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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Mark One



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
|--- | ----------------------------------------------------------------------------------------------------------------------------

or



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



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Commission File Number: 333-34120

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

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

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

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

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

The number of shares of the registrants common stock, $.001 par value,
outstanding as of April 30, 2002 was 16,753,312.

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TABLE OF CONTENTS



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



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Table of Contents

|        |  |                                                                                       |  |            |                                                                                                                                                                                          |  |         |   | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | - | 
|        |  |                                                                                       |  |            |                                                                                                                                                                                          |  | Page No
|        |  |                                                                                       |  |            |                                                                                                                                                                                          |  |        
|PART I  |  | FINANCIAL INFORMATION                                                                 |  |            |                                                                                                                                                                                          | 
|Item 1  |  | Financial Statements                                                                  |  |            | 3                                                                                                                                                                                        | 
|        |  |                                                                                       |  |            | Condensed Consolidated Balance Sheets   December 31, 2001 and
March 31, 2002 (unaudited)                                                                                                |  |         | 3 | 
|        |  |                                                                                       |  |            | Condensed Consolidated Statements of Operations (unaudited)   Three
Month Periods Ended March 31, 2002 and 2001 and for the Period from
February 13, 1992 (inception) to March 31, 2002 |  |         | 4 | 
|        |  |                                                                                       |  |            | Condensed Consolidated Statements of Cash Flows (unaudited)   Three Month
Periods Ended March 31, 2002 and 2001 and for the Period from
February 13, 1992 (inception) to March 31, 2002 |  |         | 5 | 
|        |  |                                                                                       |  |            | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                           |  |         | 6 | 
|Item 2  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |            | 7                                                                                                                                                                                        | 
|Item 3  |  | Quantitative and Qualitative Disclosure about Market Risk                             |  |            | 15                                                                                                                                                                                       | 
|PART II |  | OTHER INFORMATION                                                                     |  |            |                                                                                                                                                                                          | 
|Item 1  |  | Legal Proceedings                                                                     |  |            | 15                                                                                                                                                                                       | 
|Item 2  |  | Change in Securities and Use of Proceeds                                              |  |            | 15                                                                                                                                                                                       | 
|Item 3  |  | Defaults upon Senior Securities                                                       |  |            | 15                                                                                                                                                                                       | 
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  |            | 16                                                                                                                                                                                       | 
|Item 5  |  | Other Information                                                                     |  |            | 16                                                                                                                                                                                       | 
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |  |            | 16                                                                                                                                                                                       | 
|        |  |                                                                                       |  | Signatures |                                                                                                                                                                                          |  | 17      |  

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PART I  FINANCIAL INFORMATION




