<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q


Mark One

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
          OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       or

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

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

                        Commission File Number: 333-34120


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


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


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

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


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

     The number of shares of the registrant's common stock, $.001 par value,
outstanding as of July 31 was 15,598,840.

<PAGE>   2

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                 Page No
                                                                                                 -------
<S>           <C>                                                                                <C>

PART I FINANCIAL INFORMATION

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

                Condensed Balance Sheets  -  December 31, 2000 and
                June 30, 2001 (unaudited) ....................................................      3

                Condensed Statements of Operations (unaudited)  -  Three and
                Six Month Periods Ended June 30, 2001 and 2000 ...............................      4

                Condensed Statements of Cash Flows (unaudited)  -  Six Month
                Periods Ended June 30, 2001 and 2000 .........................................      5

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

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

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


PART II       OTHER INFORMATION

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

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

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

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

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

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

              Signatures .....................................................................     16
</TABLE>


                                       2
<PAGE>   3

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS


                           ISTA PHARMACEUTICALS, INC.
                            CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   June 30,         December 31,
                                                                     2001              2000
                                                                   ---------        ------------
                                                                  (Unaudited)
<S>                                                                <C>               <C>

                                 ASSETS

Current assets:
   Cash and cash equivalents                                       $   7,413         $   8,772
   Short-term investments, available for sale                          9,055            16,957
   Advance payments - clinical trials                                     94               433
   Other current assets                                                  631               669
                                                                   ---------         ---------
      Total current assets                                            17,193            26,831
Property and equipment, net                                              870               912
Note receivable from officer                                             167               162
Deposits and other assets                                                 44               116
                                                                   ---------         ---------
      Total Assets                                                 $  18,274         $  28,021
                                                                   =========         =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                $     985         $     606
   Accrued compensation and related expense                              113               364
   Accrued expenses - clinical trials                                    538             1,241
   Other accrued expenses                                              1,417             1,219
   Current portion of obligation under capital lease                      --                15
                                                                   ---------         ---------
      Total current liabilities                                        3,053             3,445

Deferred rent                                                              4                12

Stockholders' equity:
   Common stock                                                           16                15
   Additional paid in capital                                        103,538           103,942
   Deferred compensation                                              (1,287)           (2,585)
   Cumulative foreign currency translation adjustment                    (41)              (27)
   Accumulated unrealized gain on investments                             25               149
   Deficit accumulated during the development stage                  (87,034)          (76,930)
                                                                   ---------         ---------
      Total stockholders' equity                                      15,217            24,564
                                                                   ---------         ---------
      Total Liabilities and Stockholders' Equity                   $  18,274         $  28,021
                                                                   =========         =========
</TABLE>


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<PAGE>   4

                           ISTA PHARMACEUTICALS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                 For the Period
                                                                                                      From
                                                                                                  February 13,
                                                                                                      1992
                                                 Three Months Ended         Six Months Ended       (Inception)
                                                       June 30,                  June 30,           Through
                                                ---------------------     ---------------------     June 30,
                                                  2001         2000         2001         2000         2001
                                                --------     --------     --------     --------  --------------
<S>                                             <C>          <C>          <C>          <C>          <C>

Operating expenses:
   Research and development                     $  3,643     $  4,558     $  7,572     $  7,581     $ 50,514
   General and administrative                      1,659        1,711        3,154        3,211       19,145
                                                --------     --------     --------     --------     --------
Total operating expenses                           5,302        6,269       10,726       10,792       69,659
                                                --------     --------     --------     --------     --------
Loss from operations                              (5,302)      (6,269)     (10,726)     (10,792)     (69,659)
Interest income                                      383           77          647          131        2,235
Interest expense                                     (25)          41          (25)         (46)        (320)
                                                --------     --------     --------     --------     --------
Net loss                                          (4,944)      (6,151)     (10,104)     (10,707)     (67,744)

Deemed dividend for preferred stockholders            --           --           --      (19,245)     (19,245)
                                                --------     --------     --------     --------     --------

Net loss attributable to common stockholders    $ (4,944)    $ (6,151)    $(10,104)    $(29,952)    $(86,989)
                                                ========     ========     ========     ========     ========

