will be able, as applicable, to develop processes necessary to produce
substantially equivalent product or that regulatory authorities will approve
them as a manufacturer. Failure to develop necessary production processes or
receive regulatory approval could delay or stop our efforts to develop and
commercialize our product candidates.

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

We have entered into collaborations with Allergan, Inc. and Otsuka
Pharmaceuticals, Co. Ltd. relating to Vitrase® for ophthalmic uses for the
posterior region of the eye, and with Senju Pharmaceutical Co., Ltd. relating to
ISTALOL and bromfenac. If we obtain regulatory approval for Vitrase® for any
such uses in the United States and Europe, we will be dependent on Allergan for
the commercialization of Vitrase® for such approved uses in the United States
and Europe. We will depend on Otsuka for obtaining regulatory approval of
Vitrase® for any such uses in Japan, and if such approval is obtained, we will
be dependent upon Otsuka for the commercialization of Vitrase® for such
approved uses in Japan. We will also be dependent on Senju for
obtaining regulatory approval for ISTALOL in the United States. The amount and
timing of resources that Allergan, Otsuka, and Senju dedicate to our
collaborations are not within our control. Accordingly, any breach or
termination of our agreements by these collaborators could delay or stop the
development and/or commercialization of our product candidates. Our
collaborative partners may change their strategic focus, terminate our
agreements, or pursue alternative technologies. Although our agreements with
Allergan, Otsuka and Senju contain reciprocal terms providing that neither we
nor they may develop products that directly compete in the same form with the
products involved in the collaboration, there can be no assurances that our
collaborators will not develop competing products in different forms or
products that compete indirectly with our products. Accordingly, unfavorable
developments in our relationship with our strategic partners could have a
significant adverse effect on us and our financial condition.

If we have problems with our sole source suppliers, our product development and
commercialization efforts for our product candidates could be delayed or
stopped.

Some materials used in our products are currently sourced from a
single source. Biozyme Laboratories, Ltd. is currently our only source for
highly purified ovine hyaluronidase, which is the active ingredient in
Vitrase®. If approved, commercial quantities of Vitrase® will be supplied by
Cardinal Health as the sole source. ISTALOL and bromfenac, if approved, will
be supplied by a single source, Bausch & Lomb. We have not established
and may not be able to establish arrangements with additional suppliers for
these ingredients or products. Difficulties in our relationship with our sole
source suppliers or delays or interruptions in such suppliers supply of our
requirements could limit our ability to provide sufficient quantities of our
products, on a timely basis, for clinical trials and, if our products are
approved, could limit commercial sales, which would have a material adverse
effect on our business and financial condition. While we are currently pursuing
additional sources for these products and materials, our success in
establishing such additional supply arrangements cannot be assured.

We depend on our 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
Chief Executive Officer, Vicente Anido, Jr., Ph.D. We have entered into a
written employment agreement with Dr. Anido that can be terminated at any time
by the Company or by Dr. Anido. In the event Dr. Anidos employment is
terminated, other than voluntarily or for cause, Dr. Anido will receive nine
months of salary as severance compensation. In the event Dr. Anidos employment
is terminated after a change of control of the Company (such as a merger where
the Company is bought by another entity, or a sale of substantially all of the
assets of the Company), other than voluntarily or for cause, then Dr. Anidos
stock options will immediately vest and become exercisable in full, and Dr.
Anido will receive twenty-four months of salary as severance compensation. 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 and materially harm our business.

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Risks Related to Our Industry

Our suppliers and manufacturers are subject to regulation by the FDA and other
agencies, and if they do not meet their commitments, we would have to find
substitute suppliers or manufacturers, which could delay the supply of our
products to market.

Regulatory requirements applicable to pharmaceutical products make the
substitution of suppliers and manufacturers costly and time consuming. We have
no internal manufacturing capabilities and are, and expect to be in the future,
entirely dependent on contract manufacturers and suppliers for the manufacture
of our products and for their active ingredients. The disqualification of these
suppliers through their failure to comply with regulatory requirements could
negatively impact our business because the delays and costs in obtaining and
qualifying alternate suppliers (if such alternative suppliers are available,
which we cannot assure) could delay clinical trials or otherwise inhibit our
ability to bring approved products to market, which would have a material
adverse affect on our business and financial condition.

We may be required to initiate or defend against legal proceedings related to
intellectual property rights, which may result in substantial expense, delay
and/or cessation of our development and commercialization of our products.

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                                   

We currently have 56 patent applications pending. In the event any patents
are issued to us as a result of such applications, there can be no assurance
that such patents 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 or
enforceability.

