##### 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 SEPTEMBER 30, 2002

or

|      |                                                                                                                                                        
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|[   ] | 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
(State or other jurisdiction of
incorporation or organization) |  | 33-0511729
(IRS EmployerIdentification 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 October 31, 2002 was 17,092,636.





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TABLE OF CONTENTS



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



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##### Table of Contents



Table of Contents

|        |  |                                                                                                                                                                                                          |  |        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|        |  |                                                                                                                                                                                                          |  | Page No
|        |  |                                                                                                                                                                                                          |  |        
|PART I  |  | FINANCIAL INFORMATION                                                                                                                                                                                    |  |        
|Item 1  |  | Financial Statements                                                                                                                                                                                     |  | 3      
|        |  | Condensed Consolidated Balance Sheets  December 31, 2001 and September 30,
2002 (unaudited)                                                                                                             |  | 3      
|        |  | Condensed Consolidated Statements of Operations (unaudited)  Three and
Nine Month Periods Ended September 30, 2002 and 2001 and for the Period from
February 13, 1992 (inception) to September 30, 2002 |  | 4      
|        |  | Condensed Consolidated Statements of Cash Flows (unaudited)  Nine Month
Periods Ended September 30, 2002 and 2001 and for the Period from February 13,
1992 (inception) to September 30, 2002           |  | 5      
|        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                                           |  | 6      
|       
|       
|       
|       
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                                                                                    |  | 8      
|       
|       
|       
|       
|Item 3  |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                                                                |  | 16     
|       
|       
|       
|       
|Item 4  |  | Controls and Procedures                                                                                                                                                                                  |  | 17     
|       
|PART II |  | OTHER INFORMATION                                                                                                                                                                                        |  |        
|       
|       
|       
|       
|Item 1  |  | Legal Proceedings                                                                                                                                                                                        |  | 17     
|       
|       
|       
|       
|Item 2  |  | Change in Securities and Use of Proceeds                                                                                                                                                                 |  | 17     
|       
|       
|       
|       
|Item 3  |  | Defaults upon Senior Securities                                                                                                                                                                          |  | 18     
|       
|       
|       
|       
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                      |  | 18     
|       
|       
|       
|       
|Item 5  |  | Other Information                                                                                                                                                                                        |  | 19     
|       
|       
|       
|       
|Item 6  |  | Exhibits and Reports on Form 8-K                                                                                                                                                                         |  | 19     
|       
|       
|       
|       
|        |  | Signatures                                                                                                                                                                                               |  | 20     
|       
|       
|       
|       
|        |  | Index to Exhibits                                                                                                                                                                                        |  | 23     

2



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##### Table of Contents






PART I FINANCIAL INFORMATION




Item 1 Financial Statements




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

|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |              |   |        |        | 
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ---------------------------------------------- | - | ------------- | ----- | ------------ | - | ------ | ------ | 
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   | September 30, |       | December 31,
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   | 2002          |       | 2001        
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   | (Unaudited)   |       |              |   |       
|                                |                                                                                                                                                                                                                             |  |                                                      | ASSETS                                         |   |               |       |              |   |        |        | 
|Current assets:                 |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                | Cash and cash equivalents                                                                                                                                                                                                   |  | $                                                    | 4,145                                          |   |               | $     | 12,348       |  
|                                | Short-term investments                                                                                                                                                                                                      |  |                                                      |                                               |   |               |       | 3,254        |  
|                                | Advance payments  clinical trials                                                                                                                                                                                          |  |                                                      | 40                                             |   |               |       | 40           |  
|                                | Other current assets                                                                                                                                                                                                        |  |                                                      | 1,374                                          |   |               |       | 451          |  
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  |                                                      | Total current assets                           |   |               | 5,559 |              |   |        | 16,093 | 
|Property and equipment, net     |                                                                                                                                                                                                                             |  | 896                                                  |                                                |   |               | 819   |             
|Deposits and other assets       |                                                                                                                                                                                                                             |  | 44                                                   |                                                |   |               | 44    |             
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  |                                                      | Total Assets                                   |   | $             | 6,499 |              |   | $      | 16,956 | 
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  |                                                      | LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |   |               |       |              |   |        |        | 
|Current liabilities:            |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                | Accounts payable                                                                                                                                                                                                            |  | $                                                    | 1,891                                          |   |               | $     | 891          |  
|                                | Accrued compensation and related expenses                                                                                                                                                                                   |  |                                                      | 142                                            |   |               |       | 799          |  
|                                | Accrued expenses  clinical trials                                                                                                                                                                                          |  |                                                      | 669                                            |   |               |       | 770          |  
|                                | Other accrued expenses                                                                                                                                                                                                      |  |                                                      | 1,887                                          |   |               |       | 1,554        |  
|                                | Note payable to stockholders, net                                                                                                                                                                                           |  |                                                      | 3,642                                          |   |               |       |             |  
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  |                                                      | Total current liabilities                      |   |               | 8,231 |              |   |        | 4,014  | 
|Deferred rent                   |                                                                                                                                                                                                                             |  | 5                                                    |                                                |   |               | 2     |             
|Deferred income                 |                                                                                                                                                                                                                             |  | 4,792                                                |                                                |   |               | 5,000 |             
|Stockholders (deficit) equity: |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                | Common stock, $.001 par value; 100,000,000 shares authorized at
September 30, 2002 and December 31, 2001; 16,892,636 and
15,598,840 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively |  |                                                      | 17                                             |   |               |       | 16           |  
|                                | Additional paid in capital                                                                                                                                                                                                  |  |                                                      | 111,561                                        |   |               |       | 111,026      |  
|                                | Deferred compensation                                                                                                                                                                                                       |  |                                                      | (1,764                                         | ) |               |       | (3,643       | )
|                                | Accumulated other comprehensive income                                                                                                                                                                                      |  |                                                      | (37                                            | ) |               |       | (22          | )
|                                | Deficit accumulated during the development stage                                                                                                                                                                            |  |                                                      | (116,306                                       | ) |               |       | (99,437      | )
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  | Total stockholders (deficit) equity                 |                                                |   | (6,529        | )     |              |   | 7,940  |       
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             
|                                |                                                                                                                                                                                                                             |  | Total Liabilities and Stockholders (Deficit) Equity |                                                | $ | 6,499         |       |              | $ | 16,956 |       
|                                |                                                                                                                                                                                                                             |  |                                                      |                                                |   |               |       |             

