<PAGE>   1

                                  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
    EXCHANGE ACT OF 1934

    FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OR 1934

    FOR THE TRANSITION PERIOD FROM __________________ TO __________________


                             ----------------------

                        Commission File Number: 333-34120


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


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


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


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


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


     The number of shares of the registrant's common stock, $.001 par value,
outstanding as of April 30, 2001 was 15,512,683.

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                                TABLE OF CONTENTS


                                                                         Page No
                                                                         -------
PART I    FINANCIAL INFORMATION

  Item 1  Financial Statements...........................................    3

          Condensed Balance Sheets - December 31, 2000 and
          March 31, 2001(unaudited)......................................    3

          Condensed Statements of Operations (unaudited) - Three Month
          Periods Ended March 31, 2001 and 2000 and for the Period from
          February 13, 1992 (inception) to March 31, 2001................    4

          Condensed Statements of Cash Flows (unaudited) - Three Month
          Periods Ended March 31, 2001 and 2000 and for the Period from
          February 13, 1992 (inception) to March 31, 2001................    5

          Notes to Unaudited Condensed Financial Statements..............    6

  Item 2  Management's Discussion and Analysis of Financial Condition
          and Results of Operations......................................    7

  Item 3  Quantitative and Qualitative Disclosure about Market Risk......   14

PART II   OTHER INFORMATION

  Item 1  Legal Proceedings..............................................   14

  Item 2  Change in Securities and Use of Proceeds.......................   14

  Item 3  Defaults upon Senior Securities................................   15

  Item 4  Submission of Matters to a Vote of Security Holders............   15

  Item 5  Other Information..............................................   15

  Item 6  Exhibits and Reports on Form 8-K...............................   15

          Signatures.....................................................   16


                                       2

<PAGE>   3

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

                           ISTA PHARMACEUTICALS, INC.

                            CONDENSED BALANCE SHEETS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           March 31,    December 31,
                                                             2001           2000
                                                           ---------    ------------
                                                          (Unaudited)
<S>                                                        <C>           <C>
                                 ASSETS

Current assets:
   Cash and cash equivalents                               $   9,843     $   8,772
   Short-term investments, available for sale                 11,845        16,957
   Advance payments - clinical trials                            204           433
   Other current assets                                          504           669
                                                           ---------     ---------
      Total current assets                                    22,396        26,831
Property and equipment, net                                      921           912
Note receivable from officer                                     165           162
Deposits and other assets                                         44           116
                                                           ---------     ---------
      Total Assets                                         $  23,526     $  28,021
                                                           =========     =========


                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                        $     688     $     606
   Accrued compensation and related expense                      125           364
   Accrued expenses - clinical trials                          1,533         1,241
   Other accrued expenses                                      1,458         1,219
   Current portion of obligation under capital lease              --            15
                                                           ---------     ---------
      Total current liabilities                                3,804         3,445

Deferred rent                                                      8            12

Stockholders' equity:
   Common stock                                                   16            15
   Additional paid in capital                                103,507       103,942
   Deferred compensation                                      (1,713)       (2,585)
   Cumulative foreign currency translation adjustment            (38)          (27)
   Accumulated unrealized gain on investments                     32           149
   Deficit accumulated during the development stage          (82,090)      (76,930)
                                                           ---------     ---------
      Total stockholders' equity                              19,714        24,564
                                                           ---------     ---------
      Total Liabilities and Stockholders' Equity           $  23,526     $  28,021
                                                           =========     =========
</TABLE>

                                       3

<PAGE>   4

                           ISTA PHARMACEUTICALS, INC.