Net loss per common share, basic and diluted    $  (0.32)    $  (3.00)    $  (0.65)    $ (15.50)
                                                ========     ========     ========     ========

Shares used in computing net loss per
   common share, basic and diluted                15,554        2,047       15,499        1,932

Pro forma net loss per common share, basic
   and diluted                                               $  (0.53)                 $  (2.96)
                                                             ========                  ========

Shares used in computing pro forma net loss
   per common share, basic and diluted                         11,628                    10,109
</TABLE>


                                       4
<PAGE>   5

                           ISTA PHARMACEUTICALS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                            (IN THOUSANDS, UNAUDITED)

<TABLE>
<CAPTION>
                                                                                             For the
                                                                                             Period
                                                                                              From
                                                                                           February 13,
                                                                                              1992
                                                                  Six Months Ended         (Inception)
                                                                     June 30,                Through
                                                               -----------------------       June 30,
                                                                 2001           2000           2001
                                                               --------       --------     ------------
<S>                                                            <C>            <C>          <C>

OPERATING ACTIVITIES

Net loss                                                       $(10,104)      $(29,952)      $(86,989)
Deemed dividend for preferred stockholders                           --         19,245         19,245
Adjustments to reconcile net loss to net cash
  used in operating activities:
   Amortization of deferred compensation                            792          1,782          5,292
   Common stock issued for services                                  --             --            113
   Loss on disposal of property and equipment                         5             --              5
   Depreciation and amortization                                    172            141          1,157
Changes in operating assets and liabilities:
   Advanced payments - clinical trials and other current
     assets                                                         377            123           (725)
   Note receivable from officer                                      (5)            (5)          (167)
   Accounts payable                                                 379          1,852            985
   Accrued compensation and related expenses                       (251)            (1)           113
   Accrued expenses - clinical trials and other accrued
     expenses                                                      (505)        (2,395)         2,079
  Deferred rent                                                      (8)            (5)             4
  License fee received from Visionex                                 --             --          5,000
                                                               --------       --------       --------
      Net cash used in operating activities                      (9,148)        (9,215)       (53,888)
                                                               --------       --------       --------

INVESTING ACTIVITIES

Purchase of marketable investment securities                     (9,351)            --        (29,159)
Sale of marketable investment securities                         17,129             --         20,129
Purchase of equipment                                              (135)           (82)        (2,024)
Deposits and other assets                                            72            (53)           (44)
Proceeds from refinancing under capital leases                       --             --            827
Cash acquired from Visionex transaction                              --          4,403          4,403
                                                               --------       --------       --------
      Net cash (used in) provided by investing activities         7,715          4,268         (5,868)
                                                               --------       --------       --------

FINANCING ACTIVITIES

Payments on obligation under capital lease                          (15)          (164)          (827)
Proceeds from exercise of stock options                              78            216            559
Proceeds from exercise of warrants                                   --             --             41
Proceeds from bridge loans with related parties                      --             --          5,047
Payments on bridge loans with related parties                        --           (500)        (3,755)
Proceeds from issuance of preferred stock                            --         10,000         34,215
Repurchase of preferred stock                                        --             --            (56)
Proceeds from issuance of common stock                               25             --         31,986
                                                               --------       --------       --------
      Net cash provided by financing activities                      88          9,552         67,210

Effect of exchange rate changes on cash                             (14)           (27)           (41)
                                                               --------       --------       --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 (1,359)         4,578          7,413

Cash and cash equivalents at beginning of period                  8,772            709             --
                                                               --------       --------       --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                     $  7,413       $  5,287       $  7,413
                                                               ========       ========       ========
</TABLE>


                                       5
<PAGE>   6

                           ISTA PHARMACEUTICALS, INC.

                NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

                                  JUNE 30, 2001

1.   THE COMPANY

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

2.   BASIS OF PRESENTATION

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

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

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

3.   COMPREHENSIVE INCOME (LOSS)

     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. 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.

4.   NET LOSS PER SHARE

     In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin (SAB) No. 98, basic net loss per common share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. Under SFAS No. 128, diluted net income
(loss) per share is computed by dividing the net income (loss) for the period by
the weighted average number of common and common equivalent shares, such as
stock options, outstanding during the period. Such common share equivalents
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.