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##### Table of Contents






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

|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |        | 
|--------------------------------------------------------------------- | -------------------------- | - | ------------------ | ----- | ----------------- | - | ------------- | ----- | ---- | - | ------- | ------ |  | - | ------- | ------ |  | - | --------------- | ------ | 
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   | From the Period
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   | From           
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   | February 13,   
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   | 1992           
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   | (Inception)    
|                                                                      |                            |   | Three Months Ended |       | Nine Months Ended |   | Through      
|                                                                      |                            |   | September 30,      |       | September 30,     |   | September 30,
|                                                                      |                            |   |                    |       |                   |   |              
|                                                                      |                            |   | 2002               |       | 2001              |   | 2002          |       | 2001 |   | 2002   
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |        
|Revenue                                                               |                            | $ | 68                 |       |                   | $ | 0             |       |      | $ | 208     |        |  | $ | 0       |        |  | $ | 208             |       
|Operating expenses:                                                   |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|                                                                      | Research and development   |   |                    | 3,872 |                   |   |               | 3,929 |      |   |         | 11,264 |  |   |         | 11,501 |  |   |                 | 69,976 | 
|                                                                      | General and administrative |   |                    | 1,736 |                   |   |               | 1,364 |      |   |         | 5,902  |  |   |         | 4,518  |  |   |                 | 29,431 | 
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Total operating expenses                                              |                            |   | 5,608              |       |                   |   | 5,293         |       |      |   | 17,166  |        |  |   | 16,019  |        |  |   | 99,407          |       
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Loss from operations                                                  |                            |   | (5,540             | )     |                   |   | (5,293        | )     |      |   | (16,958 | )      |  |   | (16,019 | )      |  |   | (99,199         | )     
|Interest income                                                       |                            |   | 14                 |       |                   |   | 131           |       |      |   | 144     |        |  |   | 778     |        |  |   | 2,558           |       
|Interest expense                                                      |                            |   | (55                | )     |                   |   | 0             |       |      |   | (55     | )      |  |   | (25     | )      |  |   | (375            | )     
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Net loss                                                              |                            |   | (5,581             | )     |                   |   | (5,162        | )     |      |   | (16,869 | )      |  |   | (15,266 | )      |  |   | (97,016         | )     
|Deemed dividend for preferred stockholders                            |                            |   |                   |       |                   |   |              |       |      |   |        |        |  |   |        |        |  |   | (19,245         | )     
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Net loss attributable to common stockholders                          |                            | $ | (5,581             | )     |                   | $ | (5,162        | )     |      | $ | (16,869 | )      |  | $ | (15,266 | )      |  | $ | (116,261        | )     
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Net loss per common share, basic and diluted                          |                            | $ | (0.33              | )     |                   | $ | (0.33         | )     |      | $ | (1.01   | )      |  | $ | (0.98   | )      |  |   |                 |       
|                                                                      |                            |   |                    |       |                   |   |               |       |      |   |         |        |  |   |         |        |  |   |                 |       
|Shares used in computing net loss per common
share, basic and diluted |                            |   | 16,893             |       |                   |   | 15,599        |       |      |   | 16,777  |        |  |   | 15,533  |        |  |   |                 |       