                       CONDENSED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               For the
                                                                             Period From
                                                                             February 13,
                                                                                1992
                                                      Three Months End       (Inception)
                                                          March 31,            Through
                                                    ---------------------     March 31,
                                                      2001         2000         2001
                                                    --------     --------    -----------
<S>                                                 <C>          <C>         <C>
Operating expenses:
   Research and development                         $  3,929     $  3,023     $ 46,871
   General and administrative                          1,495        1,500       17,486
                                                    --------     --------     --------
Total operating expenses                               5,424        4,523       64,357
                                                    --------     --------     --------
Loss from operations                                  (5,424)      (4,523)     (64,357)
Interest income                                          264           54        1,852
Interest expense                                          --          (87)        (295)
                                                    --------     --------     --------
Net loss                                              (5,160)      (4,556)     (62,800)

Deemed dividend for preferred stockholders                --       19,245      (19,245)
                                                    --------     --------     --------
Net loss attributable to common stockholders        $ (5,160)    $(23,801)    $(82,045)
                                                    ========     ========     ========
Net loss per common share, basic and diluted        $  (0.33)    $ (13.10)
                                                    ========     ========

Shares used in computing net loss per
   common share, basic and diluted                    15,444        1,817

Pro forma net loss per common share, basic
   and diluted                                                   $  (2.77)
                                                                 ========

Shares used in computing pro forma net loss
   per common share, basic and diluted                              8,586
</TABLE>

                                       4

<PAGE>   5

                           ISTA PHARMACEUTICALS, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS

                            (IN THOUSANDS, UNAUDITED)

<TABLE>
<CAPTION>
                                                                              For the
                                                                            Period From
                                                                            February 13,
                                                                               1992
                                                     Three Months Ended     (Inception)
                                                          March 31,           Through
                                                     -------------------     March 31,
                                                       2001       2000         2001
                                                     -------    --------    ------------
<S>                                                  <C>        <C>         <C>
OPERATING ACTIVITIES
Net loss                                             $(5,160)   $(23,801)    $(82,045)
Deemed dividend for preferred stockholders                --      19,245       19,245
Adjustments to reconcile net loss to net cash
  used in operating activities:
    Amortization of deferred compensation                410         729        4,910
    Common stock issued for services                      --          --          113
    Depreciation and amortization                         84          68        1,069
Changes in operating assets and liabilities:
  Advanced payments - clinical trials                    229          79         (204)
  Other current assets                                   167         (27)        (504)
  Note receivable from officer                            (3)         (2)        (165)
  Accounts payable                                        82       2,073          688
  Accrued compensation and related expenses             (239)          3          125
  Accrued expenses - clinical trials                     292      (2,594)       1,659
  Other accrued expenses                                 239         651        1,458
  Deferred rent                                           (4)         (2)           8
  License fee received from Visionex                      --          --        5,000
                                                     -------    --------     --------
      Net cash used in operating activities           (3,903)     (3,578)     (48,643)
                                                     -------    --------     --------

INVESTING ACTIVITIES
Purchase of marketable investment securities          (4,219)         --      (24,027)
Sale of marketable investment securities               9,219          --       12,219
Purchase of equipment                                    (94)        (28)      (1,983)
Proceeds from refinancing under capital leases            --          --          827
Deposits and other assets                                 72        (371)         (44)
Cash acquired from Visionex transaction                   --       4,403        4,403
                                                     -------    --------     --------
  Net cash provided by (used in)
    investing activities                               4,978       4,004       (8,605)
                                                     -------    --------     --------

FINANCING ACTIVITIES
Payments on obligation under capital leases              (15)        (58)        (827)
Proceeds from exercise of stock options                   22          69          503
Proceeds from exercise of warrants                        --          --           41
Proceeds from bridge loans with related parties           --          --        5,047
Payments on bridge loans with related parties             --        (500)      (3,755)
Proceeds from issuance of preferred stock                 --      10,000       34,215
Repurchase of preferred stock                             --          --          (56)
Proceeds from issuance of common stock                    --          --       31,961
                                                     -------    --------     --------
      Net cash provided by financing activities            7       9,511       67,129

Effect of exchange rate changes on cash                  (11)        (26)         (38)
                                                     -------    --------     --------
INCREASE IN CASH AND CASH EQUIVALENTS                  1,071       9,911        9,843

Cash and cash equivalents at beginning of period       8,772         709           --
                                                     -------    --------     --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD           $ 9,843    $ 10,620     $  9,843
                                                     =======    ========     ========
</TABLE>

                                       5

<PAGE>   6

                           ISTA PHARMACEUTICALS, INC.

                NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

                                 MARCH 31, 2001

1.   THE COMPANY

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

2.   BASIS OF PRESENTATION

     The unaudited financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2000.