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

     Included in net loss per common share, basic and diluted, and pro forma net
loss per common share, basic and diluted, for the six months ended June 30, 2000
is the deemed dividend for preferred stockholders of approximately $19,245,000,
which relates to the Company's acquisition of Visionex on March 8, 2000. The
deemed dividend


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<PAGE>   7

represents the excess of the estimated value of the preferred shares issued to
purchase Visionex over the net tangible assets acquired.

5.   NEW ACCOUNTING PRONOUNCEMENTS

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


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

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

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

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

OVERVIEW

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

     We currently have no products available for sale. We have incurred losses
since our inception and had an accumulated deficit through June 30, 2001 of
$87.0 million. Our losses have resulted primarily from research and development
activities, including clinical trials, related general and administrative
expenses and a deemed dividend for preferred stockholders. We expect to continue
to incur operating losses for the foreseeable future as we continue our research
and development and clinical testing activities, and seek regulatory approval
for our product candidates.

     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.

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


                                       7
<PAGE>   8

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

RESULTS OF OPERATIONS

Three months Ended June 30, 2001 and 2000

     Research and development expenses. Research and development expenses were
$3.6 million for the three months ended June 30, 2001 compared to $4.6 million
for the three months ended June 30, 2000. The decrease of $1.0 million was
primarily attributable to fluctuations in the timing of certain research and
development expenses in 2000, particularly expenses associated with our two
Phase III clinical trials of Vitrase for the treatment of severe vitreous
hemorrhage. In connection with our preparations for submission of a New Drug
Application for Vitrase, we anticipate an increase in expenses and expenditures
associated with our manufacturing activities. In particular, we will need to
purchase equipment and incur certain expenses in order to improve the
manufacturing operations of our contract manufacturers.

     General and administrative expenses. General and administrative expenses
were $1.7 million for the three months ended June 30, 2001, unchanged from the
three months ended June 30, 2000. We anticipate that our total general and
administrative expenses for 2001 will approximate the total incurred in 2000.

     Interest income. Interest income was $383,000 for the three months ended
June 30, 2001 compared to $77,000 for the three months ended June 30, 2000. The
increase of $306,000 was directly attributable to higher cash balances in 2001
due to the investment of the proceeds from our initial public offering in August
2000.

     Interest expense. Interest expense was $25,000 for the three months ended
June 30, 2001 compared to an interest expense credit of $41,000 for the three
months ended June 30, 2000. The interest expense credit was primarily the result
of an adjustment in previously accrued interest expense related to loans from
shareholders that were repaid in March 2000.

Six Months Ended June 30, 2001 and 2000

     Research and development expenses. Research and development expenses were
$7.6 million for the six months ended June 30, 2001, unchanged from the six
months ended June 30, 2000.

     General and administrative expenses. General and administrative expenses
were $3.2 million for the six months ended June 30, 2001, unchanged from the six
months ended June 30, 2000.

     Interest income. Interest income was $647,000 for the six months ended June
30, 2001 compared to $131,000 for the six months ended June 30, 2000. The
increase of $516,000 was directly attributable to higher cash balances in 2001
due to the investment of the proceeds from our initial public offering in August
2000.

     Interest expense. Interest expense was $25,000 for the six months ended
June 30, 2001 compared to $46,000 for the six months ended June 30, 2000. The
decrease of $21,000 was primarily attributable to interest on loans from
shareholders that were repaid in March 2000.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2001, we had approximately $16.5 million in cash and
short-term investments.

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


                                       8
<PAGE>   9

     For the six months ended June 30, 2001, we used $9.1 million of cash for
operations principally as a result of the net loss of $10.1 million partially
offset by non-cash compensation expense of approximately $792,000. We used
approximately $9.2 million of cash for operations in the six months ended June
30, 2000.

     For the six months ended June 30, 2001, $7.7 million of cash was provided
by investing activities, primarily from the sale of marketable investment
securities. For the six months ended June 30, 2000, $4.4 million of cash was
provided from the acquisition of Visionex.

     Net cash provided by financing activities totaled $88,000 for the six
months ended June 30, 2001 compared to $9.6 million for the six ended June 30,
2000. During the six months ended June 30, 2000, $10.0 million in net cash was
provided from the private sale of preferred stock.

