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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 1934FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2003

Or

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

Commission File Number: 000-31255

ISTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


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

15279 ALTON PARKWAY #100, IRVINE, CA 92618
(Address of principal executive offices)
(949) 788-6000
(Registrants telephone number, including area code)

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

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

The number of shares of the registrants common stock, $.001 par value,
outstanding as of May 1, 2003 was 13,291,017.





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Table of Contents


TABLE OF CONTENTS



|                             |                                                                                              |                                                                |  |  |  |  |  | 
|---------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1 Condensed Consolidated Financial Statements                                          
|                             |                                                                                              | Condensed Consolidated Balance Sheets                         
|                             |                                                                                              | Condensed Consolidated Statements of Operations               
|                             |                                                                                              | Condensed Consolidated Statements of Cash Flows               
|                             |                                                                                              | Notes to Unaudited Condensed Consolidated Financial Statements
|                             | Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3 Quantitative and Qualitative Disclosures about Market Risk                           
|                             | Item 4 Controls and Procedures                                                              
|PART II OTHER INFORMATION   
|                             | Item 1 Legal Proceedings                                                                    
|                             | Item 6 Exhibits and Reports on Form 8-K                                                     
|Signatures                  
|INDEX TO EXHIBITS           
|EXHIBIT 10.1                
|EXHIBIT 99.1                
|EXHIBIT 99.2                



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|        |  |                                                                                                                                                                                              |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                                                                              |  | Page
|        |  |                                                                                                                                                                                              |  | No  
|        |  |                                                                                                                                                                                              |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                                                                                                                        |  |     
|Item 1  |  | Condensed Consolidated Financial Statements                                                                                                                                                  |  | 3   
|        |  | Condensed Consolidated Balance Sheets  March 31, 2003 (unaudited) and December 31, 2002                                                                                                     |  | 3   
|        |  | Condensed Consolidated Statements of Operations (unaudited)  Three Month Periods Ended
March 31, 2003 and 2002 and for the Period from February 13, 1992 (inception) through March 31, 2003 |  | 4   
|        |  | Condensed Consolidated Statements of Cash Flows (unaudited)  Three Month Periods Ended March 31,
2003 and 2002 and for the Period from February 13, 1992 (inception) through March 31, 2003 |  | 5   
|        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                               |  | 6   
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                        |  | 10  
|Item 3  |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                                                    |  | 20  
|Item 4  |  | Controls and Procedures                                                                                                                                                                      |  | 21  
|PART II |  | OTHER INFORMATION                                                                                                                                                                            |  |     
|Item 1  |  | Legal Proceedings                                                                                                                                                                            |  | 21  
|Item 6  |  | Exhibits and Reports on Form 8-K                                                                                                                                                             |  | 21  
|        |  | Signatures                                                                                                                                                                                   |  | 22  
|        |  | Index to Exhibits                                                                                                                                                                            |  | 25  

2



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PART I FINANCIAL INFORMATION




Item 1 Condensed Consolidated Financial Statements




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

|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |        |        |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | -------- | ------ | ----------- | ----- | ------------ | ------ | ------ |  | 
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        | March 31,   |       | December 31,
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        | 2003        |       | 2002        
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |             
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        | (Unaudited) |       |              |        |       
|ASSETS                              
|Current assets:                      |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |             
|                                     | Cash and cash equivalents                                                                                                                                                                                           |                                            | $                         | 25,205   |        |             | $     | 32,257       |       
|                                     | Short-term investments                                                                                                                                                                                              |                                            |                           | 4,967    |        |             |       | 3,455        |       
|                                     | Other current assets                                                                                                                                                                                                |                                            |                           | 606      |        |             |       | 509          |       
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|                                     |                                                                                                                                                                                                                     |                                            | Total current assets      |          |        | 30,778      |       |              |        | 36,221 | 
|Property and equipment, net          |                                                                                                                                                                                                                     |                                            | 830                       |          |        |             | 879   |             
|Deposits and other assets            |                                                                                                                                                                                                                     |                                            | 35                        |          |        |             | 35    |             
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|                                     |                                                                                                                                                                                                                     |                                            | Total Assets              |          | $      | 31,643      |       |              | $      | 37,135 | 
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |             
|                                     | Accounts payable                                                                                                                                                                                                    |                                            | $                         | 1,233    |        |             | $     | 910          |       
|                                     | Accrued compensation and related expenses                                                                                                                                                                           |                                            |                           | 145      |        |             |       | 687          |       
|                                     | Accrued expenses  clinical trials                                                                                                                                                                                  |                                            |                           | 814      |        |             |       | 721          |       
|                                     | Other accrued expenses                                                                                                                                                                                              |                                            |                           | 572      |        |             |       | 857          |       
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|                                     |                                                                                                                                                                                                                     |                                            | Total current liabilities |          |        | 2,764       |       |              |        | 3,175  | 
|Deferred rent                        |                                                                                                                                                                                                                     |                                            | 10                        |          |        |             | 10    |             
|Deferred income                      |                                                                                                                                                                                                                     |                                            | 4,653                     |          |        |             | 4,722 |             
|Stockholders equity:                |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |             
|                                     | Common stock, $.001 par value; 100,000,000
shares authorized at March 31, 2003 and
December 31, 2002; 13,291,017 and 13,288,120
shares issued and outstanding at March 31, 2003
and December 31, 2002, respectively |                                            |                           | 13       |        |             |       | 13           |       
|                                     | Additional paid in capital                                                                                                                                                                                          |                                            |                           | 153,014  |        |             |       | 153,022      |       
|                                     | Deferred compensation                                                                                                                                                                                               |                                            |                           | (1,084   | )      |             |       | (1,390       | )     
|                                     | Accumulated other comprehensive income                                                                                                                                                                              |                                            |                           | (22      | )      |             |       | (23          | )     
|                                     | Deficit accumulated during the development stage                                                                                                                                                                    |                                            |                           | (127,705 | )      |             |       | (122,394     | )     
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|                                     |                                                                                                                                                                                                                     | Total stockholders equity                 |                           |          | 24,216 |             |       |              | 29,228 |       
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       
|                                     |                                                                                                                                                                                                                     | Total Liabilities and Stockholders Equity |                           | $        | 31,643 |             |       | $            | 37,135 |       
|                                     |                                                                                                                                                                                                                     |                                            |                           |          |        |             |       |              |       