3.   COMPREHENSIVE INCOME (LOSS)

     FAS 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. In accordance with SFAS No. 130, the
accumulated unrealized gains (losses) on investments and the accumulated foreign
currency translation adjustments are disclosed as separate components of
stockholders' equity.

4.   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 share equivalents 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.

     Pro forma net loss per common share in the condensed statement of
operations has been computed as described above and also gives effect to common
equivalent shares arising from preferred stock that was converted to common
stock on the closing date of the initial public offering (August 25, 2000), and
the exercise of common stock warrants on that same date, using the as-if
converted method from the original date of issuance.


                                       6

<PAGE>   7

     Included in net loss per common share, basic and diluted, and pro forma net
loss per common share, basic and diluted, for the three months ended March 31,
2000 is the deemed dividend for preferred stockholders of approximately
$19,245,000, which relates to the Company's acquisition of Visionex on March 8,
2000. The deemed dividend represents the excess of the estimated value of the
preferred shares issued to purchase Visionex over the net tangible assets
acquired.

5.   NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which the
Company adopted on January 1, 2001. SFAS No. 133 sets forth a comprehensive and
consistent standard for the recognition of derivatives and hedging activities.
The adoption of SFAS No. 133 did not have an impact on our results of operations
or financial condition as we currently hold no derivative financial instruments
and do not currently engage in hedging activities.


ITEM 2  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

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

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

     Readers are urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors which
affect our business, including without limitation "Factors That May Affect
Results of Operations and Financial Condition" set forth in this Form 10-Q, and
the audited financial statements and the notes thereto and disclosures made
under the captions, "Management Discussion and Analysis of Financial Condition
and Results of Operations", "Risk Factors", "Consolidated Financial Statements"
and "Notes to Consolidated Financial Statements", included in the Company's
annual report on Form 10-K for the year ended December 31, 2000.

OVERVIEW

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

     We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through March 31, 2001 of
$82.0 million. Our losses have resulted primarily from research and development
activities, including clinical trials, related general and administrative
expenses and a deemed dividend for preferred stockholders. We expect to continue
to incur operating losses for the foreseeable future as we continue our research
and development and clinical testing activities, and seek regulatory approval
for our product candidates.


                                       7

<PAGE>   8

     In March 2000, we completed the acquisition of Visionex, a Singapore
corporation, which has been conducting a Phase II clinical trial of Vitrase in
Singapore. Visionex was a related party through common ownership by some of our
stockholders.

     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 in the United States and all international markets, except Mexico and
Japan. We will be dependent on the success of Allergan in commercializing
Vitrase in these markets. Our principal sources of revenue from this
collaboration and the commercialization of Vitrase will be milestone, royalty
and profit sharing payments received from Allergan. Under the terms of the
collaboration, we are responsible for the manufacture of Vitrase and for
supplying all of Allergan's requirements for Vitrase. If we are successful in
obtaining regulatory approval for Vitrase and Allergan achieves significant
sales of the product, our aggregate manufacturing costs will increase.

RESULTS OF OPERATIONS

Three months Ended March 31, 2001 and 2000

     Research and development expenses. Research and development expenses were
$3.9 million for the three months ended March 31, 2001 compared to $3.0 million
for the three months ended March 31, 2000. The increase of $900,000 was
primarily attributable to expansion of our preclinical and clinical development
activities, including two Phase III clinical trials of Vitrase for treatment of
severe vitreous hemorrhage. We anticipate that expenses in connection with our
Phase III Vitrase studies, including activities provided by contract research
organizations and patient enrollment, will increase over the next several
quarterly periods. In addition, and in connection with our preparations for
submission of a New Drug Application for Vitrase, we anticipate an increase in
expenses and expenditures associated with our manufacturing activities. In
particular, we will need to purchase equipment and incur certain expenses in
order to improve the manufacturing operations of our contract manufacturers.