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

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

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

     o   the results of our clinical trials

     o   the time and expense necessary to obtain regulatory approvals

     o   our ability to establish and maintain collaborative relationships

     o   receiving milestone payments from Allergan

     o   competitive, technological, market and other developments

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

FACTORS THAT MAY EFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

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

     We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. As of
June 30, 2001, our accumulated deficit was $87.0 million, including a net loss
of approximately $41.1 million for the year ended December 31, 2000 and a net
loss of $10.1 million for the six months ended June 30, 2001. We have not
generated any revenue from product sales to date, and it is possible that we
will never generate revenues from product sales in the future. Even if we do
achieve significant revenues from product sales, we expect to incur significant
operating losses over the next several years. It is possible that we will never
achieve profitable operations.

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

     We believe that our cash on hand will be sufficient to fund our operations
and capital expenditure needs for approximately the next nine months. During
this period, we plan to allocate our capital resources primarily to the
development of our lead product candidate, Vitrase for the treatment of severe
vitreous hemorrhage. We will need to raise additional funds to continue the
development and commercialization of our product candidates beyond this


                                       9
<PAGE>   10

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

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

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

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

     None of our product candidates has received regulatory approval from the
FDA. Approval from the FDA is necessary to 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:

     o   a product candidate may not be safe or effective

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

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

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

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

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

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

     Many of our research and development programs are at an early stage and
clinical testing is a long, expensive and uncertain process. We may not complete
our clinical trials on schedule, including our two multinational Phase III
clinical trials for Vitrase. Delays in patient enrollment in the trials may
result in increased costs, program delays or both, which could slow our product
development and approval process. Even if initial results of preclinical studies
or clinical trial results are positive, we may obtain different results in later
stages of drug development, including failure to show desired safety and
efficacy.

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


                                       10
<PAGE>   11

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

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

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

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

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

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

     We have identified a new contract manufacturer and are in the process of
negotiating an agreement for the manufacture of commercial quantities of
Vitrase. There can be no assurance that we will be able to complete an agreement
with this new contract manufacturer on favorable terms, or at all.

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

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

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

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


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<PAGE>   12

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

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

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

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

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

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

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

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

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

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

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

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

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

     We 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


                                       12
<PAGE>   13

configuration, there is a possibility that we could be sued for patent
infringement should any patents containing claims related to our Keraform
product issue from these patent applications.

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

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

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

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

WE MAY NOT DISCOVER NEW PRODUCT CANDIDATES IF HYALURONIDASE IS NOT SAFE AND
EFFECTIVE FOR NUMEROUS APPLICATIONS IN THE EYE.

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

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

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

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

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


                                       13
<PAGE>   14


ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities. The average duration of
all of our investments in 2000 and for the first six months of 2001 was less
than one year. Due to the short-term nature of these investments, we believe we
have no material exposure to interest rate risk arising from our investments. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair market value of
our interest sensitive financial investments. Declines in interest rates over
time will, however, reduce our investment income, while increases in interest
rates over time will increase our interest expense.

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


PART II  OTHER INFORMATION

ITEM 1  LEGAL PROCEEDINGS

     None


ITEM 2  CHANGE IN SECURITIES AND USE OF PROCEEDS

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.


                                       14
<PAGE>   15

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

     None


ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Set forth below is information concerning each matter submitted to a vote
at the Annual Meeting of Stockholders on May 24, 2001.

     Proposal No. 1: The stockholders elected each of the following persons as a
director to hold office until the 2004 Annual Meeting of Stockholders or until
his successor has been duly elected and qualified.

Director's Name                     Votes For        Votes Withheld
---------------                     ---------        --------------

Robert G. McNeil, Ph.D.             9,144,984            29,936
John H. Parrish                     9,167,876             7,044

     Proposal No. 2: The stockholders ratified the appointment of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ended December 31,
2001 (with 9,171,070 affirmative votes, 3,850 votes against, no votes
abstaining, and no broker non - votes).

ITEM 5  OTHER INFORMATION

     None


ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K

     None


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<PAGE>   16

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, ISTA
Pharmaceuticals, Inc. has duly caused this 10-Q report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
County of Orange, State of California, on this 9th day of August 2001.


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


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


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