Item 1 Financial Statements




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

|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |         |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ----------- | ------ | ------------ | ----- | ------- | ------ | 
|                                     |                                                                                                                                                                                           |                                            |       | March 31,   |        | December 31,
|                                     |                                                                                                                                                                                           |                                            |       | 2002        |        | 2001        
|                                     |                                                                                                                                                                                           |                                            |       |             |        |             
|                                     |                                                                                                                                                                                           |                                            |       | (Unaudited) |        |              |       |        
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     | Cash and cash equivalents                                                                                                                                                                 |                                            | $     | 3,498       |        |              | $     | 12,348  |       
|                                     | Short-term investments                                                                                                                                                                    |                                            |       | 7,233       |        |              |       | 3,254   |       
|                                     | Advance payments  clinical trials                                                                                                                                                        |                                            |       | 40          |        |              |       | 40      |       
|                                     | Other current assets                                                                                                                                                                      |                                            |       | 517         |        |              |       | 451     |       
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     |                                                                                                                                                                                           | Total current assets                       |       |             | 11,288 |              |       |         | 16,093 | 
|Property and equipment, net          |                                                                                                                                                                                           |                                            | 870   |             |        |              | 819   |        
|Deposits and other assets            |                                                                                                                                                                                           |                                            | 44    |             |        |              | 44    |        
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     |                                                                                                                                                                                           | Total Assets                               |       | $           | 12,202 |              |       | $       | 16,956 | 
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     | Accounts payable                                                                                                                                                                          |                                            | $     | 1,298       |        |              | $     | 891     |       
|                                     | Accrued compensation and related expenses                                                                                                                                                 |                                            |       | 396         |        |              |       | 799     |       
|                                     | Accrued expenses  clinical trials                                                                                                                                                        |                                            |       | 457         |        |              |       | 770     |       
|                                     | Other accrued expenses                                                                                                                                                                    |                                            |       | 1,047       |        |              |       | 1,554   |       
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     |                                                                                                                                                                                           | Total current liabilities                  |       |             | 3,198  |              |       |         | 4,014  | 
|Deferred rent                        |                                                                                                                                                                                           |                                            | 5     |             |        |              | 2     |        
|Deferred income                      |                                                                                                                                                                                           |                                            | 4,930 |             |        |              | 5,000 |        
|Stockholders equity:                |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     | Common stock, $.001 par value; 100,000,000 shares authorized at
March 31, 2002 and 2001; 16,753,312 and 15,504,983 shares issued and outstanding
at March 31, 2002 and 2001, respectively |                                            |       | 17          |        |              |       | 16      |       
|                                     | Additional paid in capital                                                                                                                                                                |                                            |       | 111,019     |        |              |       | 111,026 |       
|                                     | Deferred compensation                                                                                                                                                                     |                                            |       | (2,804      | )      |              |       | (3,643  | )     
|                                     | Accumulated
other comprehensive loss                                                                                                                                                      |                                            |       | (43         | )      |              |       | (22     | )     
|                                     | Deficit accumulated during the development stage                                                                                                                                          |                                            |       | (104,120    | )      |              |       | (99,437 | )     
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     |                                                                                                                                                                                           | Total stockholders equity                 |       |             | 4,069  |              |       |         | 7,940  | 
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        
|                                     |                                                                                                                                                                                           | Total Liabilities and Stockholders Equity |       | $           | 12,202 |              |       | $       | 16,956 | 
|                                     |                                                                                                                                                                                           |                                            |       |             |        |              |       |        

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

|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |        | 
|--------------------------------------------------------------------- | -------------------------- | - | ------------------ | ----- | ----------- | - | ------ | ----- |  | - | -------------- | ------ | 
|                                                                      |                            |   |                    |       |             |   |        |       |  |   | For the Period
|                                                                      |                            |   |                    |       |             |   |        |       |  |   | From          
|                                                                      |                            |   |                    |       |             |   |        |       |  |   | February 13,  
|                                                                      |                            |   |                    |       |             |   |        |       |  |   | 1992          
|                                                                      |                            |   | Three Months Ended |       | (Inception)
|                                                                      |                            |   | March 31,          |       | Through    
|                                                                      |                            |   |                    |       | March 31,  
|                                                                      |                            |   | 2002               |       | 2001        |   | 2002  
|                                                                      |                            |   |                    |       |             |   |       
|Revenue                                                               |                            | $ | 70                 |       |             | $ | 0      |       |  | $ | 70             |       
|Operating expenses:                                                   |                            |   |                    |       |             |   |        |       |  |   |                |       
|                                                                      | Research and development   |   |                    | 2,922 |             |   |        | 3,929 |  |   |                | 61,634 | 
|                                                                      | General and administrative |   |                    | 1,918 |             |   |        | 1,495 |  |   |                | 25,447 | 
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Total operating expenses                                              |                            |   | 4,840              |       |             |   | 5,424  |       |  |   | 87,081         |       
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Loss from operations                                                  |                            |   | (4,770             | )     |             |   | (5,424 | )     |  |   | (87,011        | )     
|Interest income                                                       |                            |   | 87                 |       |             |   | 264    |       |  |   | 2,501          |       
|Interest expense                                                      |                            |   |                   |       |             |   |       |       |  |   | (320           | )     
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Net loss                                                              |                            |   | (4,683             | )     |             |   | (5,160 | )     |  |   | (84,830        | )     
|Deemed dividend for preferred stockholders                            |                            |   |                   |       |             |   |       |       |  |   | (19,245        | )     
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Net loss attributable to common stockholders                          |                            | $ | (4,683             | )     |             | $ | (5,160 | )     |  | $ | (104,075       | )     
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Net loss per common share, basic and diluted                          |                            | $ | (0.28              | )     |             | $ | (0.33  | )     |  |   |                |       
|                                                                      |                            |   |                    |       |             |   |        |       |  |   |                |       
|Shares used in computing net loss per
common share, basic and diluted |                            |   | 16,624             |       |             |   | 15,444 |       |  |   |                |       