     General and administrative expenses. General and administrative expenses
were $1.5 million for the three months ended March 31, 2001, unchanged from the
three months ended March 31, 2000. We anticipate that our quarterly general and
administrative expenses for 2001 will approximate the quarterly expenses in
2000. We anticipate that increasing expenses in connection with support of our
expanding operations and expenses associated with requirements as a public
reporting company will be offset by a decrease in non-cash compensation expenses
related to stock option grants.

     Interest income. Interest income was $264,000 for the three months ended
March 31, 2001 compared to $54,000 for the three months ended March 31, 2000.
The increase of $210,000 was directly attributable to the investment of the net
proceeds from our initial public offering in August 2000.

     Interest expense. There was no interest expense for the three months ended
March 31, 2001 compared to $87,000 for the three months ended March 31, 2000.
The majority of the interest expense for the three months ended March 31, 2000
was related to loans from shareholders, which were repaid in March 2000.

     Deemed dividend. During the quarter ended March 31, 2000, we acquired
Visionex and accounted for the acquisition under the purchase method of
accounting. At the time of the acquisition, we recorded $4.4 million of tangible
assets acquired and recognized a deemed dividend of $19.2 million for the excess
of the extended value of the shares issued over the net tangible assets
acquired.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2001, we had approximately $21.7 million in cash and
short-term investments.

     We have financed our operations since inception primarily through private
sales of our preferred stock and sale of our common stock in our initial public
offering. We received net proceeds of $10.0 million from the private sale of
preferred stock in March 2000 and $31.8 million from our initial public offering
in August 2000.


                                       8

<PAGE>   9

     For the three months ended March 31, 2001, we used $3.9 million of cash for
operations, principally as a result of the net loss of $5.2 million partially
offset by non-cash compensation expense of approximately $410,000. We used
approximately $3.6 million of cash for operations in the three months ended
March 31, 2000, principally as a result of the net loss of $23.8 million
partially offset by the non-cash deemed dividend for preferred stockholders of
approximately $19.2 million and non-cash compensation expense of approximately
$729,000.

     For the three months ended March 31, 2001, $5.0 million of cash was
provided by investing activities, primarily from the sale of marketable
investment securities. For the three months ended March 31, 2000, $4.4 million
of cash was provided from the acquisition of Visionex.

     Net cash provided by financing activities totaled $7,000 for the three
months ended March 31, 2001 compared to $9.5 million for the three months ended
March 31, 2000. During the three months ended March 31, 2000, $10.0 million in
net cash was provided from the private sale of preferred stock.

     We believe that our cash on hand will be sufficient to fund our operations
and capital expenditure needs for approximately the next twelve months. During
this period, we plan to allocate our capital resources primarily to the
development of our lead product candidate, Vitrase, for the treatment of severe
vitreous hemorrhage. We will need to raise additional funds to continue the
development and commercialization of Vitrase for severe vitreous hemorrhage, and
further development of our other product candidates, beyond this period. This
additional financing may not be available when needed or, if available, may not
be on terms favorable to us or to our stockholders. Insufficient funds may
require us to further delay, scale back or eliminate some or all of our product
development efforts or may limit our ability to operate as a going concern. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.

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

     o  the rate of progress of, and spending on, our research and development
        programs

     o  the results of our clinical trials

     o  the time and expense necessary to obtain regulatory approvals

     o  our ability to establish and maintain collaborative relationships

     o  receiving milestone payments from Allergan

     o  competitive, technological, market and other developments

     Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies.

FACTORS THAT MAY EFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

WE HAVE A HISTORY OF NET LOSSES; WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.

     We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
March 31, 2001, our accumulated deficit was $82.1 million, including a net loss
of approximately $41.1 million for the year ended December 31, 2000 and a net
loss of $5.2 million for the three months ended March 31, 2001. We have not
generated any revenue from product sales to date, and it is possible that we
will 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. It is possible that we will never
achieve profitable operations.

IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE WILL NEED TO
SIGNIFICANTLY CURTAIL OUR OPERATIONS.

     Due to an increase in planned research and development expenditures in
connection with the completion of our Phase III clinical trials for Vitrase, we
believe that our cash on hand will be sufficient to fund our


                                       9

<PAGE>   10

operations and capital expenditure needs for approximately the next twelve
months. During this period, we plan to allocate our capital resources primarily
to the development of our lead product candidate, Vitrase for the treatment of
severe vitreous hemorrhage. We will need to raise additional funds to continue
the development and commercialization of Vitrase for severe vitreous hemorrhage,
and further the development of our other product candidates beyond this period.