We may become involved in interference proceedings in the U.S. Patent and
Trademark Office to determine the priority of our inventions. In addition,
costly litigation could be necessary to protect our patent position. We also
rely on trademarks to protect the names of our products. These trademarks may
be challenged by others. If we enforce our trademarks against third parties,
such enforcement proceedings may be expensive. 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. Disputes may arise concerning the
ownership of intellectual property or the applicability or enforceability of
these agreements, and we might not be able to resolve these disputes in our
favor.

The Company licenses patents held by the Eastern Virginia School of
Medicine (for Caprogel®) and Senju Pharmaceutical Co. Ltd. (for ISTALOL and bromfenac).
The license agreements with these licensors provide that the licensor is
responsible for prosecution, maintenance, protection and defense of such
patents, at the licensors cost with respect to the agreements with Senju, and
at our cost with respect to the agreement with the Eastern Virginia School of
Medicine. If the licensor chooses not to protect its own patent rights, we may
not be able to take actions to secure our related product marketing rights.

In addition to protecting our own intellectual property rights, third
parties may assert patent, trademark or copyright infringement or other
intellectual property claims against us based on what they believe are their
own intellectual property rights. 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 stopped from developing, manufacturing or selling our products until 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 or other fees.

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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 insurers, managed care organizations and other healthcare providers.

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 Allergan, Inc., Alcon Laboratories,
Inc., Bausch & Lomb Incorporated, CIBA Vision (a unit of Novartis AG),
Pharmacia/Pfizer 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 on reasonable terms.

We currently maintain clinical trial liability insurance with per
occurrence and aggregate coverage limits of $5 million. 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 commercially 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.

Risks Relating to Our Stock

Our stock price is subject to significant volatility.

During the two most recent fiscal years and up until the present, the
daily closing price per share of our common stock has ranged from a high of
$133.75 per share to a low of $2.60 per share. Our stock price has been and may
continue to be subject to significant volatility. The following factors, in
addition to other risks and uncertainties described in this section and
elsewhere in this report, may cause the market price of our common stock to
fall:



| |  |  | the scope, outcome and timeliness of any governmental, court or other
regulatory action that may involve us (including, without limitation,
the scope, outcome or timeliness of any inspection or other action of
the FDA)                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the availability to us, on commercially reasonable terms, of third
party sourced products and materials                                                                                                                                                                              
|
| |  |  | developments concerning proprietary rights, including the ability of
third parties to assert patents or other intellectual property rights
against us which, among other things, could cause a delay or disruption
in the development, manufacture, marketing or sale of our products
|
| |  |  | competitors announcing products under development or new commercial products                                                                                                                                                                                                         
|
| |  |  | competitors publicity regarding actual or potential products under development                                                                                                                                                                                                       
|
| |  |  | period-to-period fluctuations in our financial results                                                                                                                                                                                                                               
|
| |  |  | economic and other external factors, including disasters and other crises                                                                                                                                                                                                            

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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.

Trading in our stock over the last 12 months has been limited, so investors may
not be able to sell as much stock as they want at prevailing prices.

The average daily trading volume in our common stock for the twelve-month
period ending June 30, 2003 was approximately 17,530 shares, and the average
daily number of transactions was approximately 62 for the same period. If
limited trading in our stock continues, it may be difficult for investors to
sell their shares in the public market at any given time at prevailing prices.

Future sales of shares of our common stock may negatively affect our stock
price.

As a result of our recent PIPE financing transaction, the PIPE investors
received approximately 11.6 million shares of our common stock. The shares of
common stock issued in connection with the PIPE transaction represented
approximately 87% of our common stock. In connection with our PIPE financing
transaction, we also issued warrants to the PIPE investors that are exercisable
for the purchase of up to an aggregate of 1,578,946 shares of our common stock
based upon a purchase price of $3.80 per share. The exercise of these warrants
could result in significant dilution to shareholders at the time of exercise.

The PIPE investors also entered into lock-up agreements with the Company
that impose restrictions on the ability of the PIPE investors to sell or
otherwise dispose of the shares of our common stock that they received in the
PIPE transaction. These lock-up restrictions expired on May 19, 2003. We
filed a registration statement on Form S-3 to cover the shares issued to the
PIPE investors and issuable upon conversion of the warrants. In the future, we
may issue additional common stock or other equity securities, including but not
limited to options, warrants or other derivative securities convertible into
our common stock.

Sales of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our common stock and
impair our ability to raise capital through the sale of equity securities.