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

|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |       |       |                |         |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | ------- | ----------------------------------------- | ----- | ----------------- | ------- | ---------------- | ----- | ---- | -------- | ----- | ----- | -------------- | ------- | -
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |       |       | For the Period
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |       |       | From          
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |       |       | February 13,  
|                                                                                                                |                                                               |                                       |         |                                           |       | Nine Months Ended |         | 1992 (Inception)
|                                                                                                                |                                                               |                                       |         |                                           |       | September 30,     |         | Through         
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         | September 30,   
|                                                                                                                |                                                               |                                       |         |                                           |       | 2002              |         | 2001             |       | 2002
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |     
|Operating Activities                                                                                            |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Net loss attributable to common stockholders                                                                    |                                                               | $                                     | (16,869 | )                                         |       | $                 | (15,266 | )                |       | $    | (116,261 | )    
|Deemed dividend for preferred stockholders                                                                      |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | 19,245   |      
|Adjustments to reconcile net loss attributable to common stockholders
to net cash used in operating activities: |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|                                                                                                                |                                                               | Amortization of deferred compensation |         |                                           | 1,772 |                   |         |                  | 1,078 |      |          |       | 8,183 |               
|                                                                                                                |                                                               | Amortization of financing costs       |         |                                           | 53    |                   |         |                  |      |      |          |       | 53    |               
|                                                                                                                |                                                               | Common stock issued for services      |         |                                           | 99    |                   |         |                  |      |      |          |       | 212   |               
|                                                                                                                |                                                               | Forgiveness of note receivable        |         |                                           |      |                   |         |                  |      |      |          |       | 162   |               
|                                                                                                                |                                                               | Depreciation and amortization         |         |                                           | 252   |                   |         |                  | 263   |      |          |       | 1,581 |               
|Changes in operating assets and liabilities:                                                                    |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|                                                                                                                | Advanced payments  clinical trials and other current assets  |                                       |         | 5                                         |       |                   |         | 439              |       |      |          | (486  | )    
|                                                                                                                | Note receivable from officer                                  |                                       |         |                                          |       |                   |         | (8               | )     |      |          | (162  | )    
|                                                                                                                | Accounts payable                                              |                                       |         | 1,001                                     |       |                   |         | (8               | )     |      |          | 1,892 |      
|                                                                                                                | Accrued compensation and related expenses                     |                                       |         | (657                                      | )     |                   |         | (98              | )     |      |          | 142   |      
|                                                                                                                | Accrued expenses  clinical trials and other accrued expenses |                                       |         | (696                                      | )     |                   |         | (126             | )     |      |          | 1,752 |      
|                                                                                                                | Deferred rent                                                 |                                       |         | 3                                         |       |                   |         | (12              | )     |      |          | 5     |      
|                                                                                                                | Deferred income                                               |                                       |         | (210                                      | )     |                   |         |                 |       |      |          | 4,790 |      
|                                                                                                                | License fee received from Visionex                            |                                       |         |                                          |       |                   |         |                 |       |      |          | 5,000 |      
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|                                                                                                                |                                                               |                                       |         | Net cash used in operating activities     |       |                   | (15,247 | )                |       |      | (13,738  | )     |       |                | (73,892 | )
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Investing Activities                                                                                            |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Purchase of marketable investment securities                                                                    |                                                               |                                       | (11,026 | )                                         |       |                   | (12,346 | )                |       |      | (43,180  | )    
|Sale of marketable investment securities                                                                        |                                                               |                                       | 14,270  |                                           |       |                   | 24,129  |                  |       |      | 43,180   |      
|Purchase of equipment                                                                                           |                                                               |                                       | (323    | )                                         |       |                   | (154    | )                |       |      | (2,463   | )    
|Deposits and other assets                                                                                       |                                                               |                                       |        |                                           |       |                   | 72      |                  |       |      | (44      | )    
|Proceeds from refinancing under capital leases                                                                  |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | 827      |      
|Cash acquired from Visionex transaction                                                                         |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | 4,403    |      
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|                                                                                                                |                                                               |                                       |         | Net cash provided by investing activities |       |                   | 2,921   |                  |       |      | 11,701   |       |       |                | 2,723   |  
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Financing Activities                                                                                            |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Payments on obligation under capital lease                                                                      |                                                               |                                       |        |                                           |       |                   | (15     | )                |       |      | (827     | )    
|Proceeds from exercise of stock options                                                                         |                                                               |                                       | 119     |                                           |       |                   | 78      |                  |       |      | 679      |      
|Proceeds from exercise of warrants                                                                              |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | 41       |      
|Proceeds from bridge loans with related parties                                                                 |                                                               |                                       | 4,000   |                                           |       |                   |        |                  |       |      | 9,047    |      
|Payments on bridge loans with related parties                                                                   |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | (3,755   | )    
|Proceeds from issuance of preferred stock                                                                       |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | 34,215   |      
|Repurchase of preferred stock                                                                                   |                                                               |                                       |        |                                           |       |                   |        |                  |       |      | (56      | )    
|Proceeds from issuance of common stock                                                                          |                                                               |                                       |        |                                           |       |                   | 25      |                  |       |      | 36,007   |      
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|                                                                                                                |                                                               |                                       |         | Net cash provided by financing activities |       |                   | 4,119   |                  |       |      | 88       |       |       |                | 75,351  |  
|Effect of exchange rate changes on cash                                                                         |                                                               |                                       | 4       |                                           |       |                   | (6      | )                |       |      | (37      | )    
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|(Decrease) Increase in Cash and Cash Equivalents                                                                |                                                               |                                       | (8,203  | )                                         |       |                   | (1,955  | )                |       |      | 4,145    |      
|Cash and cash equivalents at beginning of period                                                                |                                                               |                                       | 12,348  |                                           |       |                   | 8,772   |                  |       |      |         |      
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      
|Cash and Cash Equivalents At End of Period                                                                      |                                                               | $                                     | 4,145   |                                           |       | $                 | 6,817   |                  |       | $    | 4,145    |      
|                                                                                                                |                                                               |                                       |         |                                           |       |                   |         |                  |       |      |          |      