     These funds may not be available on favorable terms, or at all. If we do
not succeed in raising additional funds, we will need to curtail our operations
significantly.

OUR PHASE III CLINICAL TRIAL RESULTS FOR VITRASE ARE UNCERTAIN. IF TRIAL RESULTS
ARE NOT SATISFACTORY, WE MAY BE FORCED TO TERMINATE DEVELOPMENT OF VITRASE.

     We are currently conducting two multinational Phase III clinical trials for
Vitrase in patients that we classify as having a severe vitreous hemorrhage. If
the results of these trials are not satisfactory, we will need to conduct
additional clinical trials or cease the development of Vitrase. These trials are
designed to support accelerated regulatory approval. Products subject to
accelerated approval regulations are generally given priority review, meaning
the FDA will attempt to complete review of our application within six months of
filing. Vitrase has also received fast-track development designation from the
FDA for the treatment of severe vitreous hemorrhage. We cannot predict the
ultimate impact, if any, of the fast-track process on the timing or likelihood
of FDA approval of Vitrase. If we obtain accelerated approval, we will need to
continue following patients who participate in the trial or initiate additional
clinical trials to document improvement in visual acuity or other related
objective clinical benefit. This may require several years of follow-up. If
there is significant patient drop-out from the study after treatment or if
patients fail to participate in follow-up procedures, we will be unable to
document improvement in visual acuity or other related objective clinical
benefit. If we fail to document an improvement in visual acuity or other related
objective clinical benefit, the FDA may withdraw our approval on an expedited
basis.

IF WE DO NOT RECEIVE AND MAINTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, WE WILL
NOT BE ABLE TO MANUFACTURE OR MARKET OUR PRODUCTS.

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

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

     o  a product candidate may not be safe or effective

     o  even if we believe data from preclinical testing and clinical trials
        should justify approval, FDA officials may disagree

     o  the FDA might not approve our manufacturing processes or facilities or
        the processes or facilities of our contract manufacturers or raw
        material suppliers

     o  the FDA may change its approval policies or adopt new regulations

     o  the FDA may approve a product candidate for indications that are narrow,
        which may limit our sales and marketing activities

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

IF WE ARE NOT ABLE TO COMPLETE OUR CLINICAL TRIALS SUCCESSFULLY OR OUR CLINICAL
TRIALS ARE DELAYED, WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVALS TO MARKET
OUR PRODUCTS.

      Many of our research and development programs are at an early stage and
clinical testing is a long, expensive and uncertain process. We may not complete
our clinical trials on schedule, including our two multinational Phase III
clinical trials for Vitrase. Delays in patient enrollment in the trials may
result in


                                       10

<PAGE>   11

increased costs, program delays or both, which could slow our product
development and approval 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.

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

IF ALLERGAN DOES NOT PERFORM ITS DUTIES UNDER OUR AGREEMENTS, OUR ABILITY TO
COMMERCIALIZE VITRASE MAY BE SIGNIFICANTLY IMPAIRED.

     We have entered into a collaboration with Allergan for Vitrase. If we
obtain regulatory approval for Vitrase, we will be dependent on Allergan for the
commercialization of Vitrase. The amount and timing of resources Allergan
dedicates to our collaboration is not within our control. Accordingly, any
breach or termination of our agreements by Allergan could delay or stop the
commercialization of Vitrase. Allergan may change its strategic focus, pursue
alternative technologies or develop competing products. Unfavorable developments
in our relationship with Allergan could have a significant adverse effect on us
and our stock price.

IF WE HAVE PROBLEMS WITH BIOZYME LABORATORIES, LTD., OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS COULD BE DELAYED OR STOPPED.

     We have a supply agreement with Biozyme pursuant to which Biozyme supplies,
our contract manufacturer with all of our ovine hyaluronidase requirements for
use in our clinical trials. Biozyme is currently our only source for highly
purified hyaluronidase, which is extracted from sheep in New Zealand.
Difficulties in our relationship with Biozyme could limit our ability to provide
sufficient quantities of our products for clinical trials and commercial sales.