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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,  
|                                                                      |                                     |   | 2003               |       | 2002        |   | 2003  
|                                                                      |                                     |   |                    |       |             |   |       
|Revenue                                                               |                                     | $ | 69                 |       |             | $ | 70     |       |  | $ | 347            |       
|Operating expenses:                                                   |                                     |   |                    |       |             |   |        |       |  |   |                |       
|                                                                      | Research and development            |   |                    | 3,426 |             |   |        | 2,922 |  |   |                | 76,889 | 
|                                                                      | Selling, general and administrative |   |                    | 2,064 |             |   |        | 1,918 |  |   |                | 33,817 | 
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Total operating expenses                                              |                                     |   | 5,490              |       |             |   | 4,840  |       |  |   | 110,706        |       
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Loss from operations                                                  |                                     |   | (5,421             | )     |             |   | (4,770 | )     |  |   | (110,359       | )     
|Interest income                                                       |                                     |   | 115                |       |             |   | 87     |       |  |   | 2,742          |       
|Interest expense                                                      |                                     |   | (5                 | )     |             |   |       |       |  |   | (798           | )     
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Net loss                                                              |                                     |   | (5,311             | )     |             |   | (4,683 | )     |  |   | (108,415       | )     
|Deemed dividend for preferred stockholders                            |                                     |   |                   |       |             |   |       |       |  |   | (19,245        | )     
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Net loss attributable to common stockholders                          |                                     | $ | (5,311             | )     |             | $ | (4,683 | )     |  | $ | (127,660       | )     
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Net loss per common share, basic and diluted                          |                                     | $ | (0.40              | )     |             | $ | (2.82  | )     |  |   |                |       
|                                                                      |                                     |   |                    |       |             |   |        |       |  |   |                |       
|Shares used in computing net loss per common share,
basic and diluted |                                     |   | 13,290             |       |             |   | 1,662  |       |  |   |                |       