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

1. The Company

ISTA Pharmaceuticals, Inc. (ISTA or the Company) was incorporated in
the state of California on February 13, 1992 to discover, develop and market
novel therapeutics for diseases and conditions of the eye. The Company
reincorporated in Delaware on August 4, 2000.

ISTAs initial product development efforts were focused on using highly
purified formulations of the enzyme hyaluronidase to treat diseases and
conditions of the eye such as vitreous hemorrhage and diabetic retinopathy.
Today, ISTA is continuing with product development activities for these
conditions and is also developing proprietary therapeutic products to treat
hyphemia, glaucoma, ocular pain and inflammation. Our lead product candidate,
Vitrase®, which has completed two Phase III clinical trials, is a proprietary
drug for the treatment of vitreous hemorrhage. ISTAs goal is to become a fully
integrated specialty pharmaceutical company by acquiring complementary
products, either already marketed or in development. The Company has not
commenced commercial operations and is considered to be in the development
stage.

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

As of September 30, 2002, we had approximately $4.1 million in cash and
short-term investments. The Company incurred a net loss of $16.9 million for
the nine months ended September 30, 2002 and had an accumulated deficit of
$116.3 million at September 30, 2002. The ability of the Company to continue as
a going concern is dependent upon its ability to obtain additional capital and
achieve profitable operations. The Company will continue to rely on outside
sources of financing to meet its capital needs for the fourth quarter and
beyond. There can be no assurance, assuming the Company raises additional
funds, that the Company will achieve positive cash flow. If the Company is not
able to secure additional funding, we will be required to scale back our
research and development programs and general and administrative activities and
we may not be able to continue in business. The 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.

On September 19, 2002 ISTA secured a commitment to provide $40 million in
equity from investors. The Company also secured a bridge loan of $4 million,
which is convertible into common stock at the option of the investors. The
terms and conditions of these financing arrangements, along with other
proposals, were approved by ISTA stockholders at a special meeting of
stockholders held on November 11, 2002. ISTA anticipates
consummating the $40 million in equity financing in November
2002, subject to satisfying certain conditions.

2. Basis of Presentation

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

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

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

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3. Revenue Recognition

We recognize revenue consistent with the provisions of the Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition, which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Amounts received for upfront product and technology
license fees under multiple-element arrangements are deferred and recognized
over the period of such services or performance if such arrangements require
on-going services or performance. Amounts received for milestones are
recognized upon achievement of the milestone, unless the amounts received are
creditable against royalties or we have ongoing performance obligations.
Royalty revenue will be recognized upon sale of the related products, provided
the royalty amounts are fixed and determinable and collection of the related
receivable is probable. Any amounts received prior to satisfying our revenue
recognition criteria will be recorded as deferred revenue in the accompanying
balance sheets.

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

4. Comprehensive Income (Loss)

Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income,requires reporting and displaying comprehensive income
(loss) and its components, which, for ISTA, includes net loss and unrealized
gains and losses on investments and foreign currency translation gains and
losses. Total comprehensive loss for the nine month period ended September 30,
2002 and 2001 was $16,906,000 and $15,262,000, respectively. In accordance with
SFAS No. 130, the accumulated balance of unrealized gains(losses) on
investments and the accumulated balance of foreign currency translation
adjustments are disclosed as separate components of stockholders equity.

5. Net Loss Per Share

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

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

6. Note Payable to Stockholders

On September 19, 2002, the Company entered into a common stock and warrant
purchase agreement with a group of investors led by the Sprout Group,
Sanderling Venture Partners and Investor Growth Capital Limited. On that same date, we
also secured a bridge loan of $4 million from these same investors.

Under the terms of the common stock and warrant purchase agreement, the
investors agreed to purchase $40 million of ISTA common stock (or
10,526,306 shares, after giving effect to a 10-for-1 reverse stock
split which went into effect as of November 13,
2002) and
receive warrants to purchase an additional $6 million of ISTA common stock (or
1,578,946 shares after giving effect to the reverse stock split).
This reverse stock split has not been reflected in the share or per
share data in the financial statements. The
per share price of the common stock and the exercise price of the warrants is
$3.80 (after giving effect to the reverse stock split). This
represents a 31% premium over $0.29, the proportionally unadjusted closing price of ISTA common
stock on September 18, 2002, the last trading day prior to the announcement of
the transaction. We anticipate consummating this private equity
transaction in November 2002, subject to satisfying certain
conditions.