IF WE HAVE PROBLEMS WITH OUR CONTRACT MANUFACTURER, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS COULD BE DELAYED OR STOPPED.

     We currently rely on Prima Pharm, Inc. for formulation and filling of dose
specific vials of hyaluronidase to be used in our clinical trials. To date,
Prima Pharm has produced only small quantities of our product for use in
clinical trials. Prima Pharm may be unable to scale up production when necessary
or accurately and reliably manufacture commercial quantities of our products at
reasonable costs. Therefore, we began considering switching to a new contract
manufacturer.

     The manufacturing facilities of our contract manufacturer, Prima Pharm or
its replacement, must comply with current Good Manufacturing Practices
regulations, which the FDA strictly enforces. Such compliance will require a
capital commitment on our part. Difficulties in our relationship with our
contract manufacturer, could limit our ability to provide sufficient quantities
of our products for clinical trials and commercial sales.

THE OUTBREAK OF FOOT-AND-MOUTH DISEASE IN EUROPE AND ELSEWHERE MAY SIGNIFICANTLY
INTERRUPT THE SUPPLY OF THE ACTIVE PHARMACEUTICAL INGREDIENT FOR OUR PRODUCTS.

     In February 2001, an outbreak of foot-and-mouth disease in the United
Kingdom (UK) led to governmental actions around the world to prevent the highly
contagious disease from spreading to animals in other countries. Such actions
have included temporarily prohibiting the importation and exportation of cattle,
sheep and other animals subject to the disease, and products derived from these
animals, to and from the UK and to and from other countries.

     The active pharmaceutical ingredient in our product candidates is
hyaluronidase, which is extracted from sheep in New Zealand. Biozyme, the
company that processes hyaluronidase for us, is located in Wales and ships
hyaluronidase to our manufacturer, Prima Pharm, in San Diego, approximately
twice per month for formulation and filling of dose specific vials. These
shipments require an export permit from the Ministry of Agriculture, Fisheries
and Food (MAFF) of the UK. The MAFF temporarily placed exportation of processed
hyaluronidase and other biological materials on hold because of the
foot-and-mouth disease outbreak. Before it will issue export permits for these
materials, including hyaluronidase, MAFF is requiring that the United States
Department of Agriculture (USDA) make a written request that permits be issued,
and the USDA has issued a permit request for our hyaluronidase. If UK
authorities do not issue permits for the export of processed hyaluronidase to
the United States, or do not do so in a timely manner, or if U.S. authorities do
not permit its importation, lengthy delays may occur in the shipment of our
active pharmaceutical ingredient to our manufacturer, Prima Pharm, which would
delay our on-going clinical studies and our business and financial condition
would be materially impaired.


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<PAGE>   12

WE MAY NOT BE ABLE TO NEGOTIATE ADDITIONAL AGREEMENTS WITH STRATEGIC PARTNERS,
WHICH COULD LIMIT OUT ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES

     We intend to enter into additional agreements with pharmaceutical companies
or others for marketing and other commercialization activities relating to some
of our product candidates. However, we may not be able to enter into additional
relationships and these relationships, if established, may not be commercially
successful.

WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE.

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

     o  our patents and pending patent applications use technology that we
        invented first

     o  we were the first to file patent applications for these inventions

     o  others will not independently develop similar or alternative
        technologies or duplicate our technologies

     o  any of our pending patent applications will result in issued patents

     o  any patents issued to us will provide a basis for commercially viable
        products, will provide us with any competitive advantages or will not
        face third party challenges or be the subject of further proceedings
        limiting their scope

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

     We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect with confidentiality
agreements with employees, consultants and others with whom we discuss our
business. These individuals may breach our confidentiality agreements and our
remedies may not be adequate to enforce these agreements. Disputes may arise
concerning the ownership of intellectual property or the applicability or
enforceability of these agreements, and we may not resolve these disputes in our
favor. Furthermore, our competitors may independently develop trade secrets and
proprietary technology similar to ours. We may not be able to maintain the
confidentiality of information relating to such products.

OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD
CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.

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

     We are in negotiations with a third party for our acquisition of rights to
patent applications owned by such party related to our Keraform product in
development. If we are not successful in finalizing this acquisition, we may be
required to license these patent rights in order to commercialize our Keraform


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<PAGE>   13

product as currently planned. Such a license may not be available to us on
favorable terms, if at all. If such license is not available and we
commercialize our Keraform product in its current configuration, there is a
possibility that we could be sued for patent infringement should any patents
containing claims related to our Keraform product issue from these patent
applications.

IF WE DO NOT RECEIVE THIRD-PARTY REIMBURSEMENT, OUR PRODUCTS MAY NOT BE ACCEPTED
IN THE MARKET.

     Third-party payors 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 payors may not establish adequate
levels of reimbursement for our products, which could limit their market
acceptance.

WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE THAT COULD RESULT IN
PRODUCTS THAT ARE SUPERIOR TO THE PRODUCTS WE ARE DEVELOPING.

     We have numerous competitors in the United States and abroad, including,
among others, major pharmaceutical and specialized biotechnology firms,
universities and other research institutions that may be developing competing
products. Such competitors may include Alcon Laboratories, Inc., Bausch & Lomb,
Incorporated, CIBA Vision (a unit of Novartis AG), 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 MAY NOT DISCOVER NEW PRODUCT CANDIDATES IF HYALURONIDASE IS NOT SAFE AND
EFFECTIVE FOR NUMEROUS APPLICATIONS IN THE EYE.

     A part of our strategy is to leverage our experience with hyaluronidase to
develop new product candidates. Hyaluronidase may not be safe and effective for
numerous applications in the eye. Our failure to develop new product candidates
could have an adverse effect on our business.

WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND INSURANCE AGAINST THESE CLAIMS
MAY NOT BE AVAILABLE TO US AT A REASONABLE RATE.

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

WE DEAL WITH HAZARDOUS MATERIALS AND GENERATE HAZARDOUS WASTES AND MUST COMPLY
WITH ENVIRONMENTAL LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE AND RESTRICT HOW
WE DO BUSINESS. WE COULD ALSO BE LIABLE FOR DAMAGES OR PENALTIES IF WE ARE
INVOLVED IN A HAZARDOUS MATERIAL OR WASTE SPILL OR OTHER ACCIDENT.

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


                                       13


<PAGE>   14

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 2000 and for the first three months of 2001 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 have historically been
insignificant and we have no current plans to substantially increase Visionex's
activity. As a result, currency fluctuations between the Singapore dollar and
the currencies in which Visionex does business will cause foreign currency
translation gains and losses. We do not expect our foreign currency translation
gains or losses to be material. We do not currently engage in foreign exchange
hedging transactions to manage our foreign currency exposure.



PART II OTHER INFORMATION

ITEM 1  LEGAL PROCEEDINGS

     None

ITEM 2  CHANGE IN SECURITIES AND USE OF PROCEEDS

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

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

     The net proceeds from our initial public offering are primarily being used
to fund our clinical trials and preclinical research, with a particular focus on
Vitrase for the treatment of severe vitreous hemorrhage, and for general
corporate purposes, including working capital. We may use a portion of the net
proceeds to acquire or invest in technologies, products or businesses
complementary to our business. We are in negotiations with a third party for
our acquisition of rights to patent applications owned by such third party
related to our Keraform product. We do not anticipate that the costs of
acquiring these rights will be material. None of the net offering proceeds of
ISTA have been or will be paid directly or indirectly to any director, officer,
general partner of ISTA or their associates, persons owning more than 10% or
more of any class of ISTA's equity securities, or an affiliate of ISTA.


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<PAGE>   15

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5  OTHER INFORMATION

     None

ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K

     None


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<PAGE>   16

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 11th day of May 2001.


                                            ISTA Pharmaceuticals, Inc.
                                            --------------------------
                                                   (Registrant)


                                            /s/ J. C. MacRae
                                            ------------------------------------
                                                J. C. MacRae
                                                Executive Vice President,
                                                Chief Operating Officer and
                                                Chief Financial Officer



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