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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,       
|                                                                                  |                               |                                                               |                                                                             |                                           |      | 2003               |         | 2002             |      | 2002
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |     
|Operating Activities                                                              |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Net loss attributable to common stockholders                                      |                               | $                                                             | (5,311                                                                      | )                                         |      | $                  | (4,683  | )                |      | $    | (127,660 | )
|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                                       |                                           |      | 306                |         |                  |      | 728  |          |   |       | 8,878          |        
|                                                                                  |                               |                                                               | Amortization of fair value of warrant discount and related accrued interest |                                           |      | (16                | )       |                  |      |     |          |   |       | 451            |        
|                                                                                  |                               |                                                               | Common stock issued for services                                            |                                           |      |                   |         |                  |      |     |          |   |       | 310            |        
|                                                                                  |                               |                                                               | Forgiveness of note receivable                                              |                                           |      |                   |         |                  |      |     |          |   |       | 162            |        
|                                                                                  |                               |                                                               | Depreciation and amortization                                               |                                           |      | 88                 |         |                  |      | 83   |          |   |       | 1,753          |        
|                                                                                  |                               |                                                               | Deferred rent                                                               |                                           |      |                   |         |                  |      | 3    |          |   |       | 10             |        
|                                                                                  |                               |                                                               | Deferred income                                                             |                                           |      | (69                | )       |                  |      | (70  | )        |   |       | 4,653          |        
|Changes in operating assets and liabilities:                                      |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|                                                                                  |                               | Advanced payments  clinical trials and other current assets  |                                                                             |                                           | (97  | )                  |         |                  | (66  | )    |          |   | (606  | )             
|                                                                                  |                               | Note receivable from officer                                  |                                                                             |                                           |     |                    |         |                  |     |      |          |   | (162  | )             
|                                                                                  |                               | Accounts payable                                              |                                                                             |                                           | 323  |                    |         |                  | 407  |      |          |   | 1,234 |               
|                                                                                  |                               | Accrued compensation and related expenses                     |                                                                             |                                           | (542 | )                  |         |                  | (403 | )    |          |   | 145   |               
|                                                                                  |                               | Accrued expenses  clinical trials and other accrued expenses |                                                                             |                                           | (192 | )                  |         |                  | (820 | )    |          |   | 1,510 |               
|                                                                                  |                               | License fee received from Visionex                            |                                                                             |                                           |     |                    |         |                  |     |      |          |   | 5,000 |               
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|                                                                                  |                               |                                                               |                                                                             | Net cash used in operating activities     |      |                    | (5,510  | )                |      |      | (4,821   | ) |       |                | (85,077 | )
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Investing Activities                                                              |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Purchase of marketable investment securities                                      |                               |                                                               | (1,523                                                                      | )                                         |      |                    | (11,026 | )                |      |      | (48,194  | )
|Sale of marketable investment securities                                          |                               |                                                               | 11                                                                          |                                           |      |                    | 7,014   |                  |      |      | 43,201   |  
|Purchase of equipment                                                             |                               |                                                               | (39                                                                         | )                                         |      |                    | (134    | )                |      |      | (2,581   | )
|Deposits and other assets                                                         |                               |                                                               |                                                                            |                                           |      |                    |        |                  |      |      | (53      | )
|Proceeds from refinancing under capital leases                                    |                               |                                                               |                                                                            |                                           |      |                    |        |                  |      |      | 827      |  
|Cash acquired from Visionex transaction                                           |                               |                                                               |                                                                            |                                           |      |                    |        |                  |      |      | 4,403    |  
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|                                                                                  |                               |                                                               |                                                                             | Net cash used in investing activities     |      |                    | (1,551  | )                |      |      | (4,146   | ) |       |                | (2,397  | )
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Financing
Activities                                                              |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Payments on obligation under capital lease                                        |                               |                                                               |                                                                            |                                           |      |                    |        |                  |      |      | (827     | )
|Proceeds from exercise of stock options                                           |                               |                                                               |                                                                            |                                           |      |                    | 116     |                  |      |      | 681      |  
|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                                            |                               |                                                               | 8                                                                           |                                           |      |                    |        |                  |      |      | 77,358   |  
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|                                                                                  |                               |                                                               |                                                                             | Net cash provided by financing activities |      |                    | 8       |                  |      |      | 116      |   |       |                | 112,704 |  
|Effect of exchange rate changes on cash                                           |                               |                                                               | 1                                                                           |                                           |      |                    | 1       |                  |      |      | (25      | )
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|(Decrease) Increase in Cash and Cash Equivalents                                  |                               |                                                               | (7,052                                                                      | )                                         |      |                    | (8,850  | )                |      |      | 25,205   |  
|Cash and cash equivalents at beginning of period                                  |                               |                                                               | 32,257                                                                      |                                           |      |                    | 12,348  |                  |      |      |         |  
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  
|Cash and Cash Equivalents At End of Period                                        |                               | $                                                             | 25,205                                                                      |                                           |      | $                  | 3,498   |                  |      | $    | 25,205   |  
|                                                                                  |                               |                                                               |                                                                             |                                           |      |                    |         |                  |      |      |          |  

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ISTA Pharmaceuticals, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2003

1. The Company

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

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

As of March 31, 2003, the Company had approximately $30.2 million in cash and
short-term investments. The Company incurred a net loss of $5.3 million for the
three months ended March 31, 2003 and had an accumulated deficit of $127.7
million at March 31, 2003. The ability of the Company to continue as a going
concern is dependent upon its ability to obtain additional capital and achieve
profitable operations. The Companys ability to transition from the development
stage and ultimately, to attain profitable operations, is dependent upon
obtaining sufficient working capital to complete the successful development of
its products, approval by the U.S. Food and Drug Administration
(FDA) of its products, achieving market acceptance of such
products and achievement of sufficient levels of revenue to support the
Companys cost structure. Management believes that the Companys existing
capital resources will enable the Company to fund operations for at least the
next 12 months. The condensed consolidated financial statements contained in
this Form 10-Q do not include any adjustments to the specific amounts and
classifications of assets and liabilities that might be necessary should the
Company be unable to continue as a going concern.