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Under the terms of a note and warrant purchase agreement (bridge loan) the
investors agreed to purchase $4 million in senior secured convertible
promissory notes and receive warrants to purchase $1 million of ISTA common
stock. The promissory notes mature on December 31, 2002, bear interest at an
annual rate of 8%, and are secured by substantially all of the Companys
personal and intellectual property. The $4 million principal amount and
accrued interest under the promissory notes is convertible for shares of ISTA
common stock at the per share rate of $3.80 (after giving effect to
the reverse stock split). The warrants are immediately
exercisable at a per share price of $3.80 (after giving effect to the
reverse stock split). The proceeds of
the bridge financing will be used to fund clinical trials and general corporate
activities.

7.  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

During
the quarter ended September 30, 2002, the Company completed the
planned wind down of the operations of Visionex Pte, Ltd. (Visionex),
its wholly owned subsidiary located in Singapore, following the
completion of the Phase II clinical trials of Vitrase that were
conducted in Singapore.

At
the time of the initial funding of Visionex, ISTA entered into a
distribution agreement which granted Visionex the exclusive right to
market, sell and distribute ISTA's Vitrase and corneaplasty products
throughout Southeast Asia, except Japan and Korea (the Territory), in
exchange for a license fee of $5 million. Under Singapore tax
law, Visionex was subject to a 15% withholding tax on outbound
licensing fees. However, in 1998, the Company applied for and was
granted a waiver of the withholding tax from the Economic Development
Board (EDB) in Singapore related to the $5 million license fee
paid to ISTA 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.
As a result of the delays in the growth of the Visionex operations,
and the subsequent wind down of the Visionex operations, ISTA has
continued to have discussions with the EDB related to its commitment
to implement its original business plan for Visionex, or a comparable
plan, within two years after the approval of Visionex drugs in the
Territory.

Based
upon the Company's most recent negotiations with the EDB and
management's assessment of its obligations with the EDB, management
does not believe that it will be required to pay any withholding tax
or related obligations in connection with the license fee and,
accordingly, no accruals have been made to the Company's financial
statements for the nine months ended September 30, 2002 related
to these matters.




|       |  |                                                                                      
|------ |  | -------------------------------------------------------------------------------------
|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, 2001.

Overview

ISTA is focused on saving and improving eyesight by developing proprietary
therapeutic products. Our product candidates and programs address serious
diseases and conditions of the eye such as vitreous hemorrhage, diabetic
retinopathy, hyphemia, glaucoma, ocular pain and inflammation. Building on this
pipeline, ISTAs goal is to become a fully integrated specialty pharmaceutical
company by acquiring complementary products, either already marketed or in
development.

In March 2000, we completed the acquisition of Visionex, a Singapore
corporation, which had been conducting a Phase II clinical trial of Vitrase in
Singapore. Visionex was a related party through common ownership by some of our
stockholders. During the third quarter of 2002, we completed the planned wind
down of Visionex operations following completion of the Phase II clinical
trials of Vitrase that were conducted in Singapore. See Note 7.
Commitments and Contingencies for further discussion.

In March 2000, we began a collaboration with Allergan, Inc., under which
Allergan will be responsible for the marketing, sale and distribution of
Vitrase in the United States and all international markets, except Mexico until
April 2004 and Japan. We will be dependent on the success of Allergan in
commercializing Vitrase in these markets. Our principal sources of revenue, if
any, 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

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requirements for Vitrase. If we are successful in obtaining regulatory
approval for Vitrase, and Allergan achieves significant sales of the product,
our aggregate manufacturing costs will increase.

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

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

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

In May 2002, we acquired substantially all of the assets of AcSentient,
Inc. The assets include United States marketing rights for a new formulation of
timolol, which ISTA has named ISTALOL, a beta-blocking agent for treating
glaucoma. AcSentient previously acquired rights to this compound from Senju
Pharmaceutical Co., Ltd. (Japan). Senju submitted an NDA for ISTALOL to the FDA
on September 27, 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. The assets acquired from AcSentient also
include United States product rights to bromfenac, a topical non-steroidal
anti-inflammatory compound for the treatment of ocular inflammations, and
worldwide marketing rights for Caprogel®, a novel compound for the treatment of
hyphemia, or bleeding into the front of the eye. AcSentient previously acquired
the rights to these two compounds from Senju and the Eastern Virginia School of
Medicine, respectively. Under the terms of the transaction, we have assumed
payment and other obligations and responsibility for final development of
bromfenac and Caprogel. We anticipate initiating a Phase III study of bromfenac
in the United States in the first half of 2003. We believe that data from this
Phase III study, combined with preclinical and clinical study data from trials
previously conducted in Japan, will be sufficient for us to submit an NDA for
bromfenac in late 2003. We also intend to initiate a Phase III study of
Caprogel in the first half of 2003. We believe that this Phase III study, in
combination with a Phase III study of Caprogel previously completed in the
United States, will support our preparation and submission of an NDA towards
the end of 2003. We anticipate incurring additional research and development
expenses in connection with the final development of bromfenac and Caprogel,
and if these compounds are approved for sale in the United States, we expect to
incur significant marketing and sales expenses. In addition, we will also be
responsible for certain milestone payments to a third party in connection with
the marketing approval in the United States for these compounds.