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

|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |       |                |         |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ---- | ------------------ | ------ | ---------------- | ---- | ---- | ------ | -------- | ----- | -------------- | ------- | -
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |       | For the Period
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |       | From          
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |       | February 13,  
|                                                                                                                |                                                               |                                       |                                                     |      | Three Months Ended |        | 1992 (Inception)
|                                                                                                                |                                                               |                                       |                                                     |      | March 31,          |        | Through         
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        | March 31,       
|                                                                                                                |                                                               |                                       |                                                     |      | 2002               |        | 2001             |      | 2002
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |     
|Operating Activities                                                                                            |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Net loss attributable to common stockholders                                                                    |                                                               | $                                     | (4,683                                              | )    |                    | $      | (5,160           | )    |      | $      | (104,075 | )    
|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 |                                                     |      | 728                |        |                  |      | 410  |        |          |       | 7,139          |        
|                                                                                                                |                                                               | Common stock issued for services      |                                                     |      |                   |        |                  |      |     |        |          |       | 113            |        
|                                                                                                                |                                                               | Forgiveness of note receivable        |                                                     |      |                   |        |                  |      |     |        |          |       | 162            |        
|                                                                                                                |                                                               | Depreciation and amortization         |                                                     |      | 83                 |        |                  |      | 84   |        |          |       | 1,412          |        
|Changes in operating assets and liabilities:                                                                    |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|                                                                                                                | Advanced payments  clinical trials and other current assets  |                                       |                                                     | (66  | )                  |        |                  | 396  |      |        |          | (557  | )             
|                                                                                                                | Note receivable from officer                                  |                                       |                                                     |     |                    |        |                  | (3   | )    |        |          | (162  | )             
|                                                                                                                | Accounts payable                                              |                                       |                                                     | 407  |                    |        |                  | 82   |      |        |          | 1,298 |               
|                                                                                                                | Accrued compensation and related expenses                     |                                       |                                                     | (403 | )                  |        |                  | (239 | )    |        |          | 396   |               
|                                                                                                                | Accrued expenses  clinical trials and other accrued expenses |                                       |                                                     | (820 | )                  |        |                  | 531  |      |        |          | 1,628 |               
|                                                                                                                | Deferred rent                                                 |                                       |                                                     | 3    |                    |        |                  | (4   | )    |        |          | 5     |               
|                                                                                                                | Deferred income                                               |                                       |                                                     | (70  | )                  |        |                  |     |      |        |          | 4,930 |               
|                                                                                                                | License fee received from Visionex                            |                                       |                                                     |     |                    |        |                  |     |      |        |          | 5,000 |               
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash used in operating activities               |      |                    | (4,821 | )                |      |      | (3,903 | )        |       |                | (63,466 | )
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Investing Activities                                                                                            |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Purchase of marketable securities                                                                               |                                                               |                                       | (11,026                                             | )    |                    |        | (4,219           | )    |      |        | (43,180  | )    
|Sale of marketable securities                                                                                   |                                                               |                                       | 7,014                                               |      |                    |        | 9,219            |      |      |        | 35,924   |      
|Purchase of equipment                                                                                           |                                                               |                                       | (134                                                | )    |                    |        | (94              | )    |      |        | (2,274   | )    
|Deposits and other assets                                                                                       |                                                               |                                       |                                                    |      |                    |        | 72               |      |      |        | (44      | )    
|Proceeds from refinancing under capital leases                                                                  |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 827      |      
|Cash acquired from Visionex transaction                                                                         |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 4,403    |      
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash (used in) provided by investing activities |      |                    | (4,146 | )                |      |      | 4,978  |          |       |                | (4,344  | )
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Financing Activities                                                                                            |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Payments on obligation under capital lease                                                                      |                                                               |                                       |                                                    |      |                    |        | (15              | )    |      |        | (827     | )    
|Proceeds from exercise of stock options                                                                         |                                                               |                                       | 116                                                 |      |                    |        | 22               |      |      |        | 676      |      
|Proceeds from exercise of warrants                                                                              |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 41       |      
|Proceeds from bridge loans with related parties                                                                 |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 5,047    |      
|Payments on bridge loans with related parties                                                                   |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | (3,755   | )    
|Proceeds from issuance of preferred stock                                                                       |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 34,215   |      
|Repurchase of preferred stock                                                                                   |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | (56      | )    
|Proceeds from issuance of common stock                                                                          |                                                               |                                       |                                                    |      |                    |        |                 |      |      |        | 36,007   |      
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|                                                                                                                |                                                               |                                       | Net cash provided by financing activities           |      |                    | 116    |                  |      |      | 7      |          |       |                | 71,348  |  
|Effect of exchange rate changes on cash                                                                         |                                                               |                                       | 1                                                   |      |                    |        | (11              | )    |      |        | (40      | )    
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|(Decrease) increase in cash and cash equivalents                                                                |                                                               |                                       | (8,850                                              | )    |                    |        | 1,071            |      |      |        | 3,498    |      
|Cash and cash equivalents at beginning of period                                                                |                                                               |                                       | 12,348                                              |      |                    |        | 8,772            |      |      |        |         |      
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      
|Cash and cash equivalents at end of period                                                                      |                                                               | $                                     | 3,498                                               |      |                    | $      | 9,843            |      |      | $      | 3,498    |      
|                                                                                                                |                                                               |                                       |                                                     |      |                    |        |                  |      |      |        |          |      