Concentration of ownership could delay or prevent change in control or
otherwise influence or control most matters submitted to our stockholders.

Our directors, officers, and principal stockholders together control
approximately 89.0% of our voting securities, a concentration of ownership that
could delay or prevent a change in control. Our executive officers and
directors beneficially own approximately 2.5% of our voting securities and our
5% or greater stockholders beneficially own approximately 86.5% of our voting
securities. These stockholders, if acting together, would be able to influence
and possibly control most matters submitted for approval by our stockholders,
including the election of directors, delaying or preventing a change of
control, and the consideration of transactions in which stockholders might
otherwise receive a premium for their shares over then-current market prices.

Our stockholder rights plan, provisions in our charter documents, and Delaware
law may inhibit a takeover of the Company, which could limit the price
investors might be willing to pay in the future for our common stock, and could
entrench management.

We have a stockholder rights plan that may have the effect of discouraging
unsolicited takeover proposals, thereby entrenching current management and
possibly depressing the market price of our common stock. The rights issued
under the stockholder rights plan would cause substantial dilution to a person
or group that attempts to acquire us on terms not approved in advance by our
board of directors. In addition, our charter and bylaws contain provisions that
may discourage unsolicited takeover proposals that stockholders may consider to
be in their best interests. These provisions include:



| |  |  | a classified board of directors,                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | the ability of the board of directors to designate the terms of and issue new series of preferred stock,
|
| |  |  | advance notice requirements for nominations for election to the board of directors, and                 
|
| |  |  | special voting requirements for the amendment of our charter and bylaws.                                

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We are also subject to anti-takeover provisions under Delaware law, each
of which could delay or prevent a change of control. Together these provisions
and the rights plan may make more difficult the removal of management and may
discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for common stock.




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 2002 and for the first six months of
2003 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 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 were wound down during the
third quarter of 2002 and we currently have no plans to substantially increase
Visionexs activity. As a result, 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.




Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of the end of the
fiscal quarter ended June 30, 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 240.13a-14. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our current disclosure
controls and procedures are effective in timely alerting them to material
information relating to us and our subsidiaries required to be included in our
periodic SEC filings.




PART II OTHER INFORMATION




Item 1 Legal Proceedings

From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We currently
are not a party to any legal proceedings, the adverse outcome of which, in
managements opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial position.




Item 6 Exhibits and Reports on Form 8-K



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

On April 9, 2003 we filed a Form 8-K attaching a press release announcing
that the U.S. Food and Drug Administration had issued an approvable letter
regarding the Registrants New Drug Application for Vitrase® (ovine
hyaluronidase) for the treatment of vitreous hemorrhage.

On April 9, 2003 we filed a Form 8-K attaching a Certificate of Correction
of Restated Certificate of Incorporation, filed with the Delaware Secretary of
State March 31, 2003.

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On April 23, 2003 we filed a Form 8-K attaching a press release relating
to the Registrants financial results for the quarter ended March 31, 2003.

On April 25, 2003 we filed a Form 8-K/A attaching a press release revising
certain information contained in the press release attached a part of the Form
8-K filed on April 23, 2003.

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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 2003.

| |  |                                      
| |  | -------------------------------------
| |  | ISTA PHARMACEUTICALS, INC.           
| |  |                                      
| |  | Registrant)                          
| |  |                                      
| |  | /s/ Vicente Anido, Jr., Ph.D.        
| |  |                                      
| |  | Vicente Anido, Jr., Ph.D.            
| |  | President and Chief Executive Officer
| |  |                                      
| |  | /s/ Lauren P. Silvernail             
| |  |                                      
| |  | Lauren P. Silvernail                 
| |  | Chief Financial Officer and          
| |  | Vice President, Corporate Development

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INDEX TO EXHIBITS

[ADD 2000 STOCK PLAN]

|        |  |                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                
|Number  |  | Description                                                                                                                                    
|        |  |                                                                                                                                                
|10.1    |  | 2000 Stock Plan, as amended and restated                                                                                                       
|31.1    |  | President and Chief Executive Officers Certification, as
required by Section 302 of the Sarbanes-Oxley Act of 2002                            
|31.2    |  | Chief Financial Officer and Vice President, Corporate
Developments Certification, as required by Section 302 of the
Sarbanes-Oxley Act of 2002
|32.1    |  | President and Chief Executive Officers Certification, as
required by Section 906 of the Sarbanes-Oxley Act of 2002                            
|32.2    |  | Chief Financial Officer and Vice President, Corporate
Developments Certification, as required by Section 906 of the
Sarbanes-Oxley Act of 2002

24