2. Basis of Presentation

General

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

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

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

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

3. Revenue Recognition

The
Company recognizes revenue consistent with the provisions of the SEC Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition, which sets forth guidelines in the timing of revenue
recognition based upon factors such as passage of title, installation, payments
and customer acceptance. Amounts received for upfront product and technology
license fees under multiple-element arrangements are deferred and recognized
ratably over the period of such services or performance if such arrangements require
on-going services or performance. Non-refundable amounts received for milestone
payments are recognized upon (i) the achievement of specified milestones when
the Company has earned the milestone payment or, (ii) the milestone payment is
substantive in nature and the achievement of the milestone was not reasonably
assured at the inception of the agreement. The Company defers payments for
milestone events which are reasonably assured and recognizes them ratably over
the minimum remaining period of the Companys performance obligations. Payments
for milestones which are not reasonably assured are treated as the culmination
of a separate earnings process and are recognized as revenue when the
milestones are achieved. Royalty revenue will be recognized upon sale of the
related products, provided the royalty amounts are fixed and determinable and
collection of the related receivable is probable. Any amounts received prior to
satisfying our revenue recognition criteria will be recorded as deferred
revenue in the accompanying balance sheets.

In December 2001, the Company began a collaboration with Otsuka Pharmaceutical Co.,
Ltd. under which Otsuka will be responsible for all clinical development,
regulatory approvals, sales and marketing activities for Vitrase® in Japan. The Companys
principal sources of revenue from this collaboration and the commercialization
of Vitrase® will be the license fee received in December 2001, which is being
amortized over the Companys continuing involvement with Otsuka, milestone
payments and product sales received from Otsuka. To date, the Company
has not earned this milestone payment from Otsuka and it cannot
guarantee that it will receive this milestone payment in the future. Under the terms of the
collaboration, the Company is responsible for the manufacture of Vitrase® and supplying
all of Otsukas requirements for Vitrase®.

4. Comprehensive Income (Loss)

Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income, requires reporting and displaying comprehensive income
(loss) and its components, which, for ISTA, includes net loss and unrealized
gains and losses on investments and foreign currency translation gains and
losses. Total comprehensive loss for the three-month period ended March 31,
2003 and 2002 was $5,333,000 and $4,706,000, respectively. In accordance with
SFAS No. 130, the accumulated balance of unrealized gains (losses) on
investments and the accumulated balance of foreign currency translation
adjustments are disclosed as separate components of stockholders equity.

5. Stock-Based Compensation

In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which (i) amends SFAS No. 125,
Accounting for Stock-Based Compensation to add two new transitional
approaches when changing from the Accounting Principals Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees intrinsic value method of
accounting for stock-based employee compensation to the SFAS No. 125 fair value
method and (ii) amends APB Opinion No. 28, Interim Financial Reporting to
call for disclosure of SFAS No. 128 pro forma information on a quarterly basis.
The Company has elected to adopt the disclosure only provisions of SFAS No.
148 and will continue to follow APB Opinion No. 25 and related interpretations
in accounting for stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than the market value at the measurement
date.

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

Options or stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction

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With Selling Goods or Services, and recognized over the related service
period. Deferred charges for options granted to non-employees are periodically
re-measured as the options vest.

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

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

|                                                        |  |                    |         |                |  |  |         |  
|------------------------------------------------------- |  | ------------------ | ------- | -------------- |  |  | ------- | -
|                                                        |  | Three Months Ended
|                                                        |  |                   
|                                                        |  | March 31, 2003     |         | March 31, 2002
|                                                        |  |                    |         |               
|Net loss attributed to common stockholders, as reported |  |                    | ($5,311 | )              |  |  | ($4,683 | )
|                                                        |  |                    |         |                |  |  |         |  
|Pro forma net loss                                      |  |                    | ($6,964 | )              |  |  | ($5,365 | )
|                                                        |  |                    |         |                |  |  |         |  
|Net loss per share, basic and diluted, as reported      |  |                    | ($.40   | )              |  |  | ($2.82  | )
|                                                        |  |                    |         |                |  |  |         |  
|Pro forma net loss per share, basic and diluted         |  |                    | ($.52   | )              |  |  | ($3.23  | )
|                                                        |  |                    |         |                |  |  |         |  

6. Net Loss Per Share

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

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

7. Private Placement in Public Equity

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

8. Commitments and Contingencies

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

Visionex

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

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

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

9. Recent Accounting Pronouncements

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

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

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




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

This Interim Report on Form 10-Q contains forward-looking statements that
have been made pursuant to the provisions of the Securities Litigation Act of
1995 and concern matters that involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Discussions containing forward-looking statements may be found in
the material set forth under Managements Discussion and Analysis of Financial
Condition and Results of Operations and in other sections of this Form 10-Q.
Words such as may, will, should, could, expect, plan, anticipate,
believe, estimate, predict, potential or continue or similar words
are intended to identify forward-looking statements, although not all
forward-looking statements contain these words. Although we believe that our
opinions and expectations reflected in the forward-looking statements are
reasonable as of the date of this Report, we cannot guarantee future results,
levels of activity, performance or achievements, and our actual results may
differ substantially from the views and expectations set forth in this Report.
We expressly disclaim any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to actual results
or to changes in our opinions or expectations.