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ISTA Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2002

1. The Company

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

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

As of March 31, 2002, we had approximately
$10.7 million in cash and short-term investments. The Company
incurred a net loss of $4.7 million for
the three months ended March 31, 2002 and had an accumulated
deficit of $104.1 million at March 31, 2002. The ability of the
Company to continue as a going concern is dependent upon its ability
to obtain additional capital and achieve profitable operations. These
factors raise substantial doubt about the Companys ability to
continue as a going concern. The Company will continue to rely
on outside sources of financing to meet its capital needs beyond the
next year. The
outcome of these matters cannot be predicted at this time. Further,
there can be no assurance, assuming the Company raises additional
funds, that the Company will achieve positive cash flow. If the
Company is not able to secure additional funding, we will be required
to scale back our research and development programs and general and
administrative activities and we may not be able to continue in
business. These condensed consolidated financial statements do not
include any adjustments to the specific amounts and classifications of
assets and liabilities that might be necessary should the Company be
unable to continue as a going concern.

2. Basis of Presentation

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

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

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

3. Revenue Recognition

We recognize revenue consistent with the provisions of the Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition, which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Amounts received for upfront product and technology
license fees under multiple-element arrangements are deferred and recognized
over the period of such services or performance if such arrangements require
on-going services or performance. Amounts received for milestones are
recognized upon achievement of the milestone, unless the 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 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 three month periods ended
March 31, 2002 and 2001 was $4,726,000 and $5,166,000,
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.

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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. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.

SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flows approach previously required
by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The amortization of goodwill included in
our investments in equity investees will also no longer be recorded upon
adoption of the new rules. Intangible assets that do not have indefinite lives
will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We adopted SFAS No. 142 on January
1, 2002. Because we have no goodwill or other indefinite-lived intangible
assets recorded in our financial statements, SFAS No. 142 did not have an
impact on our results of operations or financial condition.