We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through September 30, 2002
of $116.3 million. Our losses have resulted primarily from research and
development activities, including clinical trials, related general and
administrative expenses and a deemed dividend for preferred stockholders. We
expect to continue to incur operating losses for the foreseeable future as we
continue our research and development and clinical testing activities, and seek
regulatory approval for our product candidates.

Results of Operations

Three Months Ended September 30, 2002 and 2001

Revenue.Revenue of $68,000 for the three months ended September 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.

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Research and development expenses.Research and development expenses for
the three months ended September 30, 2002 were $3.9 million, and were flat
compared to the three months ended September 30, 2001.

General and administrative expenses.General and administrative expenses
were $1.7 million for the three months ended September 30, 2002 compared to
$1.4 million for the three months ended September 30, 2001. The increase in
general and administrative expenses was primarily attributable to additional
staffing and corporate operating expenses and an increase in the amortization
of non-cash, stock based compensation expense.

Interest income.Interest income was $14,000 for the three months ended
September 30, 2002 compared to $131,000 for the three months ended September
30, 2001. The decrease in interest income was attributable to higher cash
balances for the third quarter of 2001 compared to the third quarter of 2002.

Interest expense.Interest expense was $55,000 for the three months ended
September 30, 2002 compared to $0 for the three months ended September 30,
2001. The increase in interest expense was attributable to the amortization of
the debt discount associated with the warrants issued to investors in
conjunction with a $4.0 million bridge loan to the Company in September 2002.

Nine Months Ended September 30, 2002 and 2001

Revenue.Revenue of $208,000 for the nine months ended September 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
$11.3 million for the nine months ended September 30, 2002 compared to $11.5
million for the nine months ended September 30, 2001. The $11.3 million
year-to-date amount in 2002 includes the costs, including payment and other
obligations totaling $1.7 million, associated with the Companys acquisition
from AcSentient of certain rights to three late development stage patented
ophthalmology compounds in May 2002. Excluding the costs relating to the
acquisition, spending levels for research and development activities decreased
by $1.9 million during the first nine months of 2002, compared to the same
period of 2001. This is primarily attributable to lower expenses associated
with development of Vitrase for vitreous hemorrhage in 2002 as compared to
2001.

General and administrative expenses.General and administrative expenses
were $5.9 million for the nine months ended September 30, 2002 compared to $4.5
million for the nine months ended September 30, 2001. The increase in general
and administrative expenses was primarily attributable to additional staffing
and corporate operating expenses and an increase in the amortization of
non-cash, stock based compensation expense.

Interest income.Interest income was $144,000 for the nine months ended
September 30, 2002 compared to $778,000 for the nine months ended September 30,
2001. The decrease in interest income was attributable to higher cash balances
during the first nine months of 2001 compared to the first nine months of 2002.

Interest expense.Interest expense was $55,000 for the nine months ended
September 30, 2002 compared to $25,000 for the nine months ended September 30,
2001. The increase in interest expense was attributable to the amortization of
the debt discount associated with the warrants issued to investors in
conjunction with a $4.0 million bridge loan to the Company in September 2002.

Liquidity and Capital Resources

As of September 30, 2002, we had approximately $4.1 million in cash and
short-term investments.

We have financed our operations since inception primarily through private
sales of our preferred stock and sale of our common stock in our initial public
offering. We received net proceeds of $10.0 million from the private sale of
preferred stock in March 2000, $31.7 million from our initial public offering
in August 2000, $4.0 million from the private sale of common stock in December
2001, $5.0 million from a license fee payment in December 2001 and $4.0 million
from the issuance of promissory notes in September 2002.

For the nine months ended September 30, 2002, we used $15.2 million of
cash for operations principally as a result of the net loss of $16.9 million
partially offset by non-cash compensation expense of approximately $1.8
million. We used approximately $13.7 million of cash for operations in the nine
months ended September 30, 2001.

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For the nine months ended September 30, 2002, $2.9 was provided by
investing activities, primarily from the sale of marketable securities. For the
nine months ended September 30, 2001, $11.7 million was provided by investing
activities, primarily from the sale of marketable securities.

Net cash provided by financing activities totaled $4.1 million for the
nine months ended September 30, 2002 primarily from the issuance of $4.0
million of senior secured convertible promissory notes issued in September 2002
under the terms of a bridge loan from various investors.

As of September 30, 2002, the Company had an accumulated deficit of $116.3
million. The Company has operated at a loss since inception and expects this to
continue for some time. The amount of the accumulated deficit will continue to
grow as we continue clinical, research and development efforts for our product
candidates. We need to raise additional funding in order to continue our
clinical, research and development efforts, and if these activities are
successful and we receive FDA approval to market these products, additional
funding may be required to market and sell these products.

On September 19, 2002, the Company secured a commitment, subject to the
satisfaction of certain conditions including stockholder approval, to provide
$40 million in equity from various investors. ISTA stockholders approved the
$40 million financing plan and the conversion of the
$4 million bridge loan to common stock
at the option of the investors at a special meeting of
stockholders held on November 11, 2002. The Company expects to
consummate this private equity financing in November 2002 upon
satisfaction of certain remaining conditions.