Readers are urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors which
affect our business, including without limitation Factors That May Affect
Results of Operations and Financial Condition set forth in this Form 10-Q, and
the audited financial statements and the notes thereto and disclosures made
under the captions, Management Discussion and Analysis of Financial Condition
and Results of Operations, Risk Factors, Consolidated Financial Statements
and Notes to Consolidated Financial Statements, included in the Companys
annual report on Form 10-K/A Amendment No. 1 for the year ended December 31, 2002.

Overview

ISTA Pharmaceuticals, Inc. (the Company or ISTA) is a
development-stage specialty pharmaceutical company focused on the development
and commercialization of new remedies for diseases and conditions of the eye.
Since the Companys inception, we have devoted our resources primarily to fund
research and development programs and late-stage product acquisitions. In
December 2001, we announced our strategic plan to transition from a development
organization to a fully-integrated, specialty pharmaceutical company with a
primary focus on ophthalmology by acquiring complementary products, either
already marketed or in late stage development.

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

We currently have no approved products. Vitrase® (ovine hyaluronidase) is
our proprietary drug that we are developing for the treatment of vitreous
hemorrhage and diabetic retinopathy. On April 3, 2003, the FDA issued an
approvable letter in which the FDA cited issues primarily related to the
sufficiency of the efficacy data submitted with the New Drug
Application (NDA) Vitrase®. The FDA
requested additional analysis of the existing data and an additional
confirmatory clinical study based upon that analysis. We intend to discuss with
the FDA the comments contained in the approvable letter and, based upon those
discussions, determine the next appropriate steps in the review and approval
process of Vitrase®. We are also pursuing market approval in the United States
of ISTALOL, our new formulation of timolol, to treat glaucoma and developing
other products designed to treat hyphema and ocular

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inflammation. We believe that if Vitrase®, ISTALOL, and our other
ophthalmic product candidates are successful, we will advance our strategic
plan to become a fully-integrated specialty pharmaceutical company.

We currently have no products available for sale. We have incurred losses
since inception and had an accumulated deficit through March 31, 2003 of $127.7
million. Our losses have resulted primarily from research and development
activities, including clinical trials, related general and administrative
expenses and a deemed dividend to our preferred shareholders. We expect to
continue to incur operating losses for the foreseeable future as we continue to
conduct research, development and clinical testing activities, and to seek
regulatory approval for our product candidates.

Vitrase®

Our current lead product candidate is Vitrase®, which is derived from
highly purified formulations of ovine hyaluronidase.

In March 2002, we announced the preliminary results for our Phase III
clinical studies of Vitrase®. Although the data from the two Phase III studies
did not show a statistically significant improvement in the primary (surrogate)
endpoint, further analysis has shown that for a 55 IU dose of Vitrase®, in both
studies, there was a clinically meaningful and statistically significant
decrease in the density of vitreous hemorrhage. A statistically significant
difference in the proportion of patients with an improvement in best-corrected
visual acuity at one and two months was also shown, which extended to
three-month post-treatment visits in a clinical study conducted outside North
America.

Based on these improvements in visual function, and our review and
discussions with the FDA regarding the data
from the two studies, we submitted the clinical section and the chemistry,
manufacturing and controls (CMC) section of the NDA
for Vitrase® to the FDA in October 2002. The FDA accepted those sections of the
Vitrase® NDA for review in December 2002, along with the pre-clinical
pharmacology and toxicology section that was submitted in January 2002. On
April 3, 2003, the FDA issued an approvable letter in which the FDA cited
issues primarily related to the sufficiency of the efficacy data submitted with
the NDA for Vitrase®. The FDA requested additional analysis of the existing
data and an additional confirmatory clinical study based upon that analysis. We
intend to discuss with the FDA the comments contained in the approvable
letter and, based upon those discussions, determine the next appropriate steps
in the review and approval process of Vitrase®.

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. Accordingly, we depend on the success of Allergan
in commercializing Vitrase® in these markets. Our principal sources of revenue
from this collaboration will be milestone, royalty and profit-sharing payments
received from Allergan. Under the terms of the collaboration, we are
responsible for the manufacture of Vitrase® and for supplying all of Allergans
requirements for Vitrase®. If we are successful in obtaining regulatory
approval for Vitrase® and providing adequate supplies to Allergan, and Allergan
subsequently achieves significant sales of the product, we may receive
substantial royalties and other payments from Allergan; however, our aggregate
manufacturing costs may also increase.

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

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

Acquisition of Other Product Candidates

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

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

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

The NDA for ISTALOL was submitted by Senju to the FDA in September 2002.
The NDA included data from pre-clinical studies conducted in Japan, combined
with data from a Phase I clinical study conducted in the United States and a
multi-center Phase III clinical study recently completed in the United States.
We are currently initiating a Phase III study of bromfenac in the United
States. Assuming successful completion of our clinical studies, we anticipate
submitting an NDA for bromfenac in early 2004. We are currently conducting
feasibility studies for the commercialization of Caprogel®. Once completed,
and if these studies yield promising results, we intend to pursue further
clinical development of Caprogel® consistent with such studies results.
However, the timing and scope for our development of Caprogel® may change based
on our assessment, from time to time, of this product candidates market
potential, other product opportunities and our corporate priorities.