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

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

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

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

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

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

In March 2002, we announced the preliminary results for our Phase III
clinical studies of Vitrase for the treatment of severe vitreous hemorrhage.
Data from the two Phase III studies did not show a statistically significant
improvement in the primary (surrogate) endpoint. In April 2002, following
discussions and a review of preliminary safety and efficacy data from the two
Phase III studies with the FDA, we announced our plans to proceed with the
preparation and filing of the clinical and other required sections of the New
Drug Application (NDA) for Vitrase based on improvement in visual function for
Vitrase treated patients in both studies. 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 or a decision by us to
terminate further development of Vitrase for the treatment of severe vitreous
hemorrhage. We cannot assure you that we will conduct additional clinical
trials to support regulatory approval of Vitrase for the treatment of severe
vitreous hemorrhage, or, if we conduct additional studies, that the results
will support the filing or approval of a NDA.

On May 9, 2002
we acquired substantially all of the assets of AcSentient, Inc. The
assets include United States product rights to bromfenac, a topical
non-steroidal anti-inflammatory compound for the treatment of ocular
inflammations and United States marketing rights for a new
formulation of timolol, a beta-blocking agent for treating glaucoma.
The assets also include worldwide marketing rights for
Caprogel®, a novel compound for the treatment of hyphema, or
bleeding into the front of the eye. AcSentient previously acquired
rights to these compounds from Senju Pharmaceutical Co., Ltd (Japan)
and the Eastern Virginal School of Medicine. Under the terms of the
transaction, we have assumed payment and other obligations and
responsibility for final development of bromfenac and Caprogel®.
We will incur 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.

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We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through March 31, 2002 of
$104.1 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 March 31, 2002 and 2001

Revenue.Revenue of $70,000 for the quarter ended March 31, 2002 reflects
the amortization of deferred revenue recorded in December 2001
for the license fee payment made by Otsuka Pharmaceutical Co., Ltd. in
connection with the license for Vitrase in Japan.

Research and development expenses.Research and development expenses were
$2.9 million for the three months ended March 31, 2002 compared to $3.9 million
for the three months ended March 31, 2001. The decrease in research and
development expenses was primarily attributable to decreases in expenses
associated with two Phase III clinical trials of Vitrase for the treatment of
severe vitreous hemorrhage. We expect that our research and
development expenses will increase in future periods primarily due to
activities in connection with the development of bromfenac and
Caprogel®.

General and administrative expenses.General and administrative expenses
were $1.9 million for the three months ended March 31, 2002 compared to $1.5
million for the three months ended March 31, 2001. The increase in general and
administrative expenses was primarily attributable to an increase in the
amortization of non-cash, stock based compensation expense.

Interest income.Interest income was $87,000 for the three months ended
March 31, 2002 compared to $264,000 for the three months ended March 31, 2001.
The decrease in interest income was attributable to higher cash balances for
the first quarter of 2001 compared to 2002.

Liquidity and Capital Resources

As of March 31, 2002, we had approximately $10.7 million in cash and
short-term investments.

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

For the three months ended March 31, 2002, we used $4.8 million of cash
for operations principally as a result of the net loss of $4.7 million
partially offset by non-cash compensation expense of approximately
$728,000.
We used approximately $3.9 million of cash for operations in the three months
ended March 31, 2001.

For the three months ended March 31, 2002, we used $4.1 million of cash
for investing activities, primarily for the purchase of marketable securities. For the three months ended March 31, 2001, $5.0 million of cash
was provided by investing activities, primarily from the sale of marketable
securities.

Net cash provided by financing activities totaled $116,000 for the three
months ended March 31, 2002 compared to $7,000 for the three ended March 31,
2001.

As of March 31, 2002
the Company had an accumulated deficit of $104.1 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 our clinical, research and
development efforts for our product candidates. If these activities
are successful and we receive FDA approval to market these products,
additional funding will be required to market and sell these
products. As of this filing, the Companys ability to continue
as a going concern will be dependent on our ability to raise
additional capital to meet our projected operating needs for at least
the next twelve months.