Factors that May Effect Results of Operations and Financial Condition.

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

We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
September 30, 2002, our accumulated deficit was $116.3 million, including a net
loss of $22.5 million for the year ended December 31, 2001 and a net loss of
approximately $16.9 million for the nine months ended September 30, 2002. We
have not generated any revenue from product sales to date, and we may never
generate revenues from product sales in the future. Even if we do achieve
significant revenues from product sales, we expect to incur operating losses
for the foreseeable future and we may never achieve profitable operations.

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

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

The FDAs review of the NDA for Vitrase may result in a requirement that
we conduct additional Phase III clinical studies to support regulatory
approval. Additional Phase III clinical studies will require us to raise
additional capital, which we may not be able to raise on favorable terms, or at
all. Even if we raise additional funds and conduct additional clinical trials,
we cannot assure you that the results will support the filing or regulatory
approval of an NDA, and we may decide to terminate our efforts to develop
Vitrase if the results of any additional clinical studies do not justify the
costs involved. If we terminate development of Vitrase, we will be dependent on
the development of our other product candidates and our ability to successfully
acquire other products and technologies.

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

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In connection with our acquisition of substantially all of the assets of
AcSentient, we acquired United States product rights to bromfenac and worldwide
marketing rights for Caprogel. Phase I, Phase II and Phase III clinical trials
of bromfenac have already been completed in Japan. We anticipate initiating a
single Phase III study of bromfenac in the United States in the first half of
2003, and when that is successfully completed, submitting an NDA in late 2003.
Phase II and Phase III clinical trials of Caprogel have been completed and we
intend to initiate one additional Phase III study of Caprogel in the first half
of 2003. When that Phase III study is completed, we believe that we will have
the necessary support to prepare and submit an NDA for Caprogel towards the end
of 2003. However, the FDA may require us to conduct additional clinical trials
with respect to bromfenac or Caprogel prior to filing NDAs for those products.
We may not be able to raise additional capital in order to conduct necessary
clinical trials and there is a possibility that the results of any clinical
trials conducted by us for bromfenac or Caprogel may not support regulatory
approval.

We may be delisted on the Nasdaq National Market.

On September 27, 2002, we received a notice from Nasdaq that our common
stock would be delisted from the Nasdaq National Market because we had failed
to maintain the required minimum closing bid price of $1.00 set forth in
Marketplace Rule 4450(a)(5) for a period of 30 consecutive trading days. We
appealed the delisting determination, and the delisting action has been stayed
pending the outcome of our appeal. A hearing on the appeal has been scheduled
for November 14, 2002. We anticipate that our appeal will be successful because
our stockholders and board of directors recently approved a 10-for-1 reverse
stock split of our common stock, which will be effective as of 4:01
p.m. EST, November 13, 2002. This reverse stock split has not been reflected in the share or per
share data in the financial statements. We expect that this reverse stock split will
enable us to maintain a minimum closing bid price of $1.00 for a period of at
least 10 consecutive trading days as required to regain compliance with
Marketplace Rule 4450(a)(5). We also expect that this reverse stock split will
keep the minimum closing bid price of our common stock above $1.00 thereafter,
at least in the very near term.

However, our appeal
may be denied, in which case our common stock will be delisted from
the Nasdaq National Market. In addition, even if our appeal is
successful, we anticipate that we will continue incurring expenses related to
developing our products and obtaining regulatory approval for their
commercialization, and there can be no assurance that we will be able to
continue to maintain a sufficiently high minimum closing bid price on our common stock in
the future. If our common stock were to be delisted from the Nasdaq National
Market, trading in our common stock would decrease substantially, or cease
altogether, the market price of the common stock may decline further,
potentially to zero, and our stockholders may lose some or all of their
investment. Furthermore, delisting of our common stock from the Nasdaq
National Market would inhibit, if not preclude, our ability to raise additional
working capital on acceptable terms, if at all.

If regulatory approval for ISTALOL is unsuccessful or delayed, we may not be
able to market the product.

In connection with our acquisition of substantially all of the assets of
AcSentient, we acquired the United States marketing rights for a new
formulation of timolol, which ISTA has named ISTALOL. We depend on Senju for
obtaining regulatory approval for ISTALOL. Senju submitted an NDA for ISTALOL
to the FDA on September 27, 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. The FDA may require Senju to conduct
additional clinical trials or provide additional information in connection with
their review and possible approval of the NDA. There can be no assurance that
ISTALOL will receive FDA approval.

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

13



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

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

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

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

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

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

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

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



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

14



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##### Table of Contents



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s
attention from other business concerns. Further, we may be unable to sell our
products before we obtain a license from the owner of the relevant technology
or other intellectual property rights. If such a license is available at all,
it may require us to pay substantial royalties.

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

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

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

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

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

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

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

15



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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.

We may be required to pay withholding tax in Singapore for license fees
received from Visionex.