ISTALOL

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

Our acquisition of ISTALOL was consistent with our strategic objective of
acquiring complementary late-stage product candidates. Senju submitted the NDA
for ISTALOL to the FDA in September 2002. That NDA included data from
pre-clinical studies conducted in Japan, combined with data from a Phase I
clinical study conducted in the United States and a multi-center Phase III
clinical study recently completed in the United States.

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

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

Bromfenac and Caprogel®

The assets acquired from AcSentient also include United States product
rights to bromfenac, a topical non-steroidal anti-inflammatory compound for the
treatment of ocular inflammation, and worldwide marketing rights for Caprogel®,
a novel compound for the treatment of hyphema, or bleeding into the front of
the eye. AcSentient had previously acquired the rights to these two compounds
from Senju and the Eastern Virginia School of Medicine, respectively. Under the
terms of the AcSentient asset acquisition, we are responsible for payments and
other obligations connected with further development of bromfenac and
Caprogel®.

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

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

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

Results of Operations

Three Months Ended March 31,
2003 and 2002

Revenue. Revenue of $69,000 and $70,000 for the three months ended March
31, 2003 and 2002 reflects the amortization for the period of deferred revenue
recorded in December 2001 for the license fee payment made by Otsuka in
connection with the license for Vitrase® in Japan.

Research
and development expenses. Research and development expenses for
the three months ended March 31, 2003 were $3.4 million compared to $2.9
million for the three months ended March 31, 2002. The increase of $500,000 is
principally the result of development and manufacturing activities related to
Vitrase®, ISTALOL and bromfenac.

Selling,
general and administrative expenses. Selling, general and
administrative expenses were $2.1 million for the three months ended March 31,
2003 compared to $1.9 million for the three months ended March 31, 2002. The
increase is primarily due to additional personnel and facilities expenses in 2003
compared to 2002 and an increase in the cost of directors and officers insurance
that went into effect during the last half of 2002.

Interest
income. Interest income was $115,000 for the three months ended
March 31, 2003 compared to $87,000 for the three months ended March 31, 2002.
The increase in interest income was primarily attributable to higher cash balances for
the first quarter of 2003 compared to the first quarter of 2002 due to the
PIPE transaction that occurred in November 2002.

Interest
expense. Interest expense was $5,000 for the three months ended
March 31, 2003 and there was no interest expense for the three months ended
March 31, 2002. The interest expense was primarily attributable to the financing of our
directors and officers insurance premiums during the three months ended March
31, 2003.

Liquidity and Capital Resources

As of March 31, 2003, we had approximately $30.2 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, $31.5 million from our initial public offering
in August 2000, $4.0 million from the private sale of common stock in December
2001, $5.0 million from a license fee payment in December 2001, $4.0 million
from the issuance of promissory notes in September 2002 and $40.0 million from
our PIPE transaction in November 2002. This PIPE transaction involved a private
placement of 10,526,306 shares of our common stock for the aggregate
purchase price of approximately $40.0 million, or $3.80 per share, and warrants
to purchase up to 1,578,946 shares of our common stock for an exercise price of
$3.80 per share.

For the
three months ended March 31, 2003, we used $5.5 million of cash
for operations principally as a result of the net loss of $5.3 million
partially offset by non-cash compensation expense of $306,000. We
used approximately $4.8 million of cash for operations in the three months
ended March 31, 2002.

For the
three months ended March 31, 2003, we used $1.6 million of cash
for investing activities, primarily to purchase marketable securities.
For the three months ended March 31, 2002, we used $4.1 million for investing
activities, primarily to purchase marketable securities.

For the
three months ended March 31, 2003, we received $8,000 from
financing activities, primarily from the issuance of common stock
relative to our Employee Stock Purchase Plan. For the three months ended March 31, 2002, we received
$116,000 from financing activities, primarily from the exercise of stock
options.

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

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

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



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

Factors that May Affect Results of Operations and Financial Condition.

Risks Related to Our Company

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

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

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

Although we recently received an approvable letter from the FDA with
respect to ISTAs NDA for Vitrase® for the treatment of vitreous hemorrhage,
the FDA has requested additional analysis of the existing data and an
additional confirmatory clinical study based upon that analysis. There can be
no assurances that the FDA will approve our NDA for Vitrase®, even if we decide
to and are successfully able to undertake the further analysis and clinical
testing requested by the FDA.