Due to expenses
associated with the acquisition of products rights from AcSentient
and currently anticipated increase in research and development expenses in 2002 over levels previously
planned, we now anticipate that our cash on hand will be sufficient to
fund our operations and capital expenditure needs for approximately
the next six months. We will need to raise additional funds to continue the development and
commercialization of Vitrase for the treatment of vitreous hemorrhage and
diabetic retinopathy, fund further development of our other product
candidates, including bromfenac and Caprogel®,
and to acquire or in-license additional products and technology beyond this
period. Alternatives to raise additional funds include borrowings, collaborative research
and development arrangements with technology companies, the licensing of product rights to third parties or
additional public and private financing. There can be no assurance that funds
from these sources will be available when needed or, if available, will be on
terms favorable to us or to our stockholders. Insufficient funds may require us
to further delay, scale back or

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eliminate some or all of our product development efforts or may limit our
ability to operate as a going concern. If additional funds are raised by
issuing equity securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience additional dilution or such equity
securities may provide for rights, preferences or privileges senior to those of
the holders of our common stock.

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



| |  |  | the rate of progress of our research and development programs                            
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | the results of our clinical trials and requirements to conduct additional clinical trials
|
| |  |  | the time and expense necessary to obtain regulatory approvals                            
|
| |  |  | activities in connection with the in-license or acquisition of products and technologies 
|
| |  |  | our ability to establish and maintain collaborative relationships                        
|
| |  |  | receiving milestone payments from Allergan and Otsuka                                    
|
| |  |  | competitive, technological, market and other developments                                

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
March 31, 2002, our accumulated deficit was $104.1 million, including a net
loss of $22.5 million for the year ended December 31, 2001 and a net loss of
approximately $4.7 million for the three months ended March 31, 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 significant operating losses
over the next several years. We may never achieve profitable operations.

If we cannot raise additional capital on acceptable terms, we will need to
significantly curtail our operations.

We believe that our cash on hand will be sufficient to fund our operations
and capital expenditure needs for approximately the next six months. During
this period, we plan to allocate our capital resources primarily to the
development of our lead product candidate, Vitrase, for the treatment of severe
vitreous hemorrhage and bromfenac and Caprogel®. We will need to raise additional funds to continue the
development and commercialization of all our product candidates, including
Vitrase, beyond this period. These funds may not be available on favorable
terms, or at all. If we do not succeed in raising additional funds, we will
need to curtail our operations significantly.

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 preliminary efficacy and safety results for
our two Phase III clinical trials of Vitrase for the treatment of severe
vitreous hemorrhage. Data from both Phase III studies did not show a
statistically significant improvement in the primary (surrogate) endpoint. In
April 2002, following discussions and a review of preliminary safety and
efficacy data from the two Phase III studies with the FDA, we announced our
plans to proceed with the preparation and filing of the clinical and other
required sections of the New Drug Application (NDA) for Vitrase based on
improvement in visual function for Vitrase treated patients in both studies.
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, we may decide to terminate further development of
Vitrase for the treatment of severe vitreous hemorrhage. If we terminate
development of

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Vitrase, we will not have a lead product candidate, and we will be
dependent on the development of our other product candidates and our ability to
successfully acquire other products and technologies. Even if we conduct
additional studies for Vitrase, we cannot assure you that the results will
support the filing or regulatory approval of a NDA.

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

In connection with our acquisition of substantially all of the assets of
AcSentient, we acquired United States product rights to bromfenac and worldwide
marketing rights for Caprogel®. Phase I, Phase II and Phase III clinical
trials of bromfenac have already been completed in Japan and we anticipate
submitting an NDA for bromfenac following successful completion of a single
Phase III study in the United States. Phase II and Phase III clinical trials
of Caprogel® have been completed and we believe that we need to complete one
additional Phase III study prior to a submission of an NDA. However, the FDA
may required us to conduct additional clinical trials with respect to bromfenac
or Caprogel® prior to filing an NDA. 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 conduct by us for bromfenac
or Caprogel® may not support regulatory 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                                                                                         
|
| |  |  | 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.