Under Singapore tax law, Visionex, our wholly owned subsidiary
located in Singapore, was subject to a 15% withholding tax on a $5
million license that it paid to us in connection with a license to market, sell and
distribute our Vitrase and 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.
Visionex operations were wound down in 2002, and the proposed project
was never implemented. In an effort to maintain the waiver, we are
conducting discussions with the EDB regarding our plans to implement
an appropriate business plan for Visionex after the approval of
Visionex drugs in parts of Southeast Asia. If we are required to pay
this withholding tax, our financial condition will suffer.

Our stock price is subject to significant volatility.

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



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

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




Item 3 Quantitative and Qualitative Disclosures about Market Risk

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

16



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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



| | a) |  | Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this quarterly report,
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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Changes in Internal Controls. There have been no
significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to
the date we carried out this evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         




PART II OTHER INFORMATION




Item 1 Legal Proceedings

None




Item 2 Change in Securities and Use of Proceeds

Initial Public Offering

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

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

The net proceeds from our initial public offering were primarily 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 also used a portion of the
net proceeds to acquire products complementary to our business. None of the net
offering proceeds of ISTA have been or will be paid directly or indirectly to
any director, officer, general partner of ISTA or their associates, persons
owning more than 10% or more of any class of ISTAs equity securities, or an
affiliate of ISTA.

Otsuka Collaboration

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

The sale and issuance of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended in reliance upon
Section 4(2) of the Securities Act of 1933, as amended. The recipients of
securities represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate

17



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##### Table of Contents



legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with ISTA, to
information about us.

AcSentient, Inc. Asset Purchase

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

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

$40 Million Private Equity Financing and $4 million Bridge Loan

On September 19, 2002, the Company entered into a common stock and warrant
purchase agreement with a group of investors led by the Sprout Group,
Sanderling Venture Partners and Investor Growth Capital Limited. On that same date, we
also secured a bridge loan of $4 million from these same investors.

Under the terms of the common stock and warrant purchase agreement, the
investors agreed to purchase $40 million of ISTA common stock (or
10,526,306 shares, after giving effect to a 10-for-1 reverse stock
split which went into effect as of 4:01 p.m. EST, November 13,
2002) and
receive warrants to purchase an additional $6 million of ISTA common stock (or
1,578,946 shares after giving effect to the reverse stock split). This reverse stock split has not been reflected in the share or per
share data in the financial statements. The
per share price of the common stock and the exercise price of the warrants is
$3.80 (after giving effect to the reverse stock split). This
represents a 31% premium over $0.29, the proportionally unadjusted closing price of ISTA common
stock on September 18, 2002, the last trading day prior to the announcement of
the transaction. We anticipate consummating this private equity
transaction in November 2002, subject to satisfying certain
conditions.

Under the terms of a note and warrant purchase agreement (bridge loan) the
investors agreed to purchase $4 million in senior secured convertible
promissory notes and receive warrants to purchase $1 million of ISTA common
stock. The promissory notes mature on December 31, 2002, bear interest at an
annual rate of 8%, and are secured by substantially all of the Companys
personal and intellectual property. The $4 million principal amount and
accrued interest under the promissory notes is convertible for shares of ISTA
common stock at the per share rate of $3.80 (after giving effect to
the reverse stock split). The warrants are immediately
exercisable at a per share price of $3.80 (after giving effect to the
reverse stock split). The proceeds of
the bridge financing will be used to fund clinical trials and general corporate
activities.




Item 3 Defaults upon Senior Securities

None




Item 4 Submission of Matters to a Vote of Security Holders

None

18



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Item 5 Other Information

None




Item 6 Exhibits and Reports on Form 8-K



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

| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. On
July 9, 2002, we filed a Form 8-K under Item 5, disclosing that we had
entered into an agreement for the manufacture and production of commercial
quantities of Vitrase.                                                                                                                                                                                                       
|
| | 2. On
September 25, 2002, we filed a Form 8-K under Item
5, disclosing that we had consummated a bridge loan financing of $4 million and
that we had also entered into an agreement for the private placement of $40
million of common stock, which would be consummated subject to satisfaction of
various conditions, including receipt of stockholder approval to the
transaction.

19



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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 November 2002.

| |                                                                
| | ---------------------------------------------------------------
| | ISTA PHARMACEUTICALS, INC                                      
| |                                                                
| | (Registrant)                                                   
|
| | /s/ VICENTE ANIDO, JR., PH.D                                   
| |                                                                
| | Vicente Anido, Jr., Ph.D.
President and Chief Executive Officer

20



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CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Vicente Anido, Jr., Ph.D., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of ISTA
Pharmaceuticals, Inc.;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| | a. |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
evaluation functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ Vicente Anido, Jr., Ph.D.

---

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


21



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CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David R. Waltz, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of ISTA
Pharmaceuticals, Inc.;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| | a. |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c. |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
evaluation functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ David R. Waltz

---

David R. Waltz
Vice President, Finance


22



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                     
|------- |  | --------------------------------------------------------------------
|Exhibit |  |                                                                     
|Number  |  | Description                                                         
|        |  |                                                                     
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer

23