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Clinical testing of pharmaceutical products is also a long, expensive and
uncertain process. Even if initial results of preclinical studies or clinical
trial results are positive, we may obtain different results in later stages of
drug development, including failure to show desired safety and efficacy. Our
bromfenac product, a topical non-steroidal anti-inflammatory compound for the
treatment of ocular inflammation is currently undergoing clinical trials. The
clinical trials of any of our product candidates could be unsuccessful, which
would prevent us from obtaining regulatory approval and commercializing the
product.

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



| |  |  | FDA officials may not find a product candidate safe or effective to
merit an approval                                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | FDA officials may not find that the data from preclinical testing and
clinical trials justifies approval, or they may require additional
studies that would make it commercially unattractive to continue pursuit
of approval                                           
|
| |  |  | the FDA might not approve our manufacturing processes or facilities,
or the processes or facilities of our contract manufacturers or raw
material suppliers                                                                                                             
|
| |  |  | the FDA may change its approval policies or adopt new regulations                                                                                                                                                                                                       
|
| |  |  | the FDA may approve a product candidate for indications that are
narrow or under conditions that place our product at a competitive
disadvantage, which may limit our sales and marketing activities or
otherwise adversely impact the commercial potential of a product

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

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

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

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



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

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

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

We currently are in the process of developing our sales, marketing and
distribution capabilities. However, our current capabilities in these areas
are limited. In order to commercialize any products, we must internally
develop substantial sales, marketing and distribution capabilities, or
establish collaborations or other arrangements with third parties to perform
these services. We do not have extensive experience in these areas, and we may
not be able to establish adequate in-house sales, marketing and distribution
capabilities or engage and effectively manage relationships with third parties
to perform any or all of such services. For example, we

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intend to rely on Allergan to commercialize Vitrase® in the United States,
and Otsuka Pharmaceuticals, Co. Ltd. to market Vitrase® in Japan. To the
extent that we enter into co-promotion or other licensing arrangements, our
product revenues are likely to be lower than if we directly marketed and sold
our products, and any revenues we receive will depend upon the efforts of third
parties, whose efforts may not be successful.

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

We have only a limited operating history upon which you can evaluate our
business. We have never been profitable, and we might never become profitable.
As of March 31, 2003, our accumulated deficit was $127.7 million, including a
net loss of approximately $23.0 million for the year ended December 31, 2002
and a net loss of $5.3 million for the three months ended March 31, 2003. We
have not generated any revenue from product sales to date, and we may never
generate revenues from product sales in the future. Even if we do achieve
significant revenues from product sales, we expect to incur significant
operating losses over the next several years. As of March 31, 2003, we had
approximately $30.2 million in cash and short-term investments and working
capital of $28.0 million. We anticipate that our existing capital resources
will enable us to fund operations for at least the next twelve months. We may
be required to raise additional capital in the future. If we are required to
raise additional capital in the future there can be no assurance that the
additional financing will be available on favorable terms.

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

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

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

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

We have entered into a master services agreement with R.P Scherer West,
Inc. (which was subsequently acquired by Cardinal Health), for the manufacture
of commercial quantities, if approved, of our Vitrase® finished product. We
have also entered into a manufacturing services agreement with Bausch and Lomb
for the manufacture of commercial quantities, if approved, of our ISTALOL and
bromfenac products. To date, we have needed these products only in amounts
sufficient for clinical trials. Before any contract manufacturer can produce
commercial quantities of a product, we must demonstrate to the FDAs
satisfaction that the product source for commercial quantities is substantially
equivalent to the supply of the product used in our clinical trials. Such
demonstration may include the requirement to conduct additional clinical
trials. In addition, the manufacturing facilities of all of our contract
manufacturers must comply with current Good Manufacturing Practice regulations,
which the FDA strictly enforces. Moreover, the facilities of the contract
manufacturer must undergo and pass pre-approval inspection by the FDA before
any of our products can be approved for manufacture. We cannot assure you that
Cardinal Health or Bausch and Lomb will be able, as applicable, to develop
processes necessary to produce substantially equivalent product or that
regulatory authorities will approve them as a manufacturer. Failure to develop
necessary production processes or receive regulatory approval could delay or
stop our efforts to develop and commercialize our product candidates.

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

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

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

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

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

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

exercisable in full, and Dr. Anido will receive twenty-four months of salary as
severance compensation. In addition, we do not maintain key person life
insurance policies covering Dr. Anido. The loss of Dr. Anido would jeopardize
our ability to execute our strategic plan and materially harm our business.

Risks Related to Our Industry

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

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

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

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



| |  |  | our patents and pending patent applications use technology that we invented first                      
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | we were the first to file patent applications for these inventions                                     
|
| |  |  | others will not independently develop similar or alternative technologies or duplicate our technologies
|
| |  |  | any of our pending patent applications will result in issued patents                                   

We currently have 56 patent applications pending. In the event any
patents are issued to us as a result of such applications, there can be no
assurance that such patents will provide a basis for commercially viable
products, will provide us with any competitive advantages, or will not face
third party challenges or be the subject of further proceedings limiting their
scope or enforceability.