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

In connection with our acquisition of substantially all of the assets of
AcSentient, we also acquired the United States marketing rights for a new
formulation of timolol. We depend on Senju Pharmaceutical Co., Ltd for
obtaining regulatory approval for the new formulation of timolol. We believe
that an NDA submission by Senju for this new formulation will be based on
pre-clinical trials and other clinical trials, combined with data from a
multi-center Phase III clinical trial recently completed in the United States.
However, the FDA may require Senju to conduct additional clinical trials prior
to filing an NDA. The amount of time and resources Senju dedicates to
obtaining regulatory approval of the new formulation of timolol is not within
our control.

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

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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 relied on Prima Pharm, Inc. (Prima Pharm) for formulation and
filling of dose specific vials of hyaluronidase used in our clinical trials.
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. If we fail to reach an agreement with a new contract
manufacturer, we will have to negotiate with Prima Pharm to improve Prima
Pharms manufacturing facilities in order to manufacture our products in
commercial volume in compliance with current Good Manufacturing Practice
regulations. Such improvements will require a substantial capital commitment on
our part. Difficulties in our relationship with Prima Pharm could limit our
ability to insure that the required improvements are made.

We have entered into a letter of intent with a new contract manufacturer,
SP, to scale up production and are in the process of negotiating a definitive
agreement for the manufacture of commercial quantities of Vitrase. To date, we
needed Vitrase only for clinical trials. We may not be able to complete an
agreement with this new contract manufacturer on favorable terms, or at all.
Additionally, 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. A new manufacturer will
also be subject to new testing and compliance inspections by regulatory
authorities. We cannot assure you that any new contract manufacturer will be
able to develop processes necessary to produce substantially equivalent product
or that regulatory authorities would approve any new manufacturer. Failure to
complete an agreement with a new contract manufacturer on a timely basis, or
alternatively, successfully implement improvements to the manufacturing
facilities of Prima Pharm, will adversely affect our ability to provide
sufficient quantities of our products for commercial sale.

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

We have entered into collaborations with both Allergan and Otsuka 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 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

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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, Prima Pharm, in San Diego, approximately
twice per month for formulation and filling of dose specific vials. The export
of each shipment of hyaluronidase from the United Kingdom (UK) requires that
the Ministry of Agriculture, Fisheries and Food (MAFF) issue an export permit.
The MAFF has never denied the issuance of an export permit for any shipment of
hyaluronidase to ISTA. To permit the importation of hyaluronidase in to the
United States, we are required to secure an annual import permit from the
United States Department of Agriculture (USDA). The USDA has never denied the
issuance of an annual import permit to ISTA.

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

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

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



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

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

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

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competitors may independently develop trade secrets and proprietary
technology similar to ours. We may not be able to maintain the confidentiality
of information relating to such products.

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

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

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

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

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

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

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

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

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

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

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

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




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 three 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.

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




PART II OTHER INFORMATION




Item 1 Legal Proceedings

None




Item 2 Change in Securities and Use of Proceeds

Initial Public Offering

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

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

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

Otsuka Collaboration

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

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




Item 3 Defaults upon Senior Securities

None

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Item 4 Submission of Matters to a Vote of Security Holders

None




Item 5 Other Information

None




Item 6 Exhibits and Reports on Form 8-K



| | 1. |  | January 2, 2002 a Form 8-K was filed with regard to the Companys
adoption of a Preferred Stockholders Rights Agreement.                                                                                                                      
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | January 2, 2002 a Form 8-K was filed with regard to the Companys
entering into a (i) License Agreement, (ii) Supply Agreement, (iii)
Securities Purchase Agreement and (iv) Registration Rights Agreement
with Otsuka Pharmaceutical Co., Ltd.

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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 15th day of May 2002.



| | ISTA Pharmaceuticals, Inc.
(Registrant)  /s/   J. C. MacRae
J. C. MacRae
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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