We may become involved in interference proceedings in the U.S. Patent and
Trademark Office to determine the priority of our inventions. In addition,
costly litigation could be necessary to protect our patent position. We also
rely on trademarks to protect the names of our products. These trademarks may
be challenged by others. If we enforce our trademarks against third parties,
such enforcement proceedings may be expensive. We also rely on trade secrets,
unpatented proprietary know-how and continuing technological innovation that we
seek to protect with confidentiality agreements with employees, consultants and
others with whom we discuss our business. Disputes may arise concerning the
ownership of intellectual property or the applicability or enforceability of
these agreements, and we might not be able to resolve these disputes in our
favor.

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

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

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

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

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

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

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

We are exposed to product liability claims, and insurance against these claims
may not be available to us on reasonable terms.

We currently maintain clinical trial liability insurance with per
occurrence and aggregate coverage limits of $5 million. The coverage limits of
our insurance policies may be inadequate to protect us from any liabilities we
might incur in connection with clinical trials or the sale of our products.
Product liability insurance is expensive and in the future may not be available
on commercially acceptable terms, or at all. A successful claim or claims
brought against us in excess of our insurance coverage could materially harm
our business and financial condition.

Risks Relating to Our Stock

Our stock price is subject to significant volatility.

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



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

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

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

The average daily trading volume in our common stock for the twelve-month
period ending March 31, 2002 was approximately 14,770 shares, and the average
daily number of transactions was approximately 75 for the same period. If
limited trading in our stock continues, it may be difficult for investors to
sell their shares in the public market at any given time at prevailing prices.

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Future sales of shares of our common stock, including sales of shares following
the expiration of lock-up arrangements, may negatively affect our stock
price.

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

The PIPE investors also entered into lock-up agreements with the Company
that impose restrictions on the ability of the PIPE investors to sell or
otherwise dispose of the shares of our common stock that they received in the
PIPE transaction. These lock-up restrictions expire on May 19, 2003. We filed
a registration statement on Form S-3 to cover the shares issued to the PIPE
investors and issuable upon conversion of the warrants. In the future, we may
issue additional options, warrants or other derivative securities convertible
into our Common Stock.

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

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

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

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

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



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

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




Item 3 Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold

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a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. The average
duration of all of our investments in 2002 and for the first three months of
2003 was less than one year. Due to the short-term nature of these investments,
we believe we have no material exposure to interest rate risk arising from our
investments. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
market value of our interest sensitive financial investments. Declines in
interest rates over time will, however, reduce our investment income, while
increases in interest rates over time will increase our interest expense.

We have operated primarily in the United States and have had no sales to
date. Accordingly, we have not had any significant exposure to foreign currency
rate fluctuations. Visionexs functional currency is the Singapore dollar and a
portion of Visionexs business is conducted in currencies other than the
Singapore dollar. However, Visionexs operations were wound down during the
third quarter of 2002 and we currently have no plans to substantially increase
Visionexs activity. As a result, we do not expect our foreign currency
translation gains or losses to be material. We do not currently engage in
foreign exchange hedging transactions to manage our foreign currency exposure.




Item 4 Controls and Procedures



| | a) |  | Evaluation of Disclosure
Controls and Procedures. Within the 90
days prior to the date of this quarterly report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule
240.13a-14. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our current disclosure controls
and procedures are effective in timely alerting them to material
information relating to us and our subsidiaries required to be included
in our periodic SEC filings.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Changes in Internal
Controls. There have been no significant
changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date we carried
out this evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         




PART II OTHER INFORMATION




Item 1 Legal Proceedings

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




Item 6 Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| |  |  | See Exhibit Index
| |  |  | -----------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

On March 18, 2003 we filed a Form 8-K attaching a press release announcing
that the U.S. Food and Drug Administrations Dermatologic and Ophthalmic Drug
Advisory Committee reviewed the Registrants Vitrase® product (ovine
hyaluronidase) for the treatment of vitreous hemorrhage

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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 2003.

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

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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



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



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



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



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



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

Date: May 15, 2003

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

23



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Lauren P. Silvernail, certify that:



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



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



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



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



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

Date: May 15, 2003

/s/ Lauren P. Silvernail
Lauren P. Silvernail
Chief Financial Officer &
Vice President, Corporate Development

24



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                   
|Number  |  | Description                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                   
|10.1    |  | Executive Employment Agreement between Lauren P. Silvernail and the Registrant, dated February 10, 2003                                                                                                                           
|        |  |                                                                                                                                                                                                                                   
|99.1    |  | President and Chief Executive Officers Certification Pursuant to Section 1350, Chapter 63 of Title 18
of the United States Code, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                            
|        |  |                                                                                                                                                                                                                                   
|99.2    |  | Chief Financial Officer and Vice President, Corporate Developments Certification Pursuant to Section
1350, Chapter 63 of Title 18 of the United States Code, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

25